Educ. Technical Coll., Inc. v. Atue Real Estate S.E. (In re Educ. Technical Coll., Inc.)

643 B.R. 301

IN RE: EDUCATIONAL TECHNICAL COLLEGE, INC., Debtor.

Educational Technical College, Inc., Plaintiff

v.Atue Real Estate S.E. et al., Defendants.

CASE NO. 21-02392 (EAG)

ADVERSARY NO. 21-00085 (EAG)

United States Bankruptcy Court, D. Puerto Rico.

Signed August 5, 2022

Carmen D. Conde Torres, Luisa S. Valle Castro, C. Conde & Associates, San Juan, PR, for Plaintiff.

Migda L. Rodriguez Collazo, Department of Justice of the Government of Puerto Rico, San Juan, PR, for Defendants Hon Domingo Emanuelli Hernandez in his Capacity of Secretary of Justice of the Commonwealth of Puerto Rico, Hon Sigfrido Steidel Figueroa as Head of Courts Administration Office, The Regional Marshal for the Court of First Instance in Bayamon, Hon. Domingo Emanuelli Hernandez, Hon. Sigfrido Steidel Figueroa.

Myrna L. Ruiz Olmo, MRO Attorneys at Law, LLC, San Juan, PR, Brian K. Tester, Tester & Alcala, LLC, Hato Rey, PR, for Defendants Atue Real Estate S.E., A. Cordero Badillo, Inc., Atilano Cordero Badillo.

OPINION AND ORDER

Edward A. Godoy, United States Bankruptcy Judge

Pending before the court is a motion to dismiss filed by defendants Atue Real Estate, S.E. ("Atue"), A. Cordero Badillo, Inc., and Atilano Cordero Badillo (collectively, the "defendants"), and the opposition to it filed by debtor Educational Technical College, Inc. ("Edutec," "plaintiff," or "debtor"). For the reasons stated below, the court denies the motion to dismiss.

I. Jurisdiction.

This court has jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a), Local Civil Rule 83K(a), and the General Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of Puerto Rico dated July 19, 1984 (Torruella, C.J.).¹ This is a core proceeding in accordance with 28 U.S.C. § 157(b).

II. Procedural History.

On August 9, 2021, Edutec filed a petition for voluntary relief under chapter 11 of the Bankruptcy Code. (Bankr. Dkt. No. 1.) On August 18, 2021, Edutec filed an adversary complaint against Atue alleging that the creditor had garnished certain funds several days before the bankruptcy filing pursuant to a writ of execution of judgment entered in local court. (Adv. Dkt. No. 1); see D CD 2018-0192. The complaint sought a declaratory judgment that those funds were property of the estate and must be turned over to Edutec. Id. It also included counts for turnover of property under section 542, violation of stay, and avoidance of preferential transfers under sections 547, 548, and 550. Id.

On October 6, 2021, Edutec amended the complaint after allegedly being informed by Atue that the garnished funds were not in its possession but were instead being held in local court. (Adv. Dkt. No. 17 at p. 2.) The amended complaint added as defendants A. Cordero Badillo, Inc., the managing partner of Atue; and Atilano Cordero Badillo, the sole shareholder and president of the board of directors of A. Cordero Badillo, Inc. (together, the "Cordero Badillo defendants.") (Adv. Dkt. No. 17.) It also included as defendants the marshal for the marshal's Office of the Court of First Instance, who is not identified by name; Hon. Domingo Emanuelli, the Secretary of Justice for the Commonwealth of Puerto Rico; and Hon. Sigfrido Steidel Figueroa, the head of the Puerto Rico Court's Administration Office (together, the "Puerto Rico court defendants.") Id. The amended complaint also added a count for turnover of property held by a custodian under section 543. (Adv. Dkt. No. 17 at ¶¶ 86-90.)

On November 5, 2021, the debtor moved for a preliminary injunction, seeking the turnover of the funds from the marshal for the local court.² (Adv. Dkt. No. 42.) A hearing was held on November 15, 2021, during which the court entered an order, with the consent of all parties, for the funds to be transferred to the registry account of the bankruptcy court.³ (Adv. Dkt. No. 64.) At the conclusion of the hearing, the court took the matter under advisement. (Adv. Dkt. No. 125.) In an opinion and order dated November 18, 2021, the court denied the motion for preliminary injunction without prejudice, finding, among other things, that it was not clear from the record whether the marshal for the Bayamon Court of First Instance qualified for purposes of section 543(b) as a custodian under section 101(11)(A) of the Bankruptcy Code. (Adv. Dkt. No. 70 at p. 8.)

On December 2, 2021, Edutec renewed its motion for preliminary injunction, which the defendants opposed. (Adv. Dkt. Nos. 93 & 99.) A hearing was held on December 13, 2021, during which the court "advance[d] the trial on the merits and consolidate[d] with the hearing" as to all counts of the amended complaint other than the violation of stay and fraudulent transfer counts, pursuant to Rule 65(a)(2) made applicable to this adversary proceeding under Federal Bankruptcy Rule 7065. (Adv. Dkt. No. 102.) At the conclusion of the hearing, the court took the matter under advisement. Id.

In an opinion and order dated December 22, 2021, the court entered partial judgment in favor of Edutec on the counts for declaratory judgment that the funds constitute property of the estate under section 541, avoidance under section 547 and 550, as well as turnover of property under sections 542 and 543. (Adv. Dkt. Nos. 104 & 105.) Further, the court ordered the Clerk of the Bankruptcy Court to disburse $161,262.92 to Edutec from the court's registry account and dismissed the amended complaint as to the Puerto Rico court defendants. Id. The partial judgment also dismissed as moot the count for avoidance under section 548. Id.

On December 29, 2021, the remaining defendants appealed to the Bankruptcy Appellate Panel for the First Circuit (the "BAP"). (Adv. Dkt. No. 109.) The appeal was later voluntarily dismissed, however, on March 18, 2022. (Adv. Dkt. Nos. 157 & 158.)

On January 13, 2022, Atue and the Cordero Badillo defendants filed a motion to dismiss the remaining counts of the amended complaint for violation of the automatic stay and damages stemming therefrom. (Adv. Dkt. No. 134.) Edutec filed its opposition on February 18, 2022. (Adv. Dkt. No. 152.)

III. Motion to Dismiss Standard Under Rule 12(b)(6).

Rule 8(a)(2), made applicable to adversary proceedings by Bankruptcy Rule 7008, requires a plaintiff to include in the complaint "a short and plain statement of the claim showing that the pleader is entitled to relief." Failure to do so is grounds for dismissal under Rule 12(b)(6). 5B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure: Civil § 1356 (4th ed. 2020).

In deciding a motion under Rule 12(b)(6), made applicable to adversary proceedings by Bankruptcy Rule 7012(b), the court must take a two-step approach. First, courts "isolate and ignore statements in the complaint that simply offer legal labels and conclusions or merely rehash cause-of-action elements." Schatz v. Republican State Leadership Comm., 669 F.3d 50, 55 (1st Cir. 2012) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L.Ed. 2d 929 (2007) ). Second, courts "take the complaint's well-pled (i.e., non-conclusory, non-speculative) facts as true, drawing all reasonable inferences in the pleader's favor, and see[s] if they plausibly narrate a claim for relief." Id. "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 556 U.S. at 675, 129 S.Ct. 1937 (citing Twombly, 550 U.S. at 555, 127 S.Ct. 1955 ).

"[D]etermining whether a complaint states a plausible claim is context-specific, requiring the reviewing court to draw on its experience and common sense." Iqbal, 556 U.S. at 663-64, 129 S.Ct. 1937. However, when evaluating the plausibility of a legal claim, a court may not "attempt to forecast a plaintiff's likelihood of success on the merits; ‘a well-pleaded complaint may proceed even if ... a recovery is very remote and unlikely.’ "

Ocasio-Hernandez v. Fortuño-Burset, 640 F.3d 1,13 (1st Cir. 2011) (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955 ).

IV. Factual Allegations Accepted As True for Rule 12(b)(6) Analysis.

For purposes of the Rule 12(b)(6) analysis, the court takes the following factual allegations from the amended complaint as true:

Pre-petition, on July 21, 2020, the Court of First Instance, Bayamon Superior Court, issued judgment against Edutec in the amount of $470,626.98 in case no.: D CD 2018-0192, Atue Real Estate S.E. v. Edutec, Inc., Educational Technical College, Inc. et al. (Adv. Dkt. No. 17 at ¶10.) On or about July 6, 2021, Atue requested execution of its judgment, and the Bayamon court issued a writ for the execution of judgment on July 13, 2021. (Adv. Dkt. No. 17 at ¶11.) Five days prior to the filing of the bankruptcy petition, on August 4, 2021, Atue garnished several bank accounts held by Edutec at Banco Popular de Puerto Rico. (Adv. Dkt. No. 17 at ¶12.) The garnishment was executed by the marshal for the Bayamon Superior Court. Id.

On August 9, 2021, Edutec filed for bankruptcy. (Adv. Dkt. No. 17 at ¶18.) The following day, on August 10, 2021, Edutec informed Atue's local court counsel of the bankruptcy filing and requested the return of the garnished funds. (Adv. Dkt. No. 17 at ¶19.) On August 16, 2021, that attorney informed Edutec that Atue had retained separate bankruptcy counsel and that future communications should be directed to him. (Adv. Dkt. No. 17 at ¶20.)

On August 18, 2021, Edutec filed this adversary proceeding against Atue to obtain the garnished funds. (Adv. Dkt. No. 17 at ¶21.) On August 31, 2021, the bankruptcy counsel informed Edutec that he had, in fact, not been engaged to represent Atue in the bankruptcy proceedings, directing Edutec back to Atue's local court counsel. (Adv. Dkt. No. 17 at ¶23.)

On September 14, 2021, Edutec again contacted Atue's local court counsel to try to resolve the matter, but Atue did not respond. (Adv....