In re Betteroads Asphalt LLC

608 B.R. 7

IN RE: BETTEROADS ASPHALT LLC, Debtor

In re: Bettercycling Corporation, Debtor

CASE NO. 17-04156 (ESL)

CASE NO. 17-04157 (ESL)

United States Bankruptcy Court, D. Puerto Rico.

Signed October 10, 2019

Alexis A. Betancourt Vincenty, Lugo Mender Group LLC, Wigberto Lugo Mender, Lugo Mender & Co., Guaynabo, PR, for Debtor.

OPINION AND ORDER

Enrique S. Lamoutte, United States Bankruptcy Judge

The matter before the court in the above captioned involuntary chapter 11 petitions is whether the Petitioning Creditors, composed of Firstbank Puerto Rico ("Firstbank"), Banco Santander de Puerto Rico ("Banco Santander"), the Economic Development Bank for Puerto Rico ("EDB"), and Banco Popular de Puerto Rico ("Banco Popular" or the "Administrative Agent", and collectively with Firstbank, Banco Santander and EDB, the "Lenders"), Sargeant Marine, Inc. and Sargeant Trading LTD (collectively "Sargeant"), Facsimil Paper Connection, Inc. ("Facsimil"), Champion Petroleum, Inc. ("Champion"), Control Force, Corp., ("Control Force") and St. James Security, Inc. ("St. James" and together with the Lenders, Sargeant, Champion, Control Force and Facsimil, the "Petitioning Creditors") filed the involuntary petitions in bad faith. The critical legal issue before the court, that bad faith is an independent cause for the dismissal of an involuntary petition under section 303(b), 11 U.S.C. § 303(b), even when the petitioning creditors satisfied the three-prong requirement for filing an involuntary petition, was determined in this court's opinion and order entered on November 30, 2018. In re Betteroads Asphalt, LLC and In re Betterecycling Corporation, 594 B.R. 516 (Bankr. D. P. R. 2018). Because bad faith is a fact intensive issue, an evidentiary healing was scheduled and heard.

EVIDENTIARY HEARING

A detailed exposition of the events and the evidence presented at the hearings is found in this court's minutes (docket numbers 480, 493, 494 and 497), which are attached and made a part of this opinion and order as an exhibit.

The burden to prove that the petitioning creditors filed an involuntary petition whether or not the involuntary petitions were filed " in bad faith, that is, for an improper purpose that constitutes an abuse of the bankruptcy process" lies on the alleged debtors. In re Betteroads Asphalt, LLC and In re Betterecycling Corporation, 594 B.R. 516, 564. During the evidentiary hearing the court emphasized that key to the alleged debtors prevailing in their allegations of bad faith was to establish pursuant to the totality of the circumstances that the involuntary petitions were filed for an improper bankruptcy purpose.

The evidence presented by the involuntary debtors established that the decision by the petitioning creditors to file the involuntary petitions was made upon consultation with legal counsel for the petitioning financial institutions.

Banco Popular de Puerto Rico and the involuntary debtors engaged in extensive negotiations and discussions after the involuntary debtors defaulted on their loan payments. As part of the negotiations Banco Popular unsuccessfully tried to renegotiate the terms of the loans which restricted the potential sale of the loans. Banco Popular initiated state court actions for collection of monies. Banco Popular as agent for a syndicate of lenders contracted and provided legal advice on the filing of the involuntary petitions.

Mr. Jorge L. Díaz, president of the involuntary debtors, testified and recounted the institutional history of the corporations and the events leading to the loan with Banco Popular. Mr. Díaz described the operations of the corporations before and after the filing of the involuntary petitions. He related the pressures placed by Banco Popular upon the corporations to make payment of the loans and how their ability to make checks and disbursements was restricted. Mr. Díaz gave as an example of undue pressure the signing of a forbearance agreement, as a condition to provide a moratorium or an extension of time to make payments, which would change the loan terms which restricted the banks from selling assets of the corporation without consultation and authorization from the involuntary debtors. As a result, Banco Popular foreclosed accounts receivable and restricted access to income, which led to the closing of the corporations.

Ms. Marisel Rivera Torres, former Vice President of Finance of the involuntary debtors, testified regarding her return after the corporations ceased to operate upon Mr. Díaz request in order to assist on the accounting and financial affairs of the corporations. She found the facilities in a critical situation as there were no systems working that could provide reliable date regarding the accounting records. Although the systems were restored and they moved to another facility, there was substantial accounting information missing. Thus, the financial information that could be produced to the financial institutions was limited.

The alleged debtors presented Mr. Francisco J. Pericás Alfaro as a witness. Mr. Pericás has worked for Banco Popular since 1999. He was the director of the special loan division from March 2013 to October 2013. He was then transferred to the corporate banking division as director and vice president of Banco Popular. He testified to be familiar with the involuntary debtors' credit facilities with Banco Popular, although there were other officers directly working with the credit facilities, particularly the syndicated credit facility, in which other banks participated. Banco Popular was the agent for the syndicate loan.

Prior to the filing of the involuntary petitions the banks that formed the syndicate (Banco Popular, Banco Santander de Puerto Rico, Firstbank, and the Economic Development Bank) met in order to discuss what steps to take in relation to the involuntary debtors' loan. One action taken was the filing of two actions against the involuntary debtors around September 2015. The discussions concerning the filing of the state court actions and the filing of the involuntary petitions were not directly related. The considerations and analysis of the filing of the involuntary petitions were made by counsel for the syndicate banks.

However, Mr. Pericás gave a detailed explanation of the reasons that triggered the filing of the involuntary petitions. The same are found in the minutes of the hearing held on July 17, 2019 (dkt. #494, pages 62–69 ). The court highlights below the same in part.

Mr. Peric[á]s proceeded to explain the reasons that triggered the filing of the bankruptcy petitions. He testified that around September 2016, after a year (365 days) of the bank not receiving payment for the principal or interest on the loans, which is important for banks under local banking law because after a year lapses without receiving payment, banks have to charge the full amount of the loan, regardless of the value of the collateral. Thus, the banks sat down to assess the situation, they did not want to charge the full amount of the loan but there was no progress on the sale of the terminal. Even though there were parties that were interested, and they had capital to support the transaction. There was the case of Sargeant Marine which had the writ of attachment and they did not know if there could be more cases like these. Therefore, they decided to exercise the remedies under the contract. He stated that they tried to agree on a foreclosure agreement, but that did not prosper, thus the banks went ahead and filed a collection claim around September 2016. Shortly thereafter, the banks learned through a member of the bank syndicate that some of the plants were being leased to third parties. Banco Popular was not aware of that situation. Mr. Peric[á]s testified that they requested the borrower to allow the banks to visit some of the plants. He stated that around October 2016, a group of officers from the bank syndicate visited nine (9) plants and they learned that four (4) of the plants; Aguada; Arecibo, Manatí and Salinas were leased to a company named Transporte Rodriguez. Two of the plants in Barranquitas and Caguas were leased to Carlos Ortiz. A bank officer from Banco Popular noticed that the equipment at Caguas labeled as property of Betteroads and Betterecycling. The Carolina plant was leased to someone identified as Engineer [Purros?]. The Humacao plant, which the bank understood was not operating based on conversations with the borrower, was being leased and operated to Javi Melendez. The banks were not aware that the assets that were the banks' collateral were being leased to third parties. Their counsel at the same time wanted to know whether Betteroads and Betterecycling was doing business with the municipalities so they were looking at the Registry of the Puerto Rico Comptroller's office (Oficina del Contralor de Puerto Rico). They identified two (2) contracts that seemed to be projects awarded to Betteroads and Betterecycling and there was an attempt to transfer those contracts to a company under the name of Puerto Rico Asphalt. Around the same time, through a random google search they learned that a license under the nuclear regulatory commission that was under Betteroads' name was transferred to Puerto Rico Asphalt.

He further stated that once the accounts receivables were foreclosed, they attempted to collect payments and there was a significant discrepancy between the balance of accounts receivables as reported by the borrower to the banks and the amounts the municipalities recognized as the balance of those accounts receivables. The difference was significant. In some cases, the municipality was recognizing about 10% of the amount reported by the borrower. In addition, they were also following the local state court website to find out if there was additional litigation being filed against the borrower because that would be a concern because it could put the assets at risk in case of an adverse decision in local court.

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