In re Promoters

499 B.R. 192

In re NATIONAL PROMOTERS AND SERVICES, INC., Debtor.

No. 12–01076 (ESL).

United States Bankruptcy Court, D. Puerto Rico.

Sept. 9, 2013.

Carmen D. Conde Torres, Alicia I. Lavergne Ramirez, San Juan, PR, Luisa S. Valle Castro, C. Conde & Associates, San Juan, PR, for Debtor.

OPINION AND ORDER

ENRIQUE S. LAMOUTTE, Bankruptcy Judge.

This case is before the court upon the Debtor's Motion to Set Aside Order Prohibiting the Use of Cash Collateral and to Show Cause (the “ Motion for Reconsideration ”, Docket No. 186). The main controversy hinges on whether creditor LSREF2 Island Holdings Ltd. (“Island Holdings”) has a valid lien over the Debtor's rent proceeds. For the reasons stated below, the court determines that a valid lien was properly constituted over the Debtor's rent proceeds in favor of Island Holdings. Consequently, the Debtor's Motion for Reconsideration is hereby denied.

Procedural Background

The Debtor filed a voluntary Chapter 11 bankruptcy petition on May 15, 2012 (Docket No. 1).

On June 6, 2012, FirstBank filed a Proof of Claim (Claims Register No. 7–1) and a Motion Submitting Documents in Support of Claim No. 7 (Docket No. 40). On April 19, 2013, Island Holdings filed a Transfer of Claim (Docket No. 136) informing that FirstBank had transferred to it Claim No. 7–1.

On June 5, 2013, Island Holdings filed an Urgent Request for Entry of Order Prohibiting the Use of Island Holdings' Cash Collateral and for Adequate Protection (“ Motion to Prohibit the Use of Cash Collateral ”, Docket No. 180) alleging that prior to the filing of the bankruptcy petition, FirstBank had entered into various loan and security agreements with the Debtor and others, whereby FirstBank extended certain promissory notes, guarantees, pledge agreements, security agreements, mortgage notes agreements, deeds of mortgages and assignment of leases and rents, among others. Island Holdings sustains that pursuant to the Assignment of Leases and Rents agreement, it has a first priority interest in the cash collateral pursuant to 11 U.S.C. §§ 363(a) and 552(b)(2). It argues that the Assignment of Leases and Rents was duly authenticated by Notary Public José J. Ledesma on December 28, 2001, Affidavit No. 1451, and consequently the perfection of a continuing lien on its proceeds complies with the Civil Code of Puerto Rico and case law. Island Holdings also contends that it has not consented and does not consent to the Debtor's use of its cash collateral and that the Debtor has not provided adequate protection for such use. The Assignment of Leases and Rents was filed with a Motion Submitting Document on June 6, 2012 (Docket No. 181).

On June 6, 2013, the court entered an Order Prohibiting the Use of Cash Collateral and to Show Cause (the “ Order Prohibiting the Use of Cash Collateral ”, Docket No. 182) ruling that the Debtor, its employees, contractors and agents were prohibited from using any cash collateral of Island Holdings. The court also ordered the Debtor to show cause in writing on or before June 13, 2013 why a further order should not be entered: (a) ordering the Debtor to forward all proceeds from the rental contracts to Island Holdings immediately; (b) requiring that any cash collateral of Island Holdings that is in the possession, custody or control of the Debtor or any of the Insiders of the debtor (as such term is defined in 11 U.S.C. § 101) be turned over to Island Holdings, whether now existing or hereafter created; (c) requiring an accounting of all cash collateral received by or for the benefit of the Debtor since the petition date; (d) permitting Island Holdings immediate access to the books and records of the Debtor, including all electronic records on any company computers, to make electronic copies, photocopies or abstracts of the business records of the Debtor. A hearing was scheduled for June 18, 2013. The Order was entered without prejudice to the Debtor moving the court for the use of case collateral pursuant to 11 U.S.C. § 363, Fed. R. Bankr.P. 4001–(2) and LBR 4001–2.

On June 12, 2013, the Debtor filed the Motion for Reconsideration (Docket No. 186) alleging that the Order Prohibiting the Use of Cash Collateral was entered without allowing the Debtor the opportunity to respond to the Motion to Prohibit the Use of Cash Collateral and that Island Holdings does not have a validly perfected security over the rent proceeds because it failed to show that it filed a financing statement under Puerto Rico's Secured Commercial Transactions Act of 1995, as amended, 19 L.P.R.A. §§ 2101 et seq. (“Puerto Rico's Secured Commercial Transactions Act”). The Debtor argues that Island Holdings does not have any cash collateral rights or any right to receive adequate protection on the rent proceeds. Alternatively, the Debtor argues that in the specific case of rents, adequate protection does not need to be provided if the rents are being renewed on a monthly basis and are not declining in value, and that in the instant case, rents have not decreased, but rather increased, as new leases have been obtained for its premises. That same day, on June 12, 2013, the court entered an Order and Notice (Docket No. 187) ruling that the Debtor's Motion for Reconsideration would be considered at the June 18, 2013 hearing.

On June 17, 2013, Island Holdings filed a Reply to Debtor's Motion for Reconsideration and to Set Aside [the Order Prohibiting the Use of Cash Collateral] and Memorandum of Law in Support (Docket No. 192) contending that Puerto Rico's Secured Commercial Transactions Act adopted 9 of the 13 articles of the Model Uniform Commercial Code (“UCC”), and that notwithstanding such adoption, Puerto Rico excluded the applicability of the UCC to the creation or transfer of an interest in or lien or real estate, including a lease or rents thereunder pursuant to 19 L.P.R.A. § 2004. Consequently, Island Holdings sustains that the attachment and lien on real estate properties are governed by state law, in particular, Article 1416 of the Civil Code of Puerto Rico, 31 L.P.R.A. § 3941, as interpreted by the Supreme Court of Puerto Rico in IBEC Housing v. Banco Comercial, 117 P.R. Off. Trans. 446, 117 D.P.R. 371 (1986), and Building Maintenance v. Hato Rey Executive, infra, ruling that in order for an assignment to be effective against third parties, even if the tenant is not notified, the document must include a fixed date and that an affidavit before a notary public suffices to satisfy that requirement. Island Holdings concludes that pursuant to Article 1416 of the Civil Code of Puerto Rico, supra, it has a properly perfected pre-petition security interest in the Debtor's rent proceeds pursuant to the Assignment of Leases and Rents.

On June 18, 2013, the court held a hearing to consider the Debtor's use of cash collateral, if any ¹, and its Motion for Reconsideration. The court determined that the contested matter involved a two-step process: (a) determining if Island Holdings has a lien over cash collateral; and (b) if so, what adequate protection would be provided, if any. The Debtor was granted 7 days to file uncontested facts, Island Holdings was granted 14 days thereafter to file its adopted legal argument and the Debtor was granted 14 days to reply. See Docket No. 202.

On June 19, 2013, the Debtor filed a Motion in Compliance with Order (Docket No. 198) submitting its statement of uncontested facts. On July 3, 2013, Island Holdings filed its Motion in Compliance with Order (Docket No. 204) where, in addition to restating the arguments and legal grounds it had already discussed in its prior Motion to Prohibit the Use of Cash Collateral, it proffers that Deed No. 42 of Mortgage executed by the Debtor and FirstBank on December 28, 2001 before Notary Public José J. Ledesma (the “ Deed of First Mortgage ”) also provides for the for the assignment of rents in favor of the lender upon the occurrence of an event of default security (Docket No. 40–12, p. 17), and that said mortgage deed is duly recorded at Puerto Rico's Property Registry. Additionally, Island Holdings also sustains that the Assignment of Rents and Leases falls within the scope of Section 552(b) of the Bankruptcy Code.

On July 17, 2013, the Debtor filed a Reply to Island Holdings' Objection to Statement of Uncontested Facts and Response to Case Law Cited in Open Court (Docket No. 211) contesting the allegation that the assignment of rents was duly perfected through the recordation of the Deed of First Mortgage and citing Simonds v. Registrador de Humacao, 22 P.R.R. 567, 22 D.P.R. 608 (1915), for the proposition that an assignment of rent was a purely personal contract, not an interest in real estate under Puerto Rico's Mortgage Law ². The Debtor also cites Cintrón v. El Registrador de Caguas, 29 P.R.R. 392, 29 D.P.R. 420 (1921), for the proposition that a deed for assignment of rents cannot be recorded in the Property Registry because it constitutes an assignment of a personal property interest. Thus, the Debtor reaffirms that an assignment of rents can only be secured in Puerto Rico through the Secured Commercial Transactions Act, supra, and that such compliance did not happen in the instant case. In regards to Island Holdings' argument that the assignment of rents falls under 11 U.S.C. § 552(b), the Debtor sustains that said section has certain exceptions, one of which is Section 544, which provides for the avoidance of an unperfected security.

On July 24, 2013, Island Holdings filed a Motion to Strike Debtor's Reply to Island Holdings' Objection to Proffers Made at Cash Collateral Hearing, Docket No. 211 and Request for Entry of Order (Docket No. 217) claiming that Debtor cited various cases in Spanish, which is prohibited by Local Rules and case law and thus requests the court to strike the Debtor's Reply at Docket No. 211. On July 29, 2013, the Debtor filed a Response to Motion to Strike Debtor's Reply and Request for Order (Docket No. 219)...