Popular Auto, Inc. v. Reyes-Colon (In re Reyes-Colon)

922 F.3d 13

IN RE: Edgar A. REYES-COLON, Involuntary Debtor.

Popular Auto, Inc.; Banco Popular De Puerto Rico, Appellees, Cross-Appellants,

v.Edgar A. Reyes-Colon, Appellant, Cross-Appellee.

Nos. 17-1971

17-1972

United States Court of Appeals, First Circuit.

April 24, 2019

Michael J. Fencer, with whom Lynne F. Riley, David Koha, and Casner & Edwards, LLP, Boston, MA, were on brief, for appellant and cross-appellee.

Roberto Abesada-Agüet, with whom Sergio E. Criado, Correa-Acevedo & Abesada Law Offices, PSC, Guaynabo, PR, Eldia Díaz-Olmo, San Juan, PR, Díaz-Olmo Law Offices, Gerardo Pavía Cabanillas, and Pavía & Lazaro, PSC were on brief, for appellees and cross-appellants.

Before Howard, Chief Judge, Thompson and Kayatta, Circuit Judges.

KAYATTA, Circuit Judge.

Edgar Reyes-Colon ("Reyes-Colon"), a licensed plastic surgeon specializing in facial cosmetic surgery, allegedly failed to repay certain debts. In November 2006, one of his creditors, Banco Popular de Puerto Rico ("Banco Popular"), filed an involuntary bankruptcy petition that a second creditor, Popular Auto (collectively, "the Banks"), joined. Under 11 U.S.C. § 303(b), fewer than three petitioning creditors cannot force a debtor into bankruptcy unless the debtor has fewer than twelve creditors in total. So the parties embarked on what has now turned into twelve years of litigation concerning the number of Reyes-Colon's creditors and whether he might somehow be placed in bankruptcy involuntarily for "equitable" reasons. For the following reasons, we affirm the decision of the bankruptcy court to dismiss the petition for want of a third petitioner.

I.

Reyes-Colon obtained a loan from Popular Auto and guaranteed an affiliate's loan from Banco Popular. On November 22, 2006, after Reyes-Colon allegedly failed to pay his debts, Banco Popular filed an involuntary bankruptcy petition, forcing Reyes-Colon into bankruptcy proceedings. Popular Auto joined the petition shortly thereafter.

In early 2007 the bankruptcy court dismissed the involuntary petition, concluding that Reyes-Colon had more than twelve eligible creditors at the time the involuntary petition was filed and that, after a reasonable opportunity, Banco Popular had failed to join a third creditor to maintain the petition under section 303(b)(1). See In re Reyes-Colon, Nos. PR 07-053, 06-04675-GAC, 2008 WL 8664760, at *1 (B.A.P. 1st Cir. Nov. 21, 2008). A year and a half later, the bankruptcy appellate panel ("BAP") set aside the dismissal and remanded the case. Id. The panel determined that all creditors should have been given notice and the opportunity for a hearing before the bankruptcy court dismissed the case. Id. at *8.

Reyes-Colon did not appeal that panel ruling. Instead, the parties returned to the bankruptcy court for another three-plus years of proceedings. On March 2, 2011, Reyes-Colon moved for summary judgment, again seeking dismissal of the petition. The bankruptcy court partially granted the motion on May 23, 2012, holding that Reyes-Colon had fifteen qualified creditors at the time the involuntary petition was filed. In re Reyes-Colon, 474 B.R. 330, 383, 391 (Bankr. D.P.R. 2012). The court nevertheless allowed the parties to conduct discovery and present evidence on whether "special circumstances" existed to excuse compliance with section 303(b)(1)'s three-creditor requirement and whether Reyes-Colon had been paying his debts as they became due. Id. at 391.

The bankruptcy court eventually held evidentiary hearings in late 2015. On September 2, 2016, the bankruptcy court dismissed the involuntary petition, citing Law v. Siegel, 571 U.S. 415, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014). In re Reyes-Colon, 558 B.R. 563, 568 (Bankr. D.P.R. 2016), rev'd, No. 16-2638 (GAG), 2017 WL 6365433 (D.P.R. Aug. 9, 2017). The court found that although Reyes-Colon schemed to defraud his creditors by misrepresenting his finances, id. at 565, the court did not have the equitable power to override the provisions of section 303(b)(1), id. at 568. The Banks appealed to the district court.

The district court reversed the dismissal order and remanded to the bankruptcy court. In re Reyes-Colon, 2017 WL 6365433, at *1. It found that the involuntary petition did not need three or more petitioning creditors because Reyes-Colon had fewer than twelve eligible creditors when the petition was filed. Id. The court also found that Reyes-Colon was generally not paying his debts as they became due, and required entry of an order of relief against Reyes-Colon on remand pursuant to section 303(h)(1). Id. This appeal and cross-appeal followed.

II.

Section 303(b) of the Bankruptcy Code requires that an involuntary petition against a debtor have at least three petitioning creditors if, at the time the petition was filed, the debtor had twelve or more eligible creditors. 11 U.S.C. § 303(b)(1)-(2). Reyes-Colon argues that he had twelve or more creditors at the time the petition was filed, and that the involuntary petition is therefore insufficient because there are only two petitioning creditors -- Banco Popular and Popular Auto.

In response, the Banks raise two types of arguments. First, they claim that Reyes-Colon has procedurally waived his right to put forward the arguments that might arguably support his position. Second, they argue on the merits that the bankruptcy court did indeed err in dismissing their petition.

A.

We begin with the several asserted threshold issues of waiver raised by the Banks. When the Banks appealed the bankruptcy court summary judgment rulings at issue to the district court, they argued, among other things, that the bankruptcy court erred in determining that Reyes-Colon had fifteen eligible creditors as of the date the involuntary bankruptcy petition was filed. In response, as appellee, Reyes-Colon argued only that the Banks had failed to preserve the creditor numerosity issue. The district court then ruled that Reyes-Colon had fewer than twelve eligible creditors as of the date of filing and that he was generally not paying his debts as they came due. In re Reyes-Colon, 2017 WL 6365433, at *1. In Reyes-Colon's opening brief in this court, he asserts that the bankruptcy court correctly determined that he had more than twelve eligible creditors when Banco Popular filed its petition and that the district court erred in ruling otherwise. He devotes very little argument to this effect. Rather, he quotes the statute's text, argues briefly that the burden of proof rests on the petitioning creditors, purports to incorporate and refer us to the bankruptcy court's summary judgment order for further explanation, and then briefly argues that there was at least one other creditor overlooked by the bankruptcy court.

The Banks claim waiver by Reyes-Colon, twice over. First, they say that by failing to present an argument on the number of creditors to the district court, Reyes-Colon waived the ability to later defend the bankruptcy court ruling on that issue. Second, the Banks argue that by failing to develop more fully his argument in favor of the bankruptcy court ruling in his opening brief in this court, Reyes-Colon again waived his ability to contend on appeal that he had twelve or more creditors when the petition was filed.

These two contentions of waiver pose relatively tricky issues of appellate procedure on which there is no controlling precedent that has come to our attention. Title 28 U.S.C. § 158(a) - (b) provides for intermediate appeals either to the district court or to the BAP. See also Fed. R. Bankr. P. 8003 -05. A party who loses that intermediate review may either accept the loss and return to the bankruptcy court, with the BAP or district court ruling controlling, see, e.g., In re Hermosilla, 450 B.R. 276, 287-88 (Bankr. D. Mass. 2011), or may appeal to this court, see 28 U.S.C. § 158(d)(1). In the event of an appeal to this court, however, we do not review per se the BAP or district court ruling. Rather, we "assess[ ] the bankruptcy court's decision directly," In re DeMore, 844 F.3d 292, 296 (1st Cir. 2016) (quoting In re Sheedy, 801 F.3d 12, 18 (1st Cir. 2015) ), giving no deference to the intermediate appellate ruling, see In re IDC Clambakes, Inc., 852 F.3d 50, 59 (1st Cir. 2017). In short, once a notice of appeal to this court has been filed, the operative ruling under review is the bankruptcy court ruling, with the BAP or district court ruling serving more or less like an amicus brief (albeit one that can be extremely helpful). In re Old Cold LLC, 879 F.3d 376, 383 n.2 (1st Cir. 2018).

One resulting oddity is that when the BAP or district court disagrees with the bankruptcy court, the appellant in this court is the party supporting the ruling under review (the bankruptcy court ruling). Generally, such a party nevertheless explains in its initial brief why the BAP or district court erred, treating the intermediate appellate opinion in effect as if it were the opening brief. Here, though, the district court opinion said almost nothing on point (for a reason we will explain next). And Reyes-Colon claims to be happy with the bankruptcy court's opinion, with one small exception. So, Reyes-Colon in his opening brief simply refers us to the bankruptcy court's summary judgment order to demonstrate, in his words, "that [the Banks] failed to carry their burden of proof that, as of the petition date, Reyes-Colon had fewer than 12 eligible creditors."

This court has held that "[a]rguments incorporated into a brief solely by reference to district court filings are deemed waived."

United States v. Burgos-Montes, 786 F.3d 92, 111 (1st Cir. 2015). But that rule comes from cases where the appellant has lost in the district court and is seeking to alter a judgment or order through appellate review. There is no controlling precedent that deems it a defalcation of any type for an appellant who defends a lower court ruling to rest on that ruling. If a party truly feels content to rely on the opinion of the bankruptcy court...