LUQUILLO PLAZA CORP

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IN THE UNITED STATES BANKRUPTCY COURT FOR
THE DISTRICT OF PUERTO RICO
IN RE:
LUQUILLO PLAZA CORP 	CASE NO. 07-04440 BKT
Chapter 7
XXX-XX5746
FILED & ENTERED ON 12/08/2010
Debtor(s)
OPINION AND ORDER
At hearing held on September 22, 2010, this Honorable Court ordered
parties to file motions on the legality of the Option to Purchase Agreement
[hereinafter “Purchase Agreement] signed by Trustee and Mr. Pedro Umpierre
Torregrosa [hereinafter “Buyer”]. The parties have complied and the matter is
submitted. Buyer argues in his motion that the Purchase Agreement is null
under Puerto Rico Law because it reserved Trustee’s right to continue
marketing the property to third parties, and to rescind the agreement should a
better price be obtained for the same property. The trustee counters that the
instant proceeding involves an agreement for the sale of estate’s assets, thus
it is a core proceeding governed by the Bankruptcy Code and under the
authority of this Court. For the reasons stated below, this Court finds that
the Purchase Agreement was a legally binding contract, in accordance with the
Trustee’s obligation under bankruptcy law, therefore the chapter 7 trustee’s
forfeiture of the $50,000.00 good faith deposit was proper.
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BACKGROUND
Debtor, Luquillo Plaza Corp., filed a Chapter 7 petition for relief on
August 8, 2007. 	Schedule A filed with Debtor’s petition listed real property
as follows: “Property Lot #3, Carr. No. 3, Kilometer 15.2, Luquillo, PR” with
a scheduled value of $750,000.00. Upon inquiry and investigation Trustee
initiated proceedings to administer this asset of the bankruptcy estate,
described at the Registry of Property as follows:
“RUSTICA: Parcel of land located at Mata de Platano Ward within the
municipality of Luquillo. It is bounded by the NORTH, with lot number 2
owned by the Puerto Rico Industrial Development Company; by the SOUTH,
with lands owned by Sucesión Méndez Bás; by the EAST, with State Road
#3; and by the WEST, with railroad owned by the Fajardo Development
Railroad. It has an area of 4, 682.43 square meters, equivalent to one
“cuerda” and one thousand nine hundred thirteen ten thousandths of
another.”
At the time of the filing, the deeds of purchase transferring property in
favor of Debtor had been presented but not inscribed in the Registry of
Property. Upon further investigation Trustee learned that the owner of the
asset’s adjacent lot was Mr. Pedro Umpierre Torregrosa. On December 4, 2007,
four months after debtor’s filing for relief, Trustee signed a Purchase
Agreement 	with the owner of the lot immediately adjacent to the property,
Buyer. Terms of the purchase agreement signed by the parties were the
following:
a) The purchase price was $1,000,000.00. A good faith deposit of $50,000.00
was paid to the Trustee.
b) The sale of the property was subject to the filing of a notice of sale. The
Trustee explicitly reserved his right to accept any better offer received on
or before the date of closing, but subject to an auction between buyer and any
additional interested parties.
c) The agreement explicitly states that the sale was subject to the Bankruptcy
Court’s entry of order directing the Registrar of Property to inscribe the
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asset in favor of Debtor. Thus, it was agreed that the sale would take place
within 60 days after the entry of the court order.
d) If Mr. Umpierre failed to purchase the property then the good faith deposit
would be forfeited by the Trustee.
e) The sale was to be made without warranty of any kind. To be purchased “as
is, where is.”
With the exception that the sale would be conducted free and clear of liens, a
reading of the contract shows that aside from the aforementioned, Buyer made
no other reservations or conditions for the purchase of the property.
In compliance with the terms of the purchase agreement and his duties
pursuant to 11 USC § 704, on December 18, 2007, Trustee filed adversary
proceeding number 07-00343, seeking declaratory judgment directing the
Registrar of Property to inscribe the asset in favor of Debtor. On July 31,
2008, judgment was entered declaring the property part of the bankruptcy
estate and ordering its inscription at the Registry of Property, Carolina
Part, in favor of Debtor. On April 16, 2008, Trustee filed applications for
employment of notary and realtor, both granted by the Court. Pursuant to the
terms of the purchase agreement, Buyer was to purchase the property on or
before September 29, 2008 (60 days after entry of the judgment dated July 31,
2008). 	On August 27, 2008, Trustee filed “Notice of Intent to Sell Property
at Private Sale” wherein the Trustee gave notice of his intention to sell the
property to Buyer as per the terms of the purchase agreement. An amended
notice of sale was filed on September 15, 2008, upon request of secured
creditor, LPP Mortgage Ltd.
Upon this Court’s entry of judgment on July 31, 2008, the Trustee and
the professionals hired by the estate notified Buyer, that the terms of the
Purchase Agreement had been met by the Trustee and that he was ready for
closing. Instead of purchasing the property, Buyer, through Carlos E.
Rodríguez Quesada Esq., sent a letter to the Trustee dated September 18, 2008,
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requesting the return of the deposit based on the allegation that the property
had a billboard which is leased by a third party. A meeting was held by the
parties and their counsel on October 15, 2008, where the Trustee agreed to
grant an extension for the purchase of the property until November 20, 2008.
Despite multiple calls to Buyer and Mr. Rodriguez Quesada, no answer was
received and the terms of the contract, along with the extension, expired
without Buyer signing the deed of purchase.
DISCUSSION
Article 1042 of the Puerto Rico Civil Code, 31 L.P.R.A. § 2992 states
that obligations are created by law, by contracts, and quasi contracts, and by
illicit acts and omissions in which a kind of fault or negligence occurs.
Obligations arising from law are not presumed, and the provisions of the laws,
which may have established them, shall govern them. Article 1043 of the Civil
Code, 31 L.P.R.A. § 2993. It is for this reason that Courts may not relieve a
party of its obligations to do whatever it was agreed to do by contract,
provided said contract is legal, valid and without defect. Cerveceria Corona
v. Commonwealth Insurance Co.,115 D.P.R. 342 (1986).
In Irizarry Lopez v. Garcia Camara, 155 D.P.R. 713 (2001), the Supreme
Court of Puerto Rico found that when interpreting a sales option contract it
will hold to the literal meaning of its terms when these are clear and leave
no doubts as to the intention of the parties. Article 1210 of the Civil Code
establishes that “[c]ontracts are perfected by mere consent, and from that
time are binding, not only in regard to the fulfillment of what has been
expressly stipulated, but with regard to all consequences which according to
their character, are in accordance with good faith, use, and law.” 31 L.P.R.A.
§ 3375.
A contract is in existence between two parties when the following
conditions are met (1) the consent of the contracting parties; (2) a definite
object which may be the subject of the contract; and (3) the cause for the
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obligation, which may be established. See, Article 1213 of the Civil Code, 31
L.P.R.A. § 3391. 	Once the essential conditions required for their validity
exist, contracts shall be binding between the parties. See, Article 1230, 31
L.P.R.A. § 3451. Parties are free to accord and contract all that they deem
appropriate as long as it is not against the law, morals or public order.
Vélez López v. Izquierdo Stella, 162 D.P.R. 88 (2004);Article 1207 of Puerto
Rico Civil Code, 31 L.P.R.A. § 3372. Since the signing of a contract, parties
are bound to comply with that which was expressly agreed. Article 1210 of the
Civil Code, 31 L.P.R.A. § 3375.
Article 1044 of the Civil Code of Puerto Rico, 31 L.P.R.A. §2994 states
that 	“[o]bligations 	arising 	from 	contracts 	have 	legal 	force 	between 	the
contracting 	parties, 	and 	must 	be 	fulfilled 	in 	accordance 	with 	their
stipulations.” 	Article 1207 of the Civil Code, 31 L.P.R.A. §3372 provides that:
“[T]he contracting parties may make the agreement and establish the
clauses and conditions which they may deem advisable, provided that
they are not in contravention of law, morals, or public order.”
Once the essential conditions required for their validity exist, contracts
shall be binding between the parties. See, Article 1230, 31 L.P.R.A. § 3451.
The contractual provisions of the Purchase Agreement defined and controlled
the legal relationship between the Chapter 7 trustee and Buyer.
The contract, which this Court finds was legally binding under state
law, is also within the ambit of bankruptcy law. 	Contracts for the sale of
real property in bankruptcy are primarily governed by the Bankruptcy Code not
by the Civil Code of Puerto Rico. In re Terrace Chalet Apartments, Ltd., 159
B.R. 821, (N.D. Ill. 1993); 11 U.S.C. § 363(b). A purchase-option agreement
for the sale of estate property is a core proceeding governed by the
Bankruptcy Code and Rules. Such a contract directly deals with the sale of
estate’s assets for distribution to creditors by a bankruptcy trustee.
Pursuant to 28 U.S.C. § 157 (b)(1) and(2)(M) and (N) this Court has
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jurisdiction over sales of property of the bankruptcy estate. 11 U.S.C. §
541(a) provides that the commencement of a case filed pursuant to Chapter 7 of
the Bankruptcy Code creates an estate. The bankruptcy estate is administered
by the Chapter 7 Trustee who is the representative of the estate and must
“collect and reduce to money the property of the estate [...], and close the
estate as expeditiously as is compatible with the best interest of parties.”
11 U.S.C. §§ 323, 704. Buyer’s arguments in his motion ignore that the
applicable law governing the contract before this Court is the Bankruptcy Code
and Rules. He completely overlooks the provisions governing the sale of assets
of the bankruptcy estate and cites local state case law which is inapplicable
because in those cases the local courts were not entertaining issues regarding
the sale of assets under the administration of a Chapter 7 Trustee. 	Section
363(b) of the Bankruptcy Code authorizes the Trustee to sell property of the
bankruptcy estate. In re WHET, Inc., 12 B.R. 743 (Bkrtcy.Mass. 1981).
Bankruptcy courts have found that in complying with his duties to maximize the
return of assets of the estate, the Trustee may place conditions on the sale
of estate assets. In re Spenlinhauer, 231 B.R. 429 (D.Me.1999); Joseph
DeMarco, Inc. V. Campo, 163 B.R. 49 (S.D.N.Y. 1994); 11 U.S.C. § 363(e). This
is necessary in order for the Trustee to comply with his obligation to
maximize revenues for the bankruptcy estate. In re S.N.A. Nut Co.,186 B.R. 98
(Bkrtcy. N.D.Ill. 1995). Buyer fails to acknowledge that he was purchasing
property of the bankruptcy estate subject to the administration of the Trustee
and the provisions of the Code. 	Pursuant to 11 U.S.C. § 704 the Trustee has
an obligation to maximize the return on the sale of the real property and thus
accept a better offer and hold a public auction if necessary. The finality of
sales of the assets of the estate is determined, not under state law, but
under federal bankruptcy law. Joseph DeMarco, Inc. V.Campo, 163 B.R. 49
(S.D.N.Y. 1994); In re Allison Warehouse & Transfer, Inc., 145 B.R. 293
(Bkrtcy.E.D.Ark. 1992). It is important to note that in this case an auction
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was not necessary because no better offer was received.
The Buyer argues that the Purchase Agreement is null because it
incorporates an auction clause recognizing Trustee’s obligation. On the
contrary, such a clause needs to be incorporated in order to comply with the
Bankruptcy Code and assure a good faith negotiation where a purchaser is aware
of the requirements of the Code, before he signs the agreement. 	To accept
Buyer’s argument that such a clause makes a purchase option agreement null
would mean that the Trustee would be stripped of any authority to sell assets
of the estate while, at the same time, complying with his duty to maximize
distribution to creditors. The sale of the assets of the estate goes hand-in-
hand with distribution to creditors.
CONCLUSION
The motion to set aside the notice of sale and return of the deposit
filed by Buyer on December 4, 2008 [Dkt. No. 61] is hereby DENIED. The Court
rules that the Chapter 7 trustee acted in accordance with state and federal
law. 	The request for imposition of monetary sanctions and attorney’s fees
filed by the Chapter 7 trustee on December 26, 2008 [Dkt. No. 64] is hereby
DENIED. Each party is to assume their legal costs and fees.
IT IS SO ORDERED.
San Juan, this 08 day of December, 2010.
Brian K. Tester
U.S. Bankruptcy Judge
CC: 	DEBTOR(S)
ROBERT 	MILLAN
WILFREDO 	SEGARRA MIRANDA
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