EMPRESAS INABON INC et al v. HATTON GOTAY

OCR transcription for search; preserved printed pages are authoritative

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO

IN RE: : CASE NO. 96-06038
EMPRESAS INABON, INC., : CHAPTER
Debtor
IN RE: : CASE NO. 97-14399
ALFONSO HERNANDEZ TORRES and : CHAPTER 11
RAMONITA ORTIZ VAZQUEZ, :
Debtors
IN RE: : CASE NO. 97-14400
ALFONSO A. HERNANDEZ ORTIZ, ; CHAPTER 11
Debtor .
EMPRESAS INABON, INC., : ADVERSARY NO. 01-0073

ALFONSO HERNANDEZ TORRES and
RAMONITA ORTIZ VAZQUEZ, and
ALFONSO A. HERNANDEZ ORTIZ,

Plaintifis

Vv.

ROBERT HATTON GOTAY and
MARIA DE LOS ANGELES RENTAS,

Debtors

OPINION AND ORDER
This case came before the court for trial on January 10, 11 and 12, 2005, and
February 9 and 10, 2005. At issue is the validity and allowed amount of the proofs of

claim filed by defendants Robert Hatton Gotay and Maria de los Angeles Renftas (“the

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Hattons”) in the debtors’ bankruptcy cases, which are based upon a series of financial
1 transactions entered into between the parties. The debtors argue that they are jointly
2 liable to pay the Hattons only $3,021,145.00, which includes principal and interest at the
3 rate of 16.75% per annum. The Hattons argue that they should receive the entire amount
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claimed in their proofs of claim, including interest, fees and charges which, according to
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5 their expert, amounted to $12.7 million dollars as of June, 2002.
7 Having considered the stipulated facts, the testimonial and documentary evidence
8 presented at trial, and the post-trial memoranda of law, the court concludes that as of the
9 filing of its bankruptcy petition on August 6, 1996, Empresas Inabén was indebted to the
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Hattons, jointly with Hernandez Torres and Hernandez Ortiz, in the amount of
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$4,523,894.59'. Further, as of the filing of their bankruptcy petitions on December 5,
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43 1997, the amount to which Hernandez Torres and Hernandez Ortiz were indebted to the
14 Hattons had increased to $7,856,780.65". However, the court has not been placed in a
1 position to determine with certainty to what extent the claims are secured as to each
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'This is approximately the amount of the secured claim filed by the Hattons in Inabén’s
18 bankruptcy petition, claim no. 119, and is based upon the amounts agreed upon by the
19 parties as to each of the four debts in the “Stipulation” (Exhibit PP) as of June 18, 1996,
plus interest calculated on those amounts as of August 6, 1996, the date of the filing of
20 Inabén’s bankruptcy petition. The proof of claim contains a mathematical error;
although it shows a total of $4,523,894.76, the actual total of the four principal amounts,
21 plus interest as of the petition date, totals $4,523,894.59.
22 ?This is the amount of the claim filed by the Hattons in the Hernandez Torres case
93 (unsecured) and the Hernandez Ortiz case (secured) on March 2, 1998 (claims no. 10 and
13, respectively), and is based upon the amounts agreed upon by the parties as to each of
24 the five debts in the Renewal Agreement (Exhibit XI) as of May 15, 1997, plus interest
calculated on those amounts as of December 5, 1997, the approximate date of the filing
25 of the Hernandez, Torres and Hermandez Ortiz bankruptcy petitions,
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debtor, and upon what basis they are secured, because it does not know the value of the

1 properties securing the debts. Notwithstanding, the court is able to determine that the

2 Hattons’ claims are not oversecured, a fact assumed by all parties at trial; therefore, they

; are not entitled to post-petition interest, fees and costs on their claims.

Background

6 Debiors filed the complaint commencing this adversary proceeding on August 16,

7 2001, for a determination of the validity, priority or extent of lien or other interest in

8 property. Debtors also objected to the claims filed by the Hattons in their bankruptcy

8 proceedings. The first cause of action seeks to have the Hattons’ claims denied in their
" entirety and that the court rescind the four financial agreements entered into between the
; parties because they are unenforceable and against public policy due to the Hatton’s
13 unconscionable negotiation tactics. The second cause of action seeks to have the
14 agreements declared void and unenforceable pursuant to 31 L.P.R.A. § 3404 and § 3406
15 because the debtors were intimidated into entering into them. The third cause of action
6 seeks to have the Hattons’ proofs of claim denied in their entirety and the loan
; agreements declared void and unenforceable because they violate Regulation 26-A, which
19 regulates maximum interest rates and finance charges. The fourth cause of action asks
20 that the proofs of claim be denied because of the Hattons’ breach of their fiduciary duty to
ra debtors, which arose from their close business relationship and from debtors’ confidence
22 and trust in the Hattons and SOMO. The fifth cause of action alleges fraud based upon
" the Hattons intentional and willful misrepresentation of facts and concealment of material
; information to induce the debtors into executing the ruinous financial agreements. The
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sixth cause of action alleges that the Hattons and SOMO converted some of the proceeds
of the loan agreements. The seventh cause of action alleges the Hatton’s proof of claim is
invalid under 11 U.S.C. § 502(b)(4) because it improperly includes penalties for
“defaulting” on the Management Agreement, and Hatton’s claim should be limited to the
value of the services he rendered to Inabén. The eighth cause of action alleges that the
proof of claims are invalid under 11 U.S.C. § 506(b) because it includes unreasonable
interest, fees and charges. The ninth cause of action alleges breach of contract with
regard to a mortgage note, executed on November 15, 1995 in the amount of
$1,000,000.00 at 8.75% interest, and pledged to Shell Company PR, Lid. on February 19,
1997, to guarantee a debt, the collateral for which was a 46 cuerdas property belonging to
Hernandez Ortiz.

The Hattons answered the complaint on October 15, 2001. They argue, among
other affirmative defenses, that the debtors’ claims are barred by the doctrines res
judicata and collateral estoppel in that they have already been adjudicated by another
court, and that the parties have already reached a settlement agreement which
encompasses the issues raised in the complaint.

After a series of status and pre-trial conferences, trial was scheduled for January,
2005. The defendants filed proposed findings of fact on January 7, 2005 (dkt. #64), and
the debtors filed proposed findings of fact and conclusions of law on January 10, 2005
(dkt. #65). After the trial, the parties filed post-trial memoranda, including proposed

findings of fact and conclusions of law, on July 26, 2005 (dkts. #91 and 92),

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Stipulated Findings of Fact®

1. On December 7, 1995, a Loan Agreement was signed by ALRA Construction
Corp. (hereinafter “ALRA”) and Southern Mortgage Corporation (“SOMO”) for the sum
of $603,348,00* [hereinafter referred to as “the first loan”) (Joint Exhibit V).

2. From the aforementioned amount, ALRA received the sum of $474,360.11.
The balance of the loan was retained by SOMO for the following:

(a) $24,439.89 for embargo/property insurance

(b) $1,200.00 for manager’s insurance fee

(c) $103,348.00 for SOMO
(Defendants’ Exhibit C).

3. The Promissory Note evidencing this transaction is Exhibit B and the Loan
Agreement is Joint Exhibit V.

4, On January 2, 1996, a Loan Agreement was signed by Empresas Inabén
(hereinafter “Inabén”) and SOMO for the sum of $2,475,000.00 [hereinafter referred to as
“the second loan”} (Joint Exhibit VII).

5. From the aforementioned amount, Inabon received the sum of $1,621,966.00
through a check marked as Joint Exhibit IV. The balance of the loan was retained by
SOMO for the following:

(a) $ 83,500.00 for federal embargo

(b)$ 1,000.00 for the cost of cancelling the embargo
(c) $ 45,000.00 for legal expenses

*The stipulations were submitted in court on January 11, 2005; see minutes of
proceedings, dkt. no. 68 in adversary proceeding no. 01-0073. The stipulations are
transcribed herein, with discrepancies footnoted and comments by the court in brackets.

“The stipulations incorrectly state the amount as $603,603,348.00.

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(d) $ 99,000.00 for origination
(e) $200,000.99 for Alliance Capital

1 () $ 46,000.00 for penalty for sale margination

2 for a total of $475,000.00. (Defendants’ Exhibit G).

° 6. From the proceeds of the loan, $350,000.00 was discounted by SOMO to pay
that sum to Citibank for the benefit of Inabon to pay off the Mortgage Loan that

6 encumbered the property that secured the transactions. See Exhibit F2 (check) and

7 Exhibit FF (Citibank Mortgage Note in the principal amount of $315,000.00 with an

8 interest rate of $15% issued on July 16, 1992).

7. The Exhibits related to this transaction are Exhibits G to Q.

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8. The Promissory Note evidencing this transaction is Exhibit H and the Loan
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2 Agreement is Joint Exhibit VIL.
13 9. The Mortgage Note (Exhibit FF) was delivered by Citibank to SOMO who
14 kept it as additional collateral. Robert Hatton (“Hatton”) currently holds this note. See

16 Exhibit M (Pledge Agreement dated January 2, 1996, between SOMO and Inabén).

° 10. Joint Exhibit IV (check in the amount of $1,621,966.80) was issued to the
. order of SOMO who endorsed the check to Inabén.
19 11. In addition, the amount of $28,034,99, divided into three checks of $9,344.42
20 each, was retained by SOMO; that sum was reduced and discounted from the loan.
21 12. On January 24, 1996, Inabén and Hatton executed an Executive Management
2 Services Agreement (Joint Exhibit VII). This Agreement was guaranteed by Alfonso
, Hernandez Torres (“AHT”) and Alfonso Hernandez Ortiz (“AHO”).
95 13. On January 24, 1996, SOMO, Inabén, AHT and AHO executed a Financial
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Agreement (Joint Exhibit [X).

14, The Executive Management Agreement was cancelled by Inabdn through its
President.

15. On February 5, 1996, Empresas Inab6n, AHT and AHO filed a complaint
against Hatton in the Puerto Rico Court of General Jurisdiction, Ponce Part, case no. JEP
96-0011 (Exhibit DD).

16. On February 16, 1996, Hatton filed two (2) complaints against Empresas
Inabén, AHT, AHO, and ALRA in the Puerto Rico Court of General Jurisdiction, Ponce
Part (Exhibits HH, II)’.

17. Hatton answered the complaint no. JEP 96-0011 on March 21, 1996, and also
filed a counterclaim (Exhibit KK).

18. On June 2, 1996, AHT, AHO, Inabén, ALRA and Hatton and his wife
executed a handwritten document entitled “Acuerdo” [hereinafter referred to as the
“Acuerdo”]. The parties acknowledge that Hatton credited the $24,439.89 that had been
retained until the embargo was paid in full. Said amount was credited and reduced from
the $603,348.00 principal of the first loan, reducing the principal of the first loan to
$578,908.11. The parties further agreed that ALRA, AHT and AHO were to pay Hatton
the following amounts of money for the principal, accrued interest and penalties
regarding the first loan:

(a) Principal $578,908.11

*Although both complaints are dated February 15, 1996, case no. JCD 96-0015(602)
bears no date stamp indicating when it was filed, while case no. JCD 96-0016(603) bears
a date stamp indicating that it was filed on February 16, 1996,

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(b) Interest until June 7, 1996 $ 30,541.20
(c) 10% legal fees $ 57,800.00
(d) 5% breach penalty $ 28,943.00°
(ec) 20% penalty $115,781.62
(f) Creditor’s Fees $ 18,000.00
(g) Creditor’s Expenses $ 4,675.00

(h) Attorney’s Fees until final resolution $ 10,000.00
(i) Penalty for the late payment oninterest $ 1,126.82

For a total amount of $845,777.74. (Exhibit OO).
19. The aforementioned agreement also provided that the $2,475,000.00 second
loan was reduced to $2,391,500.00 and Inabén, AHT, and AHO agreed to pay the

following amounts of money for the principal, accrued interest, penalties and late charges

and creditors’ fee:

(a) Principal $2,391,500.00
(b) Interest to June, 1996 $ 141,314.17
(c) 10% Legal Fees $ 239,150.00
(d) 5% Late Penalty of Monthly Interest Penalty $ 5,090.65
(ec) 20% Penalty $ 115,781.62?
(f) Creditor’s Expenses $ 10,000.00
(g) Creditor’s Attorneys Fees $ 13,350.00

For a total of $2,800,409.70.8 (Exhibit OO).
20. In addition, the parties agreed to pay Hatton $441,900.00 for the cancellation
of the Executive Management Agreement (hereinafter referred to as “the management

agreement debt”) and $262,353.00 for the cancellation of the Financial Agreement

Although the parties stipulated this amount, the “Acuerdo” (Exhibit OO) indicates the
amount was $28,945.00.

7Although the parties stipulated as to this amount, it was not included in the “Acuerdo”
(Exhibit OO) and is obviously not included in the total.

*A lthough the parties stipulated as to this amount, and it is the amount included as the
total in the “Acuerdo”, by the courts calculation the actual amount is $2,800,404.70.

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(hereinafter referred to as “the financial agreement debt”).
1 21. The parties agreed to a repayment schedule of the revised obligation of
2 $4,500,440.40°.
; 22, On June 18, 1996, the parties entered into stipulations [hereinafter referred to
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as the “Stipulation”], represented by their respective legal counsels, in all of the cases
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6 pending in the Superior Court, Ponce Part. Through said stipulations, the charges and
7 principal related to loan #1 [the first loan] were increased to $846,903.00 and the ones
8 related to loan #2 [the second loan] were increased to $2,859,443.00. (Exhibit PP).
9 23. All of the aforementioned principals, interest, and other charges were
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consolidated, capitalized and converted into the following promissory notes:
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(a) $2,859,443.00 [regarding the second loan] to the order of Hatton, to become
12 due December 18, 1996, with interest to accrue at 18.75% per annum (Exhibit
13 QQ).
14 (b) $449,261.50 [regarding the management agreement debt] to the order of
Hatton, to become due on December 18, 1996, with interest to accrue at the rate
15 of 18.75% per annum (Exhibit RR).
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(c) $262,353.00 [regarding the financial agreement debt] to the order of Hatton to
17 become due on December 18, 1996, with interest to accrue at the rate of 18.75%
per annum (Exhibit $8).
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49 (d) $98,706.50 [regarding the first loan] to the order of Hatton to become due on
December 18, 1996, with interest to accrue at the rate of 18.75% per annum
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21 *Although the parties stipulated as to this amount, it is not clear to the court from where
this amount comes, as the total of the amounts owed for the first loan (paragraph 18), the
22 second loan (paragraph 19), the management agreement debt and the financial agreement
93 debt (paragraph 20) actually total $4,350,440.44. Although the amount of $4,500,440.40
(as stipulated) is included on the last page of the “Acuerdo”as the “total revised
24 obligation”, there are additional calculations on that page (which are only partially
legible), indicating a final balance owed of $595,440.40. There is no indication of a
25 repayment schedule in said “Acuerdo”.
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(Exhibit TT)”.

1 24, The stipulations further provided that if the original term of the notes

2 (December 18, 1996) expired, and they had not been paid, Hatton could renew the

° obligations (“first renovation”) at the request of any of the Debtors and that Hatton, at his

option, could automatically renew said notes. All renovations granted by Hatton would

6 increase the obligations by 10%, including principal, interest, late charges and other

7 penalties like $12,000.00 for courier attorney fees, as well as creditor’s fees at the rate of

8 $250.00 per hour.

4 25. On August 6, 1996, Inabén filed for reorganization before this court.
' 26. A partial judgment approving the stipulations entered in the cases that were
2 filed in the Superior Court of Ponce was entered on August 7, 1996, and notified to the
13 parties on August 9, 1996 (Exhibit X).
14 27. One month after the filing of Inabén’s petition, on September 7, 1996, AHT
1 and AHO executed an agreement titled “Agreement regarding Stipulations of Judgment
" by Settlement’"! (Exhibit XT) through which the various obligations executed on June 18,
. 1996 were further renewed and renegotiated as follows:
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‘Although it is not clear in the stipulated findings of fact, as is subsequently detailed in
20 paragraph 108 of this opinion, in the findings of fact based upon the proceedings at trial,
this amount is based upon the assignment of $750,000.00, by the debtors to Hatton, from
the sale of a parcel of land to the Puerto Rico Highway and Transportation Authority.
When said amount is subtracted from the $846,903.00 owed on the first loan, a balance
of $98,706.50 remains. However, apparently that amount was not paid to Hatton, as the
23 subsequent financial agreements reflect the balance owed returning to its original amount
- plus, of course, interest, fees and charges.

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9 "Acuerdo en Relacién a Estipulacién de Sentencia por Transaccién”, hereinafter
referred to as the “Stipulation Agreement”,

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(a) The $449,261.50 note was increased to $556,419.29 [re: the management

agreement debt].

(b) The note for $2,859,443.00 was increased to $3,305,429.61 [re: the second
loan].

(c) The note for $846,903.00 was increased to $1,009,962.25 [re: the first loan].

(d) The note for $262,353.00 was increased to $343,235.13 [re: the financial
agreement debt].

for a total of $5,215,046.28".

28. All amounts mentioned in the preceding determination were capitalized and
included in four (4) promissory notes’ that were issued by AHT and AHO on that same
date, which would accrue interest at the rate of 18.75% per annum until their due date on
June 18, 1997, and could be renewed under the same conditions established for
renovation in the Stipulations.

29. On May 15, 1997, AHT, AHO and Hatton executed an agreement entitled
“Agreement for the Renewal of Obligations’ (Joint Exhibit XI), whereby the parties
agreed to renew all the obligations issued in favor of Hatton on September 7, 1996,
through which said obligations were further renewed and renegotiated as follows:

(a) The $556,419.29 note was increased to $751,121.96 (Exhibit EEE) [re: the
management agreement debt].

"The individual debtors also agreed to pay the Hattons $18,000.00 in fees and costs in the
stipulation agreement.

"However, said promissory notes were not submitted into evidence at the trial.

'Acuerdo Sobre Renovacion de Obligaciones”, hereinafter referred to as the “Renewal
Agreement”.

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(b) The $3,818,804.10 note was increased to $4,244,684.50 (Exhibit FFF)*.

(c) The $1,009,962.25 note was increased to $1,327,504.00 (Exhibit GGG) [re:
the first loan].

(d) The $343,235.13 note was increased to $504,052.98 (Exhibit HHH) [re: the
financial agreement debt].

30, In addition, through the Agreement described in the preceding paragraph,
AHT and AHO agreed to pay Hatton $117,044.45 for additional creditors attorney’s fees
expended in the Inabén bankruptcy; $247,353.00 for “previous financing agreement” and
$3,579.00 for other fees related to the execution of legal documents, for a total of
$367,976.45", (Exhibit IID).

31. AHT and AHO filed their respective Chapter 11 petitions on December 5,
1997,

32. On November 13, 1996, Hatton filed a proof of claim in the Inabén case for
$4,845,644.76.

33. On March 9, 1998, Hatton filed a proof of claim in each of AHT and AHO
cases for $7,856,780.65 plus interest at 18.75%.

Findings of Fact - Trial on the Merits

34, Debtor Empresas Inabin, Inc. (“Inabén”) is a domestic corporation organized
and operating under the laws of the Commonwealth of Puerto Rico with principal offices

located in the city of Ponce, Puerto Rico. (Complaint {[ 4).

'SThe court assumes this relates to the second loan but is not clear where the amount of
$3,818,804,10 comes from since, according to stipulated finding of fact no. 27(b), the
amount of the note pertaining to that debt was $3,305,429.61,

'SAn additional promissory note was executed in this amount.

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35. The majority and controlling shareholders of Inabon during the occurrence of
1 all relevant facts are debtors Alfonso Hemandez Torres (Hernandez Torres), his spouse,
2 Ramonita Ortiz a.k.a. “Monin” (Mrs. Ortiz) and their only son, Dr. Alfonso Hernandez
, Ortiz a.k.a. “Alfonsito” (Dr. Hernandez).
36. Hernandez Torres is a developer of residential, commercial and industrial
6 properties, a general contractor and an industrialist, who has been in business for over
7 fifty (50) years. He has developed approximately 12,000 units including one project of
8 5,000 units, Urb, Punto Oro. He has had commercial financing experience since 1956,
8 his highest commercial financing being in the range of $500,000,000.00.
° 37. Dr. Hernandez is a psychiatrist with a private practice in the city of Ponce,
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° Puerto Rico.
13 38. Mrs. Ortiz was a housewife, although a teacher by trade, and in addition to
14 being a shareholder and director of Inabén, acted as the secretary of said corporation.
15 39. Hernandez Torres, Mrs. Ortiz and Dr. Hernandez have also been members of
" the board of directors and officers of Inabén.
. 40. Hernandez Torres, Mrs. Ortiz and Dr. Hernandez are also the sole
19 shareholders of a domestic corporation named ALRA Construction Corporation (ALRA),
20 dedicated to the business of construction and development.
21 41. Towards the end of the year 1995, Inabén was undergoing substantial
2 financial difficulties and was in need of working capital. Exhibit D; trial transcript
; 1/10/05, dkt. no. 75 at p. 8.
95 42, Mr. Herandez, Torres, President of Inabén, was referred to Mr. Robert
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Hatton Gotay (“Hatton”) as a person who could provide the financing needed by Inabén.

1 43. Southern Mortgage Corporation (“SOMO”) is a domestic corporation
? dedicated to the business of mortgage financing for over thirty (30) years with main
° offices in the City of Ponce, Puerto Rico. Mr. Hernandez Torres was a shareholder of
SOMO in its origins.
6 44, Hatton has never been a shareholder, director, officer or employee of SOMO.
7 45, The president of SOMO is Mr. Jorge Rivera, who was the person who signed
8 in representation of SOMO all documents executed by SOMO in relation to the matters of
° this adversary proceeding. See trial transcript 1/10/05, dkt. no. 75 at pp. 27-28.

. 46. Mr. Rivera has been a friend of Mr. Hernandez Torres for approximately

12 twenty (20) years.

13 47. In late 1995, Inabén approached SOMO for a loan to assist it in paying its

14 payroll and emergency expenses. Complaint { 8.

8 48. Attorney Rafael Elvira, a friend, accompanied Mr. Hernandez Torres to meet

; with Mr. Rivera for the loan.

8 49. Product of negotiations, in December, 1995, and January, 1996, SOMO

19 granted two commercial loans to Inabén and ALRA. Exhibits C and G; trial transcript

20 1/10/05, dkt. no, 75 at pp. 11, 22, 32, 33.

al 50, On December 7, 1995, SOMO granted ALRA a loan for the amount of

* $603,348.00. Complaint J 9; Exhibit C; Joint Exhibit V; written stipulation no. 1.

; 51. On that same date, Hernandez Torres, as president of ALRA, signed a

95 promissory note for the aforementioned principal amount of $603,348.00. Exhibit B,

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written stipulation no. 3.

1 52. SOMO and ALRA also executed a document entitied “Contrate de Préstamo,
2 Prenda y de Cesién de Cuenta por Cobrar”., Hernandez Torres appeared in the said
3 document as president of ALRA, and also with Mrs. Ortiz, both as personal guarantors of
’ ALRA’s obligations. Joint Exhibit V; written stipulation no. 3.
53. On that same date, ALRA, represented by its president, Hernandez Torres,
7 subscribed with the Puerto Rico Highway and Transportation Department (PRHTD) an
8 agreement entitled “Contrato de Cesién de una Porcién del Precio de Compraventa”.
9 Exhibit A.
" 54, In the “Contrato de Cesién de una Porcién del Precio de Compraventa”,
. ALRA authorized PRHTD to pay SOMO directly the amount of $603,348.00, to be
13 deducted from the proceeds of the purchase price of a parcel of land property of ALRA,
14 said amount to be applied to the repayment of the loan granted by SOMO to ALRA.

15 Exhibit A.

6 55. Shortly after the said loan was granted, SOMO assigned the agreement
. referred to in the previous two paragraphs to Hatton. Complaint, {j 9.
19 56. On January 2, 1996, SOMO granted Inabdn a second loan for the amount of
90 $2,475,000.00. Exhibit G; Joint Exhibit VI; see also, Complaint J 11 and 12; written
21 stipulation no. 4; trial transcript 1/10/05, dkt. no. 75 at pp. 32-33.
22 57. On that same date, Hernandez Torres, as president of Inabén, signed a
* promissory note for the principal amount of $2,475,000.00. Defendant’s Exhibit I;
; written stipulation no, 7.
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58. Hernandez Torres, his spouse, Mrs. Ortiz, and Dr. Hernandez are guarantors
1 on both loans, Exhibit J; Exhibit K; and Exhibit L; written stipulation no. 7.
2 59, On that same date of January 2, 1996, Inabén as well as Hernandez Torres,
: Mrs. Ortiz and Dr. Hernandez signed several promissory notes and the respective
mortgage deeds in order to execute liens over real property owned by them, guaranteeing
P the repayment of Inabén’s debt towards SOMO. Exhibit M, Exhibit N, Exhibit O, and
7 Exhibit P; written stipulation no. 7.
8 60. Also on January 2, 1996, Inabén, represented by its president, Hernandez
9 Torres, and Dr. Hernandez, signed with Westernbank Puerto Rico and SOMO an
" agreement to limit the mortgage credit and for secondary pledge of the mortgage note for
; $1,500,000.00 held by Westernbank. Exhibit Q; writien stipulation no. 7.
13 61. Subsequently, as previously agreed, these loans were purchased from SOMO
14 by Hatton who thus became debtors’ creditor by assignment. Exhibits Fl, F2, F3 and F4.
15 62. Although Inabén received the above-described amount, it still needed funds
6 and was for such purpose negotiating with SOMO another loan for the amount of
. $4,000,000.00. Exhibit R, Exhibit 8.
19 63. SOMO expressed its willingness to agree to such loan if Hatton, or any other
20 investor, would previously agree to the loan (the credit) after disbursement. Trial
24 transcript 1/12/05, dkt. no. 72 at p. 51.
22 64. Since this was an essential condition for SOMO, Inabén and Hatton entered
= into negotiations for the purchase of the said loan. Trial transcript 1/12/05, dkt. no. 72, p.
24
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65. Hatton informed Inabén’s shareholders that he would purchase the loan if

1 Inabén’s management were substituted in order to diminish the risk on recovering the

2 sums to be invested. Trial transcript 1/12/05, dkt. no. 72 at pp. 52 and 53.

° 66. Hernandez Torres and Hatton agreed that in order to insure proper

management of Inabén’s affairs, and the credits he was holding and was about to

6 purchase, that Hatton directly undertake the full management of Inabén as executive

7 director of the corporation. Joint Exhibit VHI; trial transcript 1/12/05, dkt. no. 72 at pp.

8 52 and 53.

s 67. Engineer Miguel Cordero Santiago (Eng. Cordero), Inabén’s chief of
. operations, was appointed by Hernandez Torres to participate in the drafting of a
10 Management Agreement. Trial transcript 1/12/05, dkt. no. 72 at pp. 54 and 55.
13 68. After negotiations involving the review and discussion of several drafts of the
14 final document that was signed, Inabén and Hatton reached an agreement entitled
15 “Executive Management Agreement”. Trial transcript 1/12/05, dkt. no. 72 at pp. 54-56.
6 69. On January 20, 1996, Hernandez Torres and his spouse, Mrs. Ortiz, suffered a
. car accident which resulted in injuries that required their hospitalization on an emergency
19 basis at the Caguas Regional Hospital. He was then transferred to the Ponce Regional
20 Hospital, wherein Hernandez Torres underwent surgery. On January 23, 1996, he had an
21 ear reconstructed by a plastic surgeon. Hernandez Torres was discharged on January 24,
21 4996.
23
04 70. During most of the negotiations with Hatton, Hernandez Torres and Dr.
95 Hernandez were being advised by their legal counsel, financial advisors and the
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corporation’s executives, both before, during and after the referred car accident, all of

1 whom participated in the negotiations at one time or another, Trial transcript 1/12/05,

dkt. no. 72 at pp 55-56; trial testimony 1/10/05, dkt. no. 75 at pp. 27-28 and 90-92.

° 71. On January 24, 1996, Inabén, Hernandez Torres and Dr. Hernandez signed

with SOMO a document entitled “Financial Agreement”. Joint Exhibit [X; written

6 stipulation no. 13; trial transcript 1/11/05, dkt. no. 76 at pp. 19-21.

7 72. Hernandez Torres appeared on said Financial Agreement as president of

8 Inabén and in his personal capacity, along with Dr, Hernandez, both as personal

° guarantors. Joint Exhibit IX; written stipulation no. 13; trial transcript 1/11/05, dkt. no.
" 76, p. 19.
11
10 73. On said Financial Agreement, SOMO agreed to grant a loan to Inabén in the
13 amount of $4,000,000.00. Joint Exhibit IX.
14 74. Inab6én and its guarantors represented to SOMO that they had agreed to
8 change the management of Inab6n and to retain the services of a professional executive
; manager. Joint Exhibit IX; trial transcript 1/12/05, dkt. no. 72, p. 61.

7
13 75. On the same date of January 24, 1996, Hatton, Inabon, Hernandez Torres and
49 Dr. Hernandez signed the Management Agreement. Joint Exhibit VIU; stipulation no. 12;
20 trial transcript 1/12/05, dkt. no. 72 at p. 61.
21 76. Dr. Hernandez signed the Management Agreement in his personal capacity
” and this time as president of Inab6n. Joint Exhibit VII; written stipulation no. 12.
; 77. Aside from the Hernandez Torres, Dr. Hernandez and Hatton’s signatures,
96 said Management Agreement was also signed by Eng. Cordero as witness. Joint Exhibit
° 18

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VIII; stipulation no. 12; trial transcript 1/11/05, dkt. no. 76 at pp. 19, 23.

78. Mrs. Ortiz, whose name appeared in the document as guarantor of Inabén’s
obligations, did not sign the Management Agreement. Joint Exhibit VII.

79, Hatton consented to not having to have Mrs. Ortiz sign the Management
Agreement on that same date.

80. Inabén agreed to pay Hatton for professional services $300,000 annually,
payable in twelve equal monthly installments of $25,000.00 each, plus additional benefits
and bonuses, as described in the agreement, such as the right to purchase up to 25% of all
of Inabén’s outstanding stock, at a set price of one cent per share. Joint Exhibit VII,

81. Inabén’s board of directors’ certificate of corporate resolution authorizing the
Management Agreement and the Financial Agreement was prepared and signed by
Hernandez Torres as sub-secretary of Inabén. Exhibit U.

82. On the aforesaid certificate, Hernandez Torres asserts that Inabén’s board of
directors had met and approved a corporate resolution ratifying the aforementioned
Management Agreement and the Financial Agreement. Exhibit U.

83. As agreed, on the morning of Friday, January 26, 1996, Eng. Cordero
Santiago picked Hatton up at his home and drove him to Inabén’s main offices and during
all such day Hatton proceeded to undertake his responsibilities in accordance with the
terms of the Management Agreement. Trial transcript 2/12/05, dkt. no, 72 at pp. 62 and
63; Complaint J 76.

84. Sometime after 5:00 p.m., Hernandez Torres phoned Hatton at Inabén’s main

offices and told Hatton that he had decided to cancel the Management Agreement, as well

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as the other documents signed on January 24, 1996. Trial transcript 1/12/05, dkt. no. 72
1 at p. 63.
2 85. Hatton replied that such matter had to be discussed in person instead of over
° the phone and therefore they agreed to meet at Hernandez Torres’ home later that
afternoon. Trial testimony 1/12/05, dkt. no. 72, p. 64.
6 86. That afternoon Hatton met with Hernandez Torres; attorney Agustin Collazo
7 Tirado, legal counselor for Inabén; and Eng. Cordero and, although Hatton provided
8 Hernandez Torres with a detailed account of all actions he had undertaken during the day
° for Inab6n’s benefit, Hernandez Torres reaffirmed his intention of cancelling all
. agreements signed on January 24, 1996, wherefore Hatton requested from Hernandez
” Torres a written notification of his decision to unilaterally terminate the Management
43 Agreement and until such was received he would continue performing his obligations
14 under the Management Agreement. Trial testimony 1/12/05, dkt. no. 72, p. 64; trial
1 testimony 1/10/05, dkt. no. 75 at pp. 90-92.
8 87. On Monday, January 29, 1996, Hatton again went to work at Inabén’s main
: offices and while there received a letter from Hernandez Torres, reaffirming his decision
19 to terminate the Management Agreement. Hernandez Torres signed the letter as president
20 of Inabén. Exhibit V; Complaint 76; trial transcript 1/12/05, dkt. no. 72 at p. 64.
a1 88. After receipt of said letter from Hernandez Torres, Hatton left the Inabén’s
a premises against his will.
; 89. The next day, on January 30, 1996, Hatton replied to Hernandez Torres’
965 wtitten notice of termination by letter to Dr. Hernandez as president of Inabén, stating his
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objection to the unilateral early termination of the Management Agreement and attached a

1 memorandum dated January 26, 1996, in which he had exercised his right to purchase
2 25% of all Inab6n’s outstanding stock and included payment for such stock. Exhibit CC;
3 Exhibit W; Exhibit X; Exhibit Y; Exhibit Z; Exhibit AA; Exhibit BB; trial transcript
1/12/05, dkt. no. 72, pp. 67-69.
6 90. Hernandez Torres’ decision regarding the early termination of the
7 Management Agreement notified to Hatton by phone, in person, and in writing, was done
8 in his personal capacity and in representation of Inabén, in complete agreement and with
9 the consent of Dr. Hernandez. Trial transcript 1/12/05, dkt. no. 72, pp. 65-66.
" 91. Hernandez Torres did not cali for a board of director’s meeting prior to
; making and notifying Hatton of his decision to terminate the Management Agreement.
13 92. The Management Agreement provides that if Inab6n were to terminate the
14 agreement early, Inabén would pay Hatton a compensation of $5,000,000.00. Joint
15 Exhibit VHI.
6 93. All parties, that is, Hatton, Hernandez Torres and Dr. Hernandez possess the
. experience and complete understanding of the consequences of a breach of an agreement
19 such as the Management Agreement.
20 94. The Management Agreement was for twelve years, and provided that said
a] term was binding on Inabon but could be cancelled by Hatton with sixty days notice. It
22 further provided that in the event of early termination of the agreement by Inab6n, Hatton
* would be entitled to remain in his position, with all its rights and privileges, including his
; regular annual compensation of $300,000.00, until the payment of his $5,000,000.00
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termination compensation. Joint Exhibit VII.
1 95, In addition to the benefits described in the previous two paragraphs, Hatton
2 also had the right to request that Inabén and the appearing guarantors in the Management
° Agreement pay or refund all costs and attorney’s fees resulting from any case related to
such Management Agreement, as provided by its section H, paragraph 3. Joint Exhibit
6 VIL.
7 96. Likewise, pursuant to the Management Agreement, Hatton was entitled to
8 acquire stock from Empresas Inab6n, Inc., which right Hatton timely exercised giving
° prior notice and forwarding the stock certificates that should have been issued on his
; behalf, for the signature of the corporate officials, with a cashier’s check for payment of
2 the stock, as contractually agreed to by the parties. Joint Exhibit VIH; Exhibit X.
13 97. On February 5, 1996, Inabén, Hernandez Torres, Mrs. Ortiz and Dr.
14 Hernandez filed a civil action related to the management agreement against Hatton and
8 his wife, Maria de los Angeles Rentas Costas, before the Court of First Instance of the
® Commonwealth of Puerto Rico, Ponce Section, Civil No. JPE96-001, entitled Empresas
17
48 Inabon, Inc. et al. v. Robert Hatton Gotay et al. Exhibit DD.
19 98. On February 15, 1996"’, Hatton and his wife, Maria de los Angeles Rentas
20 Costas, filed a complaint for collection of monies related to the second loan against
al Inabén, Hernandez Torres, Mrs. Ortiz Torres and Dr. Hernandez, before the Court of First
Instance of the Commonwealth of Puerto Rico, Ponce Section, Civil No. JCD96-0015,
; entitled Robert Hatton Gotay et al. v. Empresas Inabon, Inc. et al.. Exhibit HH;
2 See footnote 4, above.
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Complaint; written stipulation no. 16.
1 99. On February 16, 1996, Hatton and Maria de los Angeles Rentas Costas filed a
2 complaint for collection of monies related to the first loan against ALRA Construction
, Corporation, Hernandez Torres, Ramonita Ortiz Torres and Dr. Alfonso Hernandez Ortiz,
before the Court of First Instance of the Commonwealth of Puerto Rico, Civil No.
6 JCD96-0016, entitled Robert Hatton Gotay et ai. v. ALRA Construction Corporation et
7 al. Exhibit I; Complaint; written stipulation no. 16.
8 100. On March 21, 1996, Hatton and Maria de los Angeles Rentas Costas filed
° their answer to the complaint and a counterclaim, seeking to collect damages related to
: the cancellation of the management agreement, in Empresas Inabdn, Inc. et al. v. Robert
0 Hatton Gotay et al, Exhibit KK; written stipulation no. 17.
13 101. Pursuant to negotiations that had been undertaken for the settlement of all
14 the suits among the parties, on May 31, 1996, Hatton addressed a communication to Dr.
1 Hernandez and Hernandez Torres stating his willingness to waive his right to purchase
"° Inabén’s outstanding stock in order to settle all their respective judiciary claims. Exhibit
17 NN.
18
19 102. On June 2, 1996, Hernandez Torres, Mrs. Ortiz Torres, Dr. Hernandez,
20 Inabén, ALRA, Hatton and his spouse, Maria de los Angeles Rentas Costas, entered into
21 a handwritten settlement agreement, simply entitled “Acuerdo”. Exhibit OO; written
#2 stipulation no. 18.
23
0 103. In said “Acuerdo”, the parties agreed that Inabon, Hernandez Torres, Mrs.
95 Ortiz and Dr. Hernandez would waive any and all judicial claims made against Hatton
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a

and his wife and request from the court that civil case JPE96-0011, Empresas Inabén, Inc.

1 et al. v. Robert Hatton et al. be dismissed with prejudice. Exhibit OO.
2 104. In said “Acuerdo”, the parties also agreed that Inabén, Hernandez Torres,
3 . .
Mrs. Ortiz, Dr. Hernandez and Hatton would waive all past, present and future claims
4
against each other, as individuals and as corporate representatives (mutual waiver of
5
6 claims), in accordance with the following:
7 i. ALRA, Inabon, Hernandez Torres, Mrs. Ortiz and Dr. Hernandez agreed
and promised to pay Hatton all amounts claimed in civil actions #JCD96-
8 0015 and #]CD96-0016, including all interest accrued until the total
9 payment of said debts ($845,777.75 for one and $2,800,409.70 for the
other one), as per exhibits A and B of the handwritten agreement.
10

il. Inabén, Hernandez Torres, Mrs. Ortiz, and Dr. Hernandez agreed to pay
W Hatton the amount of $441,900.00 as compensation for the early
cancellation of the Management Agreement, as well as the amount of

2 $262,353.00 as penalty for having canceled a financial agreement.

" iii. Hatton agreed to return to Inabén all of Inab6én’s stock he had acquired

14 (25% of all outstanding stock) pursuant to the Management Agreement.

1 Exhibit OO; stipulation no. 20.

"° 105. In order to formally execute the said Acuerdo, Hernandez Torres, Mrs. Ortiz
: and Dr. Hernandez insisted that their legal counsel, the firm of Mufioz, Boneta, Gonzalez
19 Arbona Benitez & Peralta, write a final version of the settlement agreement (the

20 “Stipulation”), which the parties later signed. Exhibit PP; written stipulation no. 22.

21 106. On June 18, 1996, Hatton, his spouse, Inabén, Hernandez Torres, Mrs, Ortiz
22 and Dr. Hernandez filed the settlement agreement in civil cases JEP96-0011, Empresas

; Inabon Inc., et al. v. Robert Hatton Gotay; JCD96-0016, Robert Hatton Gotay v. ALRA
95 Construction, et al., and JCD96-0015, Robert Hatton Gotay v. Empresas Inabén, Inc. et
28 24

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al. before the Court of First Instance of the Commonwealth of Puerto Rico, Ponce
Section. Exhibit PP; written stipulation no. 22.
107. Paragraph one of the settlement agreement and the Ponce court’s judgment

provide as follows:

Inabén, Hernandez Torres and Hernandez Ortiz hereby state
that the filing of their complaint [against Hatton] was due
to a lack of communication, and therefore, they admit and
accept that Hatton’s allegations in his answer to the
complaint and in his counterclaim are correct and are a
truthful account of the events that took place between the
parties.

Exhibit PP at p.3 J 1.

108. In the Stipulation signed by the parties in order to execute said agreement, as
approved by the Ponce Court, Inabén, Hernandez Torres, Mrs. Ortiz and Dr. Hernandez
agreed to pay Hatton the following sums, plus interest:

i. $2,859.443.00. This obligation relates to the second loan
and is evidenced by a promissory note signed on June 18,
1996, by Hernandez Torres, representing Inab6n, to the
order of Hatton and his wife for the amount of
$2,859,443.00, due on December 18, 1996, plus annual
interest at the rate of 18.75%, payable in advanced monthly
payments beginning on July 18, 1996, as well as a 5%
penalty if any payment is overdue for more than 10 days.
On said promissory note, it was agreed to pay Hatton, or the
note’s holder, $285,944.30 for costs, expenses and attorney
fees in the event that judicial claim needed to be made to
collect the guaranteed amounts, and to pay $250.00 to
Hatton or the holder, per hour spent on collection

proceedings. A 20% penalty in the event that Inabdén,
Hermandez Torres, Mrs, Ortiz and Dr, Hernandez filed a
claim with respect to said debt, regardless of case outcome
or results was also agreed to.

Exhibit QQ; written stipulation no. 23{a).

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ii. $441,900.00". This obligation relates to the
management agreement debt and is evidenced by a
1 promissory note signed on June 18, 1996, by Hernandez
9 Torres representing Inab6n, to the order of Hatton and his
wife for the amount of $449,261.50 (this amount includes
3 $7,361.50 for documentary stamps and recording fees
relative to the mortgage securing the same), due on
4 December 18, 1996, plus annual interest at the rate of
5 18.75%, payable in advanced monthly payments beginning
on July 18, 1996, and a 5% penalty if any payment is
6 overdue for more than 10 days. On said promissory note, it
was agreed to pay Hatton, or the note’s holder, $44,926.50
7 for costs, expenses and attorney fees in the event that
judicial claim needed to be made to collect the guaranteed
8 amounts, and to pay $250.00 to Hatton or holder, per hour
9 spent on collection proceedings. It was also agreed to pay a
20% penalty in the event that Inabén, Hernandez Torres,
10 Mrs. Ortiz and Dr. Hernandez filed a claim with respect to
4 said debt, regardless of case outcome or results.
10 Exhibit RR; written stipulation no. 23(b).
13 iti, $262,353.00. This obligation relates to the financial
agreement debt and is evidenced by a promissory note
4 signed on June 18, 1996, by Hernandez Torres representing
15 Inabén, to the order of Hatton and his wife for the amount
of $262,353.00, due on December 18, 1996, plus annual
16 interest at the rate of 18.75%, payable in advanced monthly
payments beginning on July 18,1996, and a 5% penalty if
V7 any payment is overdue for more than 10 days. On said
ia promissory note, it was agreed to pay Hatton, or the note’s
holder, $26,235.30 for costs, expenses and attorney fees in
19 the event that a judicial claim needed to be made to collect
the guaranteed amounts, and to pay $250.00 to Hatton or
20 holder, per hour spent on collection proceedings. It was
1 also agreed to pay a 20% penalty in the event that Inabén,
Hernandez Torres, Mrs. Ortiz and Dr. Hernandez filed a
29 claim with respect to said debt, regardless of case outcome
23
8A lthough in the “Stipulation” (Exhibit PP) the parties to agree to the amount of
24 $441,900.00, the corresponding promissory note (Exhibit RR) is in the amount of
95 $449,261.50. However, the morigage note is in the amount of $441,900.00 (Exhibit
YY), as is the mortgage deed which secures it (Exhibit ZZ).
26
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or results.
Exhibit SS; written stipulation no. 23(c).

iv. $846,903.00!". This obligation relates to the first loan
and, from this amount, Debtors assigned $750,000.00 to
Hatton from the proceeds of the sale of a parcel of land of
5.2054 “cuerdas” located at Canas Ward, PR-2, pending
sale to the Puerto Rico Highway and Transportation
Authority. The remaining debt of $98,706.50 (which
includes the amount of $1,803.50 for stamps and recording
fees relative to the mortgage securing the same) is
evidenced by a promissory note signed on June 18, 1996,
by Hernandez Torres representing Inabén, to the order of
Hatton and his wife for the amount of $98,706.50, due on
December 18, 1996, plus annual interest at the rate of
18.75%, payable in advanced monthly payments beginning
on July 18, 1996, and a 5% penalty if any payment is
overdue for more than 10 days. On said promissory note, it
was agreed to pay Hatton, or the note’s holder, $9,870.65
for costs, expenses and attorney’s fees in the event that a
judicial claim needed to be made to collect the guaranteed
amounts, and to pay $250.00 to Hatton or holder, per hour
spent on collection proceedings. It was also agreed to pay a
20% penalty in the event that Inabén, Hernandez Torres,
Mrs. Ortiz and Dr. Hernandez filed a claim with respect to
said debt, regardless of case outcome or results.

Exhibit TT; stipulation no. 23(d).
Thus, the total amount which Inabén, Hernandez Torres, Mrs. Ortiz and Dr. Hernandez
agreed to pay to the Hattons as of June 18, 1996, totaled $4,417,960.50.
109. On that same date, Dr. Hernandez signed two mortgage notes, in his
personal capacity, one for the principal amount of $100,000.00 and a second one for the

principal amount of $520,000.00, both due on demand and payable to the bearer. Exhibit

Although in the “Stipulation” (Exhibit PP) the parties to agree to the amount of
$846,903.00, the corresponding promissory note (Exhibit TT) is in the amount of
$98,706.50. See footnote 8, above.

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UU, Exhibit WW.
1 110. On the same date, two mortgage deeds, number 63 and number 64, were
2 subscribed before notary public Alfonso J. Gomez Roubert by Dr. Hernandez to
, respectively secure the repayment of the above-described obligations. Exhibit VV;
Exhibit XX.
; 111. On that same date, Inabén, represented by its president, Hernandez Torres,
7 signed a promissory note for the principal amount of $441,900.00, due on demand and
8 payable to the bearer. Subsequently, Inabén signed Mortgage Deed number 62 to secure
° the repayment of the obligation represented by said note. Exhibit YY; Exhibit ZZ.
° 112. On August 6, 1996, Inabon filed for bankruptcy under the provisions of
. Chapter 11 of the Bankruptcy Code. Written stipulation no. 25.
43 113. Dated August 7, 1996, and entered on August 9, 1996, the Superior Court of
14 Puerto Rico, Ponce Section, entered Partial Judgment, approving the “Estipulacién de
18 Sentencia por Transaccién” (“Stipulation”) in civil cases no. JPE96-0011 (including
6 Hatton’s counterclaim), JCD96-0015, and JCD96-0016, and as agreed to by the parties,
; said judgment was to become final, firm and unappealable as of June 18, 1996. Joint
49 Exhibit X.
20 114. On September 7, 1996, Hernandez Torres, Mrs. Ortiz and Dr. Hernandez
21 entered into and signed an agreement entitled “Acuerdo en Relacién a Estipulacién de
2 Sentencia por Transaccién” (“Stipulation Agreement”) where the parties agreed to
° postpone payment of the amounts owed to Hatton and renewed the obligations under the
4
; “Stipulation” in order to grant time to reorganize Inabén. Joint Exhibit XJ; written
26 8
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stipulation no. 27.
115. In consideration of the said extension of time, Hernandez Torres, Mrs. Ortiz,

and Dr, Hernandez agreed to pay Hatton the following amounts:

i. For the $449,261.50 (management agreement) debt:
a. interest as of 9/6/96: $18,231.62
b. costs $12,000.00
c, courier charges $12,000.00
d. attorney’s fees $10,000.00
e. creditor fees $10,000.00
f. agreed charges $44,926.17

(as per settlement agmt) —--------------

TOTAL AMOUNT $556,419.29
ii. For the $2,859.00 (second loan) debt:

a. interest as of 9/6/96: $116,042.31
b. costs _ § 12,000.00
c. courier charges $ 12,000.00
d. attorney’s fees $ 10,000.00
e. creditor fees $ 10,000.00
f. agreed charges $285,944.30
(as per settlement agmt) —---------------

TOTAL AMOUNT = $3,305,429.61

iii, For the $846,903.00 (first loan) debt:
a. interest as of 9/7/96: $34,368.95
b. costs $12,000.00
c. courier charges $12,000.00
d, attorney’s fees $10,000.00
e. creditor fees $10,000.00
f, agreed charges $84,690.30
(as per settlement agmt) —--------------
TOTAL AMOUNT — $1,009,962.25
iv, For the $262,353.00 (financial agreement) debt:
a. interest as of 9/6/96: $10,646.83
b. costs $12,000.00
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c. courier charges $12,000.00
d. attorney’s fees $10,000.00
1 e. creditor fees $10,000.00
f. agreed charges $26,235.30
2 (as per settlement agmt) _—_-------------
3 TOTAL AMOUNT = $343,235.13
4 Joint Exhibit XI; written stipulation no. 27.
5 116. The parties agreed that the said renewed debis would be represented by
6
promissory notes” in substitution of those previously identified as Exhibits QQ, RR, SS,
7
and TT, which were executed on June 18, 1996. Written stipulation no. 28.
&
9 117. In the “Stipulation Agreement”, Hernandez Torres, Mrs. Ortiz and Dr.
10 Hernandez also agreed to pay Hatton the lump sum of $18,000.00 for costs and fees; and
" agreed that this amount was to be added to the principal and would accrue interest until
"2 its repayment. Joint Exhibit XI at p. 4.
13
118. Hernéndez Torres, Mrs. Ortiz and Dr. Hernandez agreed to pay all costs and
14
15 expenses incurred by Hatton in any attempt necessary to recover (judicial or
16 extrajudicially) the principal or the interests, including travel, consulting, transportation,
7 accommodations, office, mail and stamps, and meals. Joint Exhibit XT at pp. 5-6.
18 119. Hernéndez Torres, Mrs. Ortiz and Dr. Hernandez agreed in the “Stipulation
19
Agreement” to pay for Hatton’s own fees and attorney’s fees, both at the rate of $250.00
20
01 per hour for all time spent in pursuing collection of any amount owed by the Hernandez
99 Torres, Mrs. Ortiz and Dr. Hernandez, including all meetings with attorneys or advisors,
23 court appearances, meetings with debtors or the advisors for the debtors. Joint Exhibit XT
24
0 **However, the “new” promissory notes are not part of the trial record.
26
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at pp. 5-6.

120. Also, in the “Stipulation Agreement”, Hernandez Torres, Mrs. Ortiz and Dr.
Hernandez agreed to pay Hatton all charges and fees related to these bankruptcy
proceedings, being the fees set by the parties at the rate of $250.00 per hour for Hatton
and his attorneys. Likewise, Hernandez Torres, Mrs. Ortiz and Dr. Hernandez agreed to
this amount being added to the principal and to accrue interest at the rate of 18.75%.
Joint Exhibit XI at p. 5-7.

121. The parties included a clause providing that all agreements in the
“Stipulation Agreement” would remain binding, even if Hernandez Torres, Mrs. Ortiz,
and Dr. Hernandez were to file for bankruptcy. Joint Exhibit XT at p. 9.

122. Hernandez Torres, Mrs. Ortiz and Dr. Hernandez agreed to restructure the
debt, and to pay the fees and charges described in the “Stipulation Agreement”.

123, On May 15, 1997, Hernandez Torres, Mrs. Ortiz and Dr. Hernandez and
Hatton executed yet another agreement, entitled “Acuerdo Sobre Renovacion de
Obligaciones” (“the Renewal Agreement”). Joint Exhibit XI; written stipulation no. 29.

124. As stated in the “Renewal Agreement”, it was executed as per a written
request from Hernandez Torres, Mrs. Ortiz and Dr. Hernandez to Hatton. Exhibit DDD.

125. In consideration of the said extension of time, Hernandez Torres, Mrs. Ortiz
and Dr. Hernandez agreed to pay Hatton additional amounts for costs, cxeditor’s fees,
attorney’s fees, courier charges, and stipulated charges. Joint Exhibit XII.

126. As per the terms of the “Renewal Agreement” and in consideration for such

extension of time, Hernadndez Torres, Mrs. Ortiz and Dr. Hernandez agreed to pay Hatton

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the following amounts:
1 i. For the $556,419.29 (management agreement) debt:
2 a. interests from 9/7/96
3 as of 6/18/97 $ 82,303.68
b. default penalty of 5% $ 4,115.18
Fn
SUBTOTAL $642,383.15
5 c., renewal charges of 10% $ 64,283.81
5 d. costs $ 12,000.00
e, courier charges $ 12,000.00
7 f. attorney’s fees $ 10,000.00
g. creditor fees $ 10,000.00
BP
9 TOTAL AMOUNT = $751,121.96
10 ii, For the $3,305,429.00 (second loan) debt:
n | a. interest from 9/7/96
12 as of 6/18/97 $ 488,928.12
b. default penalty of 5% $ 24,226.40
VBP rmenemenrmenemenrmenmermmnen
SUBTOTAL $3,818,804.10
14 c. renewal charges of 10% §$ 381,880.41
5 d. costs $ 12,000.00
e, courier charges $ 12,000.00
16 f. attorney’s fees $ 10,000.00
g. creditor fees $ 10,000.00
ee | reece eee
- TOTAL AMOUNT = $4,244,684.50
49 iii. For the $1,009,962.25 (first loan) debt:
20 a. interest from 9/7/96
as of 6/18/97 $ 149,390.23
21 b. default penalty of 5% $ 7,469.51
2B fee
SUBTOTAL $1,166.821.90
23 c, renewal charges of 10% $ 116,682.19
d. costs $ 12,000.00
24 e. courier charges $ 12,000.00
95 f. attorney’s fees $ 10,000.00
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g. creditor fees $ 10,000.00

TOTAL AMOUNT | $1,327,504.00
iv. For the $343,235.13 (financial agreement) debt:

a. agreed atty. and cred. fees $ 18,000.00
SUBTOTAL $361,235.13

b. interest from 9/7/96
as of 6/18/97 $ 53,432.69
c. default penalty of 5% $ 3,562.16

SUBTOTAL $418,229.98

d. renewal charges of 10%: $ 41,823.00
e. costs $ 12,000.00
f. courier charges $ 12,000.00
g. attorney’s fees $ 10,000.00
h. creditor fees $ 10,000.00

TOTAL AMOUNT = $504,052.98

v. Other expenses:

a, expenses and creditor’s fees

Inabén bankruptcy filing

as of 5/14/97 $ 87,044.45
b, expenses and attorney’s fees

Inabon bankruptcy filing

as of 5/14/97 $ 30,000.00
c, prior financial agreement $247,353.00
d. expenses, title search,

attorney’s fees, deed $ 3,579.00

TOTAL AMOUNT $367,976.45
Thus, the total amount which Hernandez Torres, Mrs. Ortiz and Dr. Hernandez agreed to
pay to the Hattons as of May 15, 1997, totaled $7,195,339.89. Joint Exhibit XT at pp. 2-

4; written stipulation no. 29.

127. Hernandez Torres, Mrs. Ortiz and Dr. Hernandez executed promissory notes

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for the principal amounts above described at a fixed interest rate of 18.75%. Exhibits
1 EEE, FFF, GGG, HHH, and II.
2 128. In the “Renewal Agreement”, the parties also agreed to include a clause
; providing that, should Hernandez Torres, Mrs. Ortiz and Dr, Hernandez file judicial or
any other claim against Hatton as a result of all agreements included in the “Stipulation”,
; or in the “Stipulation Agreement”or in the “Renewal Agreement”, they would pay Hatton
7 an amount equivalent to $250,000.00 as fees, as well as attorney’s fees at the same rate of
8 $250.00 per hour. Joint Exhibit XII.
9 129. Likewise, in the “Renewal Agremeent”, Hernandez Torres, Mrs. Ortiz and
° Dr. Hernéndez also agreed to release and relieve Hatton from all liability directly or
; indirectly related to all agreements included in the “Renewal Agreement’. Joint Exhibit
13 XII.
14 130. Furthermore, in the “Renewal Agreement”, Hernandez Torres, Mrs. Ortiz
15 and Dr. Hernandez acknowledged and attested to the validity, authenticity, legitimacy and
6 legality of all amounts owed to Hatton (which amounts include the charges and fees
. claimed in this proceeding as unreasonable); and agreed to waive any and all defenses or
19 any claims against Hatton in the event that Hatton needed to file a judicial claim, before
20 any court of law, including this Bankruptcy Court, to collect the amounts owed by
ral Hemandez Torres, Mrs. Ortiz and Dr. Hernandez.
22 131. In December 1997, Hernandez Torres, Mrs. Ortiz and Dr. Herndndez filed
23
for bankruptcy.
; 132. All due dates for Inabén, Hernandez Torres, Mrs. Ortiz and Dr. Hernandez’
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payment of their obligations to Hatton are due and yet still not fully paid.
1 133. The Hattons’ expert testified that, as of June 2002, the amount of the
2 balance of the debt was 12.7 million dollars’. Trial transcript 2/10/05, dkt. no. 79 at
, p.15.
4
; 134. Economist Joaquin Villamil determined that an analysis of Inabén’s
5 financial statements, Robert Morris parameters and Z-Score reflected a “highly real risk”
7 operation. The Altman Z-Score was negative, minus 3.3; further, pursuant to Robert
8 Morris factors, the operation was below 65% of the industry in sales to receivables, 84%
4 below the industry in cost to sales, profits were negative, and it had a 74% higher risk
° factor than the average business incorporated in the industry. Trial transcript 2/10/05,
; dkt. no. 79 at pp. 9, 10 and 13.
13 135. Mr. Villamil concluded that the 18.75% annual interest bargained for and
14 agreed by the parties was not unreasonable given the degree of risk found in the operation
15 of Inabén’s business. Trial transcript 2/10/05, dkt. no. 79 at pp. 99-100.
" 136. Mr. Villamil also concluded that the charges and interest were reasonable
. and not severe or oppressive and the total amount of claims do not seem to be
19 unreasonable to him, based upon his analysis. Trial transcript 2/10/05, dkt. no. 790 at pp.
20 13-15.
21 137. With regards to collateral for a loan, Mr. Villamil indicated “[ijt has a great
22 deal to do with the possibility of the creditor maybe recuperating some of his at-risk
23
24 21S aid statement assumes that the debts are fully secured, and therefore continued to
accrue post-petition interest, fees and charges as provided for in the financial
25 agreements.
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investment, but it does not affect the risk of the loan itself.” Trial transcript 2/10/05, dkt.
i no. 79 at p. 51.
2 Claims Analysis
° The Hattons’ Proof of Claims in the Inabén case:
In the Inabén bankruptcy case, the Hattons have filed three claims:
5 1. They filed claim no. 119 on November 12, 1996, in the amount of $321,750.00
7 unsecured and $4,523,894.76 secured, for a total of $4,845,644.76. The basis for the
8 claim is “money loaned” and “breach of financial agreements’and the proof of claim
° states that the claim is secured by real estate. Attached to the claim as Exhibit A is a
. detail of the claim, indicating that the secured claim has four parts, each with principal
0 and interest, the principal amounts being $441,900.00, $2,859,443.00, $262,343.00 and
13 $846,903.00”. Interest is calculated on each of these amounts as of August 6, 1996, the
14 date of the filing of the petition, for a total secured claim of $4,523,894.76.
15 Also attached to the claim is a letter from SOMO to Alfonso Hernandez Torres,
° dated Aime 1, 1996, regarding a loan in the amount of $742,500.00 and a second letter of
: the same date and between the same parties regarding a loan in the amount of
49 $2,475,000.00, The unsecured portion of the claim consists of 10% of each of these loan
20 amounts. It is not clear to the court whether these loans were actually disbursed; no
21 evidence regarding said loans was introduced at trial.
% There is no evidence of perfection of a security interest, nor a description of the
23
a4 *These amounts correspond to those in the Settlement Agreement of June 18, 1996,
95 relating to the management agreement debt, the second loan, the financial agreement
debt, and the first loan, respectively.
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real estate securing the debt, attached to this claim. The agreements upon which the four
{ secured debts are based are not attached to the claim.
2 2. They filed claim no. 235 on July 2, 2001, in the amount of $903,333.40 as a
: secured debt. The claim indicates that it amends the claim previously filed on November
4
12, 1996. The basis for the claim is “penalty for presentation of a frivolous complaint”
5
6 and it states that it is secured by real estate valued at $20,000,000.00. Attached to the
7 claim is a detail of the 20% penalty claimed owed on each of five notes’, totaling the
8 amount claimed. However, there is no evidence of perfection of security interest, nor a
9 description of the real estate securing the debt, attached to this claim.
10
3. They filed claim no. 287 on December 12, 2005 (post-trial), in the amount of
11
0 $270,884.00 unsecured and $9,223,988.50 secured, for a total of $9,494,872.50. The
13 basis for the claim is ‘‘money loaned” and “‘breach of financial agreements” and it is
14 secured by collateral valued at $25,000,000.00. This claim does not indicate that it
15 amends or replaces a previously-filed claim.
6 Attached to this claim is an “itemized statement of debt” detailing the amount
7
owed as of August 31, 2005. It includes a payment of $40,866.00 towards the unsecured
18
13 debt on April 8, 2003. It also lists 4 promissory notes with principal amounts of
20
21
34s has been stated throughout this opinion, there were four debts and four
22 corresponding notes, at least until the “Agreement for the Renewal of Obligations”
93 (Exhibit XID executed on May 15, 1997, which added a fifth. The attachment to this
proof of claim includes both the $846,903.00 owed on the first loan and the $98,706.50
24 owed as the balance on the first loan, taking into account the assignment of $750,000.00
to that debt from the sale of property. In other words, the $98,706.50 debt is part of the
20 $846,903.00 debt. See footnotes 8 and 13.
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$2,859,443.00, $449,900.00", $262,353.00 and $98,706.50, then calculates interest, late
1 fees, etc. to arrive to the total amount as of July 13, 2001 of $8,638,910.70, then credits a
2 payment on July 13, 2001 of $2,447,000.00, resulting in a balance of $6,191,910.70.
; The attachment then states that the principal amount as of July 13, 2001 is
$4,249,310.50, then reduces that amount by a $750,000.00 payment on July 13, 2001,
6 resulting in a principal balance on July 14, 2001 of $3,499,310.50. The attachment then
7 has a calculation of interests, fees, etc. on this “new” principal amount, resulting in anew
8 total of $9,494,872.50.
4 Also attached to this proof of claim are the letters which were attached to claim
" #119; a copy of the “Estipulacion de Sentencia por Transaccion” of June 18, 1996, filed
, in the Superior Court (Exhibit PP); a note in the amount of $2,859,443.00 dated 6/18/96
43 (Exhibit QQ); a note in the amount of $449,261.50 dated 6/18/96 (Exhibit RR); a note in
14 the amount of $262,353.00 dated 6/18/96 (Exhibit S$); and a note in the amount of
1 $98,706.50 dated 6/18/96 (Exhibit TT); as well as a bearer note in the amount of
" $603,348.00 dated 12/7/95 (Joint Exhibit V), a mortgage note in the amount of
; $315,000.00 dated 7/16/92 (Exhibit FF), a mortgage note in the amount of $1,500,000.00
19 dated 1/2/96” and a mortgage note in the amount of $441,900.00 dated 6/18/96 (Exhibit
20

“This amount does not correspond to the $441,900.00 claimed in the first proof of claim,
2 which is based upon the original amount agreed upon by the parties for the breach of the
management agreement on June 2, 1996 in the “Acuerdo”, nor to the mortgage note in
the amount of $441,900.00 executed on June 18, 1996 (Exhibit YY) and attached to the
93 claim, A promissory note in the amount of $449,261.50 (Exhibit RR) was also executed
along with the “Stipulation” on June 18, 1996 (Exhibit PP). See footnote 13.

22

24

**This mortgage note was not entered into evidence at trial; however, the mortgage
25 guaranteeing it is Exhibit N.
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YY). These documents do not indicate which real estate is serving as collateral securing
1 the claims.
2 The Hattons’ Proof of Claims in the Hernandez Torres case:
3 In the Hernandez Torres case, the Hattons have filed three claims:
1. They filed claim no. 9, which appears to have been acquired by them from
6 ADP, Alarmas de Ponce, Ine,
7 2. Hatton filed claim no. 10 on March 2, 1998, in the amount of $7,856,780.65 as
8 an unsecured claim based upon “money loaned”, Attached to the claim is an itemized
8 statement which refers to five principal amounts, plus interest and late charges. The
" principal amounts listed are as of June 19, 1997, but are the same as the amounts in the
; “Agreement for the Renewal of Obligations” (Exhibit XID) which was executed on May
43 15, 1997; to said amounts are added the interest and late charges calculation as of
14 December 5, 1997, the approximate date of the filing of the Hernandez Torres’
15 bankruptcy petition, for a total unsecured claim of $7,856,780.65. Also attached to the
a claim is a summary of exhibits listing:
" 1. Partial Judgment entered on August 9, 1996 by the Superior Court.
18 2, “Acuerdo en Relacién a Estipulacién de Sentencia Por Transaccién” executed

on September 7, 1996.

9 3. “Acuerdo Sobre Renovacioén De Obligaciones” executed on May 15, 1997.
50 4, Promissory note for the principal amount of $1,327,504.00 executed by
Herméndez Torres and his wife on May 15, 1997.
2] 5, Promissory note for the principal amount of $367,976.45 executed by
99 Hernandez Torres and his wife on May 15, 1997.
6. Promissory note for the principal amount of $4,244,684.50 executed by
94 Hernandez Torres and his wife on May 15, 1997.
7, Promissory note for the principal amount of $504,052.98 executed by
24 Hernandez Torres and his wife on May 15, 1997.
96 8. Promissory note for the principal amount of $751,121.96 executed by
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Hernandez Torres and his wife on May 15, 1997.
9. “Acuerdo Sobre Limitacién de Crédito Hipotecario y Constitucion de Prenda
1 Secundaria” executed by Hernandez Torres and others on May 15, 1997.
10. “Acuerdo Sobre Limitacién de Crédito Hipotecario y Constitucién de Prenda
2 Secundaria” executed by Hernandez Torres and others on May 15, 1997.
° 3. They filed claim no. 26 on July 6, 2001, in the amount of $903,333.40 as a
secured debt, This claim indicates that it amends the claim of November 12, 1996;
6 however, there was no claim filed on November 12, 1996 in the Hernandez Torres case,
7 only in the Empresas Inabén case. The basis for the claim is “penalty for presentation of
8 a frivolous complaint” and it states that it is secured by real estate valued at
9 $20,000,000.00. Attached to the claim is a detail of the 20% penalty claimed owed on
; each of five notes, totaling the amount claimed. However, there is no evidence of
” perfection of a security interest, nor a description of the real estate securing the debt,
43 attached to this claim. This claim is the same as the second claim filed by Hatton in the
14 Inabén case (claim #235 therein), described above; see also footnote 17.
1 The Hattons’ Proof of Claims in the Hernandez Ortiz case:
" Tn the Hernandez Ortiz case, the Hattons have filed three clatms:
: Ll. Hatton filed claim no. 13 on March 2, 1998, the amount of $7,856,780.65,
19 based upon “money loaned” and secured by property valued at $12,000,000.00. Attached
20 to the claim is a “summary of exhibits” and an “itemized statement” (the same ones filed
21 with claim no. 10 in the Hernandez Torres case), as well as title searches on two Ponce
22 properties in Barrio Canas, finca #18,645 (with a notation that Hatton has second and
; third liens) and finca #11,039 (with a notation that Hatton has second and fourth liens).
95 2. The Hattons filed claim no. 14, which appears to have been acquired by them
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from ADP, Alarmas de Ponce, Inc.
3. They filed claim no. 25 on July 6, 2001, in the amount of $903,333.40 as a

secured debt. This claim indicates that it amends the claim of November 12, 1996;

however, there was no claim filed on November 12, 1996 in the Hernandez Torres case,
only in the Empresas Inabén case. The basis for the claim is “penalty for presentation of
a frivolous complaint” and it states that it is secured by real estate valued at
$20,000,000.00. Attached to the claim is a detail of the 20% penalty claimed owed on
each of five notes, totaling the amount claimed. However, there is no evidence of
perfection of security interest, nor a description of the real estate securing the debt,
attached to this claim. This claim is the same as the second claim filed by Hatton in the
Inabén case (claim #235 therein), described above; see also footnote 17, as well as the
third claim filed by Hatton in the Hernandez Torres case (claim #26 therein), described

above.

Secured Status of the Hattons’ Claims
The First Loan

The first loan was executed on December 7, 1995, between ALRA, represented by
its president, Hernandez Torres, and SOMO in the amount of $603,348.00 (Join Exhibit
V). In guarantee of the repayment of this loan, ALRA pledged to SOMO a note, payable
to bearer, in the amount of $603,348.00 (Exhibit B), guaranteed by a first mortgage on the
following property, described in the loan agreement in the Spanish language:

RUSTICA. Parcela de terreno con una cabida de CINCO

PUNTO DOS MIL CINCUENTA Y CUATRO
CUERDAS, equivalentes a DIECINUEVE MIL

4]

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OCHOCIENTOS SESENTA Y DOS PUNTO CUATRO

MIL CUATROCIENTOS CINCUENTA Y OCHO

METROS CUADRADOS y en lindes por el NORTE, con

la Urbanizacién Punto Oro; por el SUR, con la Carretera

Estatal Numero Dos; por el ESTE, con parcela segregada y

por el OESTE, con parcela propiedad de la Autoridad de

Acueductos y Alcantarillados de Puerto Rico.
Said property is inscribed in the property registry as a property non-continuous to a larger
piece of land of 7.7,563 “cuerdas”, equivalent to 29,886.8,925 square meters, located in
Barrio Canas, in the municipality of Ponce, Puerto Rico, inscribed at page 296 of volume
721 of Ponce II, property number 38,625, now 55 of section II of Ponce, inscription

number 152. The loan agreement further provides that ALRA has an agreement with the

Puerto Rico Highway Authority for the purchase of the pledged land for a price of

$750,000.00, and that ALRA cedes a portion of this agreed sales price ($603,348.00) to
SOMO as an additional guarantee of the loan, with certain specified conditions”’.
The Second Loan

The second loan was executed on January 2, 1996, between Inabdn, represented
by Hermandez Torres, and SOMO in the amount of $2,475,000.00 (see Loan Agreement,
Joint Exhibit VH, and promissory note, Exhibit H). According to the loan agreement, in
guarantee of the repayment of this loan, Inabén gave to SOMO several notes; first, a
mortgage note payable to bearer in the amount of $500,000.00’, executed by Hernandez

Ortiz and guaranteed by a mortgage constituted by deed no. one executed on that same

*6The Cession Contract, dated December 7, 1995, and signed by Hernandez Torres, on
behalf of ALRA (but not signed by the Highway Authority), is Exhibit A.

1Said note was not entered into evidence at the trial held in January and February, 2005.

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date (Exhibit O); second, a mortgage note payable to bearer in the amount of $475,000.00
(Exhibit I), executed by Hernandez Ortiz and guaranteed by a mortgage constituted by
deed no. three executed on that same date (Exhibit P); third, a mortgage note payable to
bearer in the amount of $315,000.00 (Exhibit FF), executed by Inabon and guaranteed by
a mortgage constituted by deed no. twelve executed on July 16, 1992”; fourth, a
mortgage note payable to bearer in the amount of $1,500,000.00”, executed by Inabén
and guaranteed by a mortgage constituted by deed no. two executed on January 2, 1996
(Exhibit N); and, fifth, by the personal guarantee of Hernandez Ortiz (Exhibit K) and
Hernandez Torres and his wife (Exhibit J). See also, “Pledge Contract and Continuing
Guaranty”, executed on January 2, 1996, whereby Hernandez Ortiz pledges to SOMO, in
guaranty of the second loan, two of the bearer mortgage notes described above, those of
$500,000.00 and $475,000.00 (Exhibit L); and “Pledge Contract”, executed on January 2,
1996, whereby Hernandez Torres, on behalf of Inabén, pledges to SOMO, in guaranty of
the second loan, two of the bearer mortgage notes described above, those in the amount of
$315,000.00 and $1,500,000.00 (Exhibit M). On January 2, 1996, Inabén, SOMO,

Hernandez Ortiz and Westernbank also executed an “Acuerdo Sobre Limitacion de

8S aid mortgage was not entered into evidence at the trial held in January and February,
2005. According to a fax from Citibank to Inabén dated February 12, 1996 (Exhibit
EE), the original of Exhibit FF was delivered to Hatton on January 4, 1996, in exchange
for his payment of a loan from Citibank to Inabén in the amount of $350,000.00, per the .
instructions of Hernandez Torres. The court does not have in evidence a description of
the property securing the referenced mortgage note.

See also, Stipulated finding of Fact no. 6, indicating that $350,000 was deducted from
the proceeds of the second loan to pay this mortgage.

Said note was not entered into evidence at the trial held in January and February, 2005.

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Credito Hipotecario y Constitucién de Prenda Secundaria”, which indicates that
1 Westernbank is the holder of two bearer mortgage notes in the amount of $1,500,000.00
2 each, the first constituted by deed no. 448 executed on May 11, 1994, and the second
3
constituted by deed no. 954 executed on September 15, 1995*', and provides that
4
; Hernandez Ortiz is executing a secondary pledge of said mortgage notes to SOMO; and
6 that SOMO is designating Westernbank as the depository of the mortgage notes until the
7 obligations of Inabén and Hernandez Ortiz to Westernbank are satisfied, at which time
y Westernbank should deliver the notes to the Hattons.
9 . .
The mortgage guaranteeing the promissory note in the amount of $500,000.00
10
(Exhibit O) indicates that it is over the following property, described, in part, in the
tf
12 Spanish language as follows:
13 RUSTICA: Parcela de terreno radicada en el Barrio Canas
del término municipal de Ponce, Puerto Rico, con un 4rea
14 superficial de treinta y siete mil ciento ochenta y cinco
15 punto ocho mil ciento veintiocho (37,185.8128) metros
cuadrados, equivalentes a nueve punto cuatro mil
16 seiscientos once (9.4611) cuerdas.
7 (See Exhibit O for a complete property description). The mortgage indicates that the
8 described property is subject to several easements, as well as a mortgage in guarantee of a
19
bearer note in the amount of $1,500,000.00, constituted by deed no. 448 executed on May
20
21
22
23 Said mortgage is over the property securing the $500,000.00 promissory note of
0A Hernandez Ortiz, described in the paragraph below.
95 31Said mortgage is over the property securing the $475,000.00 promissory note of
Hernandez Ortiz, described below.
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11, 1994”.

The mortgage guaranteeing the promissory note in the amount of $475,000.00
(Exhibit P) indicates that it is over the following property, described, in part, in the
Spanish language as follows:

RUSTICA: Parcela de terreno radicada en el Barrio Canas

del término municipal de Ponce, Puerto Rico, compuesta de

cuarenta y seis punto siete mil novecientos setenta y siete

(46.7977) cuerdas equivalentes a ciento ochenta y tres mil

novecientos treinta y tres punto seis mil setecientos

cincuenta y cuatro (183,933.6754) metros cuadrados la cual
The property description then details that the land is divided into Parcel “A” of 45.9258
“cuerdas”, which is equivalent to 180,506.75 square meters, and is further divided into
Remnant I and Remnant II, the latter of which is further divided into two portions; Parcel
“B” of .7887 “cuerdas”, which is equivalent to 3,099.8985 square meters; Parcel “C”,
which is described in the lotification plan of project number 87-63-A-287-CGI_ - Urb.
Extension Punto Oro VM-139 as lot number 13 of block “OP”, composed of .0411
“cuerdas”, which is equivalent to 161.5390 square meters; and Parcel “D”, which is
described in the lotification plan of project number 87-63-A-287-CGI - Urb. Extensién
Punto Oro-VM-139 as lot number 6 of block “KL”, composed of .0421 “cuerdas”, which
is equivalent to 165.4694 square meters. (See Exhibit P for a complete property

description.) The mortgage note states that it is second in rank, the first mortgage being

one in the amount of $1,500,000.00 constituted by deed no. 954 executed on September

Said mortgage being one of two subject of the “Acuerdo Sobre Limitacion de Credito
Hipotecario y Constitucién de Prenda Secundaria” between Hernandez, Ortiz and
Westernbank.

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15, 1995*.
The mortgage guaranteeing the promissory note in the amount of $1,500,000.00
(Exhibit N) indicates that it is over the following property, described, in part, in the
Spanish language as follows:
RUSTICA: Parcela de terreno radicada en el Barrio Canas
del término municipal de Ponce, Puerto Rico, con un area
superficial de ciento cuarenta y siete mil ciento diez punto
dos mil ciento sesenta y seis (147,110.2166) metros
cuadrados, equivalentes a treinta y siete punto cuatro mil
trescientos trece (37.4313) cuerdas.

(See Exhibit N for complete property description).

The Management Agreement and Financial Agreement

On January 24, 1996, Inabon, Hernandez Torres and his wife, Hernandez Ortiz,
and Hatton executed an Executive Management Services Agreement (Exhibit VII),
whereby the parties agreed that Hatton would manage the operations of Inabon. The
individual debtors are referred to as “guarantors” in the management agreement. The
management agreement does not set forth any security for the compensation and benefits
to be provided to Hatton.

On that same date, the individual debtors, Inabén and SOMO executed a Financial
Agreement (Exhibit IX), whereby SOMO agreed to provide Inab6n up to four million
dollars in financing. The individual debtors are referred to as “guarantors” in the

financial agreement and through it agree to provide their personal, joint guarantees, as

well as mortgages over the following properties:

31d.

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37 “cuerdas” parcel at Canas Ward in Ponce
9.46 “cuerdas” parcel at Canas Ward in Ponce
19.54 “cuerdas” parcel at Canas Ward in Ponce
6.33 “cuerdas” parcel at Canas Ward in Ponce
12 “cuerdas” parcel at Canas Ward in Ponce
other parcels owned at Canas Ward in Ponce
However, there is no evidence in the record that any promissory or mortgage notes were

actually executed to provide security for the financial agreement.

The “Acuerdo”
In the “Acuerdo” signed by the parties on June 2, 1996 (Exhibit OO), the debt

regarding the first loan was reduced by $24,439.89, and amount retained by SOMO from

the original loan proceeds for “Proporty [sic] Insurance (Retenido Embargo) (see Exhibit
C “Details of Loan Disbursement”), leaving a balance of $578,908.11, to which interest,
fees and costs were added, resulting in a new total of $845,777.74. The “Acuerdo” also
acknowledges that the debt was purchased by Hatton from SOMO.

The debt regarding the second loan was reduced to $2,391,500.00, to which
interest, fees and costs were added, resulting in a new total of $2,800,409.70".
Additionally, the parties agreed to pay Hatton $441,900.00 for the cancellation of the
Executive Management Agreement and $262,353.00 for the cancellation of the Financial
Agreement. Thus, the total revised obligation of the debtors to the Hattons was
$4,500,440.40* as per the “Acuerdo”, No additional security was granted for this debt.

The “Stipulation”

4See footnote 7, supra.
See footnote 8, supra.

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In the “Stipulation” signed by the parties on June 18, 1996 (Exhibit PP), sixteen

days after the “Acuerdo”, the debt regarding the first loan was recalculated to total

$846,903.00. It was acknowledged that to partially satisfy this debt, ALRA cedes to
Hatton the total price of $750,000.00 of the sale of a parcel of land of 5.2054 cuerdas,
located in Barrio Canas, to the Puerto Rico Highway Authority. Further, it notes that in
consideration of this cession, Hatton will “free” parcels 019-00B, 019-01 and 019-03, as
identified in ALRA’s inscription plan, said parcels to be ceded to the Highway Authority
for public use. The “Stipulation” further provides that the $96,903.00 balance remaining,
after the application of the $750,000.00, is guaranteed by Inabén, Hernandez Torres and
Hernandez Ortiz, evidenced by a note (Exhibit TT), which is signed by Hernandez Torres
on behalf of Inabén, as well as by Hernandez Torres, his wife, and Hernandez Ortiz in
their individual capacity as guarantors. Actually, although the “Stipulation” refers to one
note, there is a second mortgage note (Exhibit UU), executed by Hernandez Ortiz on June
18, 1996, in the amount of $100,000.00, guaranteed by a mortgage (no. 63), executed on

June 18, 1996, in the amount of $100,000.00 over a piece of land of 46.7977 “cuerdas”,

consisting of various parcels and remnants, property of Hernandez Ortiz, located in Barrio
Canas in Ponce, Puerto Rico (see Exhibit VV for a complete property description). Said
mortgage states that the title is affected by an easement held by the Electric Energy
Authority, the Acueduct and Sewer Authority, the Puerto Rico Telephone Company; by a
mortgage in guarantee of a bearer note in the amount of $1,500,000.00 pursuant to deed

no. 954 executed on September 15, 1995; and by a mortgage in guarantee of a bearer note

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in the amount of $475,000.00 pursuant to deed no. 3 executed on January 2, 1996°°,

The debt related to the second loan was recalculated to a new total of

$2,859,443.00, and is evidenced by a promissory note (Exhibit QQ), which is signed by
Hernandez Torres on behalf of Inabén, as well as by Hernandez Torres, his wife, and
Hernandez Ortiz in their individual capacity as guarantors. No additional security was
granted for this portion of the debt.

The debt related to the management agreement was recalculated to a new total of
$441,900.00", and is evidenced by a promissory note (Exhibit RR), which is signed by
Hernandez Torres on behalf of Inabén, as well as by Hernandez Torres, his wife, and
Hernaéndez Ortiz in their individual capacity as guarantors. The stipulation provides that

this debt is guaranteed by a mortgage in the amount of $441,900.00 over a parcel of land

of 37.4313 “cuerdas” in Barrio Canas in Ponce, Puerto Rico (Exhibits YY (note) and ZZ
(deed)). The stipulation further provides that, as an additional guarantee, Hernandez
Ortiz is delivering to Hatton a bearer mortgage note in the amount of $520,000.00 over a
parcel of land of 9.4611 “cuerdas” that he owns (Exhibit WW), guaranteed by a mortgage
(no. 64) executed on June 18, 1996 (Exhibit XX) which indicates that the property is
already subject to several easements, a mortgage in the amount of $1,500,000.00
constituted by deed no. 448 executed on May 11, 1994, and a mortgage in the amount of

$500,000.00 constituted by deed no, 3 executed on January 2, 1996.

6One of the mortgages mentioned above, guaranteeing the second loan at the time it was
executed.

*7See footnote 13, supra.

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The debt related to the financial agreement was recalculated to a new total of
$262,353.00, and is secured by a promissory note (Exhibit SS), which is signed by
Hernandez Torres on behalf of Inabon**. The stipulation further provides that this debt is
also guaranteed by “the mortgage notes in Hatton’s possession”, without specifying to
which mortgages it is referring.

The “Stipulation Agreement”

On August 9, 1996, the Superior Court entered partial judgment approving the
“Stipulation” of June 18, 1996 (Exhibit X). On September 7, 1996, the individual
debtors and the Hattons further renewed and renegotiated their financial agreements and
entered into an “Acuerdo en Relacién a Estipulacién de Sentencia por Transaccién”
(“Stipulation Agreement”) (Exhibit XI), through which the parties agreed to postpone
payment of the amounts owed to Hatton and renewed the obligations under the
“Stipulation” in order to grant Inabén time to reorganize. In the stipulation agreement,
the parties recalculated the debt to Hatton to be $1,009,962.25 regarding the first loan,
$3,305,429.61 regarding the second loan, $556,419.29 regarding the management
agreement, and $343,235.13 regarding the financial agreement. Although the stipulation
agreement indicates that the obligations therein would be evidenced by four promissory
notes, said notes were not presented in evidence to the court. Additionally, in the
stipulation agreement, the individual debtors agreed to pay the Hattons $18,000.00 for

fees and costs. No additional security for the debts was executed as part of this

38 Although page 3 of said exhibit is missing from the document entered into evidence, the
court presumes that, like the other notes, it had a third page containing the signatures of
the individual debtors, as well as the notary’s seal.

30