LYNN ZAREAS v. BARED ESPINOSA

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
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IN RE: LUIS FELIX BARED ESPINOSA, : CASE NO. 04-09172(ESL)
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4 Debtor : CHAPTER 11
4 ANGELA LYNN ZAREAS, : ADV. NO. 04-0298
5 Plaintiff
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v.
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LUIS FELIX BARED ESPINOSA,
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9 Defendant
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OPINION AND ORDER
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° This case is before the court upon the debtor’s response to the court’s order to
43 show cause why this case should not be dismissed. For the reasons set forth below, the
14 debtor’s motion is denied and the case, as well as the adversary, are dismissed.
15 Background
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Plaintiff and defendant/debtor were married and lived at Candina Reef
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Condominium in Condado, Puerto Rico. Debtor had a substance abuse problem and
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49 sought treatment outside of Puerto Rico. Debtor was unable to maintain his employment
20 and became financially dependent upon his parents. Plaintiff and debtor had marital
21 problems and ultimately divorced. While separated from debtor, plaintiff began living at
2 the Condado condominium with her parents.
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Debtor owned the Condado condominium prior to his marriage to the plaintiff. In
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05 April, 2002, plaintiff filed for divorce; in May, 2002, debtor sold the apartment to his
26 parents; and in September, 2002, a final divorce decree was entered. Debtor borrowed
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nearly $339,970 from his parents during the period between April, 2002 and August,
2004. In September, 2004, debtor filed a petition for reorganization under chapter 11 of
the Bankruptcy Code.

To say that the relationship between plaintiff and debtor, and their respective
families, is contentious would be an understatement. In May, 2005, plaintiff's parents
filed a petition under chapter 7 of the Bankruptcy Code’. The parents of debtor herein
filed a motion in that case to lift the automatic stay in order to enforce an eviction
judgment obtained in the local court and, in September, 2005, plaintiff and her parents
were evicted from the Condado condominium.

Debtor’s petition includes three unsecured, non-priority creditors: (1) his father, in
the amount of $339,970.00; (2) plaintiff, in the amount of $28,990.00 for alimony and
$2,682.15 for medical expenses; and (3) Homero Gonzalez Lopez for $4,000.00 for his
ex-wife’s attorney’s fees. In terms of personal property, debtor’s schedules detail
$3,800.00 in clothing and jewelry, $12,716.00 in an individual retirement account,
$123,550.00 in an investment account, and $169,346.00 in accounts receivable from his
parents. Debtor’s schedules further indicate that he has no income and that his
expenditures are paid for by his parents. Debtors schedules also include five pending
legal actions, all involving the plaintiff herein and the debtor as parties. Debtor filed an
amended statement of financial affairs in October, 2004, indicating income from
employment in 2002 totaling $51,826.88, and income from his parents totaling

$257,654.74 between August, 2002 and August, 2004. Subsequently, debtor filed another

‘Case no. 05-04759 (GAC).

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amended statement of financial affairs in November, 2004, indicating employment
1 income of $5,159.79 in 2003.
2 Debtor’s operating reports for September, 2004 - January, 2005 indicate no
° income and no expenses. No operating reports have been filed since February, 2005.
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Debtor’s father, Luis Bared San Martin, filed proof of claim no. 1 in the amount
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6 of $331,969.95 on September 20, 2004, and an amended proof of claim no. 2 in the
7 amount of $339,969.95 on November 4, 2004”. Debtor’s ex-wife (and plaintiff herein),
8 Angela Zareas, filed proof of claim no. 3 in the amount of $145,120.00 on January 4,
° 2005. The United States Trustee filed an objection to claims no. 1 and 2, arguing that
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Luis Bared San Martin is an insider of the debtor under 11 U.S.C. §§ 101 (31) and (45)
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2 and that the proofs of claim do not include supporting documents as required by Fed. R.
43 Bankr. P. 3001(c). On January 24, 2006, this court entered an order granting the
14 objection to claim. Thus, the only remaining proof of claim is that of Angela Zareas, to
15 which debtor filed an objection on September 23, 2005.
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A preliminary pre-trial hearing was held on December 2, 2005. At the hearing the
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court noted that an examination of the record indicates that debtor has no income and no
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49 real property, no plan has been filed, and this matter is essentially a two-party dispute
20 between the debtor and his ex-wife. At its conclusion, the court entered an order to the
21 debtor to show cause why the bankruptcy petition should not be dismissed for the reasons
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93 The claims register for this case incorrectly lists these claims as being filed by Veronica
Zareas, an etror which led to this court’s misstatement at the hearing on December 2,
24 2005 (dkt. # 49 at p. 10). Nevertheless, the trustee’s objection, and this court’s order
granting the objection, correctly stated that the claims were filed by Luis Bared San
25 Martin, and said error is not determinative to the issues herein.
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stated in open court.
1 In his reply, the debtor argues that his case should not be dismissed because,
2 despite his personal problems in the past, his financial rehabilitation is feasible, he has
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assets and anticipates gainful employment upon finishing medical school. Debtor
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5 explains that his income decreased from $51,000 in 2002 to zero in 2003 because he
6 began attending medical school. Debtor alleges that his petition was filed in good faith
7 and with the purpose of reorganizing his finances. Debtor attributes the plethora of
8 filings in his bankruptcy case to the contentious relationship with plaintiff and between
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their families.
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Discussion
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1 Section 1112 of the Bankruptcy Code provides that upon request of a party in
13 interest, and after notice and a hearing, the court may convert a case under chapter 11 to a
14 case under chapter 7, or dismiss the case, whichever is in the best interest of the creditors
1 and the estate, for cause, including “continuing loss to or diminution of the estate and
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absence of a reasonable likelihood of rehabilitation”. 11 U.S.C. § 1112(b)(1).? The
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48 decision as to whether to convert a case from chapter 11 to chapter 7 is one which is
19 firmly within the court’s discretion. 7 Lawrence P. King, et al., Collier on Bankruptcy
20 { 1112.04 (15" ed. rev’d 2005); In re Consolidated Pioneer Mortgage Entities, 248 B.R.
21 368 (9" Cir. BAP 2000). “In order to avoid the costs of chapter 11 in cases in which they
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3Section 1112(b) was amended by the Bankruptcy Abuse Prevention and Consumer
24 Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23 § 442 (Apr. 20, 2005), effective for
95 all cases filed on or after October 27, 2005; hence, the amended provisions to not apply
herein.
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are not justified, section 1112(b) was designed to provide the court with a powerful tool
to weed out inappropriate chapter 11 cases at the earliest possible stage.” Collier,
g 1112.04[2] at 1112-23.

Section 1112 does not define “cause”, but lists several examples which may

justify conversion or dismissal. Collier, J 1112.01[2]. The list is not exclusive; the court

may convert or dismiss a case for other reasons so long as they are sufficient to
demonstrate cause. Id. The commentator notes that “each of the general categories of
cause enumerated in the statute involves a situation in which it is typically unlikely that
the benefits of reorganization will be achieved within a reasonable amount of time or at
an acceptable cost”; in other words, the circumstances in which it is unreasonable for the
chapter 11 case to proceed. J 1112.04[3] at 1112-24. Thus, in cases where there is a
continuing loss to, or diminution of, the chapter 11 estate, and an absence of a reasonable
likelihood of rehabilitation of the chapter 11 debtor, it is appropriate to convert the case to
chapter 7 or dismiss it, because it is unlikely that the debtor’s reorganization will be
achieved in a reasonable amount of time or at a reasonable cost, unless the court finds
that there are mitigating circumstances which show that reorganization can be achieved
within acceptable parameters.

The “diminution of the estate and lack of rehabilitation” standard set forth in
§ 1112(b)(1) has two basic requirements: first, whether the debtor has a negative cash
flow or declining asset values, and second, whether there is a reasonable likelihood that
the debtor’s losses can be stemmed and the business placed back on a solid financial

footing within a reasonable amount of time. An examination of debtor’s operating

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reports shows that debtor has no cash flow - no income, nor expenses.
1 However, the court must consider whether there is any reasonable prospect for
; reversing the debtor’s losses and revitalizing the debtor as a viable business enterprise.
° The standard is whether the debtor’s business prospects justify continuance of the
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5 reorganization effort. Collier, { 1112.04[5][a][ii]. The court must determine whether the
6 causes of the debtor’s continuing losses can be corrected and whether the debtor is
7 capable of remedying the problem - which, in most cases, depends on whether the debtor
8 has formulated a reasonably detailed business plan, or can do so within a reasonable
° amount of time. Id. The debtor’s opportunity to reorganize should be balanced against
. the protection of the creditors and the needs of the chapter 11 system as a whole. Id.
10 “However honest in its efforts the debtor may be, and however sincere its motives, the
13 District Court is not bound to clog its docket with visionary or impractical schemes for
14 resuscitation.” Id., citing Tennessee Publishing Co. v. American Nat’] Bank, 299 U.S.
8) 18, 22, 57S. Ct. 85, 81 L. Ed. 13 (1930).
; The debtor has not established that he has the means to rehabilitate his financial
43 situation nor a plan for doing so. Debtor has only stated that he is a medical school
19 student. He has not presented to this court that he has any financial prospects which
20 justify the continuance of his chapter 11 case. There is no indication that any potential
ai benefits of reorganizing debtor’s business affairs under chapter 11 will be achieved
2 within a reasonable amount of time or at an acceptable cost to the creditors and the
; bankruptcy system.
95 Other examples of cause for conversion or dismissal of a case in § 1112(b)(1) are
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the inability to effectuate a plan and unreasonable delay which is prejudicial to creditors.
1 The former examines whether it is reasonable to expect that a plan can be confirmed
2 within a reasonable amount of time. Collier, | 1112/04[5][b]. “If it appears that a debtor
; has filed a chapter 11 case ostensibly to reorganize, but has no reasonable prospects of
’ confirming a plan, then there would be no point in permitting the chapter 11 case to
continue and cause would exist to convert or dismiss the case.” Id., citing In re Abijoe
7 Realty Corp., 943 F.2d 121, 128-29 (1* Cir. 1991) (debtor’s “abysmal prospects for
8 rehabilitation” warranted dismissal). Debtor herein has not even filed a plan, contrary to
° the provisions of 11 U.S.C. § 1121(b), which provides a debtor with an exclusive period
" of 120 days to file a plan of reorganization. As a general rule, if the debtor fails to file a
; plan of reorganization within the time frames set by section 1121, cause exists to convert
43 or dismiss the case. Collier, § 1112.04[5][1] at 1112-48. Furthermore, the record shows
14 that debtor has no income, and has not had any income since 2003, instead living off of
15 the donations of his parents. Debtor has no basis for funding a plan.
8 In evaluating whether there has been unreasonable delay which is prejudicial to
: creditors, the court must consider whether the debtor has engaged in some form of
19 unreasonable delay, and whether the delay has been prejudicial. Collier, § 1112.04[5][c].
20 “The most obvious example of an unreasonable delay that may be prejudicial to creditors
21 is the unjustified failure to file a reasonable plan of reorganization in a timely fashion.”
22 Id. at 1112-44. This case has been pending nearly 17 months, yet debtor has not proposed
* any plan of reorganization, has not filed a disclosure statement, and has ceased filing
; operating reports. Furthermore, debtor did not appear for his deposition scheduled for
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November 14, 2005, which has resulted in further delays in the progress of the adversary
proceeding. There is sufficient basis for the court to conclude that there has been an
unreasonable delay which is prejudicial to debtor’s two creditors (only one of which has
filed a proof of claim).

The court has not been dissuaded from it’s conclusion at the December 2, 2005
hearing, that this is a two-party dispute between the debtor and his ex-wife, stemming
from their contentious divorce proceedings, and is not properly a matter of financial
reorganization under the Bankruptcy Code; rather, the bankruptcy court is simply being
used as another forum for the parties to air their grievances.

Conclusion

The court finds that it is in the best interest of the estate and the creditors to
dismiss this case. Accordingly, case no. 04-09172, as well as adversary proceeding no.
04-0298, are hereby dismissed. The clerk shall enter judgment accordingly.

Additionally, the clerk of the court is hereby directed to correct the claims register
in this case, as indicated in footnote 2.

SO ORDERED.

In San Juan, Puerto Rico, this 27" day of January, 2006.

we S. LAMOUTTE

United States Bankruptcy Judge