SEGARRA MIRANDA et al v. ALMACENES PITUSA INC. et al

OCR transcription for search; preserved printed pages are authoritative

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AUTHENTICATED RQ
U.S. GOVERNMENT
INFORMATION
GPO

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UNITES STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
IN RE:

ROBERTO NEGRON PEREZ
MARILYN NOEMI AYALA VELEZ

Case No. 03-09166 (ESL)
Chapter 7

DEBTORS

WILFREDO SEGARRA MIRANDA,
CHAPTER 7 TRUSTEE OF THE
ESTATE OF ROBERTO NEGRON
PEREZ AND MARILYN NOEMI
AYALA VELEZ

Plaintiff
Adv. Proc. No. 07-00240
v.

ALMACENES PITUSA, INC.;

PR RETAIL STORES, INC.; P.D.C_.M.
ASSOCIATES, 8.E.; ISRAEL KOPEL
AND HIS WIFE JOSEFINA
BALLESTER CABRERA AND THEIR
LEGAL CONJUGAL PARTNERSHIP;
ABC CORP. AND/OR S$.E.; DEF INS.
CORP.; GHI INS. CORP.; JKL INS.
CORP.

Defendants

OPINION AND ORDER
The instant adversary proceeding is before the court on defendants’ partial motion to dismiss
the complaint in its entirety as to several defendants, and to dismiss Cause II of the complaint as to
ali defendants for failure to state a claim upon which relief can be granted, pursuant to
Fed.R.Bankr.P. 7012(b)(6). (Dkt. 16), Plaintiff, Wilfredo Segarra Miranda is the chapter 7 Trustee

(the “Plaintiff” or “Trustee”) on behalf of the estate of debtors, Roberto Negron Perez and Marilyn

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Ayala. (“Debtors”) The defendants are Almacenes Pitusa, Inc. (“Pitusa”), Israel Kopel (“Kopel”) and
his wife, Josefina Ballester Cabrera (“Mrs. Kopel’) and their conjugal partnership (together, the
“Kopels’”), PDCM Associates, S.E. (“PDCM”), P.R. Retail Stores, Inc. (“PR Retail”) and certain
unnamed insurance companies (separate from Pitusa, the “non-Pitusa Defendants’) (and jointly with
Pitusa, the “Defendants”’). The Motion to dismiss is based on: 1) lack of privity of contract between
the Debtors and the Kopels and PDCM; and 2) lack of standing by the Trustee to bring Cause If for
breach of contract. For the reasons discussed below, the Motion, as prayed for, is denied.
Procedural background
The Trustee filed the complaint on July 12, 2007. (Dkt. 1).' Defendants filed the partial

motion to dismiss on September 14, 2007. (Dkt. 16) (the “Motion”). The Trustee opposed the
Motion (Dkt. 19) (“Plaintiff's Opposition”), and Defendants filed a reply in support. (Dkt. 22)
(““Defendants’ Reply’). The Trustee filed a sur-reply in opposition to the Motion on December 19,
2007. (Dkt. 25) (“Plaintiff's Sur-reply”). The Defendants argue that the claims in the complaint are
contractual in nature; and deny that the second cause of action (for breach of contract and damages)
is a core proceeding and, if not dismissed, they do not consent fo a final determination of the claim
by this court. (Dkt. 16 at 4).
The complaint

This action was filed on July 12, 2007. For purposes of deciding this Motion, the Defendants
concede that the properly pleaded facts and allegations in the complaint are treated as truc.” (Dkt. 16
at 6). The Debtors had filed for chapter 11 relief on January 4, 2001, but the case was dismissed in

August 2003. (See Case No. 01-00168 (ESL)). Shortly thereafter, on August 25, 2003, the Debtors

' References to matters of record will be to “Dkt. _”,

* Defendants do not consent to core proceeding jurisdiction over Cause II. (Dkt. 16 at 4). However, for the
reasons discussed below, the court finds that the action is core.

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filed the instant petition under chapter 11 of the Bankruptcy Code. (the “Code”) (Case No. 03-09166
(ESL)). In both bankrupicy cases, Debtors were relying on the rental income from the Property
{among other revenues) at issue in this proceeding to confirm and consummate a plan.

There are two types of claims of property of the estate at issue in this adversary proceeding.
The first type is the unpaid rent sought in Cause I. The second type is the damages claimed in Cause
I related to a two story commercial building located in the town of Adjuntas, P.R., known in this

case as the “Yumuri Building”. The Yumuri Building was built on a two cuerdas tract of land that

belonged to Debtors. (hereinafter, the “Property’”} A substantial part of the Property was leased to
Pitusa with court approval (Case No. 01-00168) starting in November 2001. (the “Lease’’). In June
2002, the Lease was amended to include additional space. (the “Amendment’’) Debtors’ case was
converted to chapter 7 on February 14, 2006.

The Defendants are a group of purportedly related business entities and individuals doing
business in Puerto Rico. The Kopels are the sole shareholders of Pitusa and PR Retail; Kopel is
Pitusa’s president and is the majority Administrative Partner of PDCM. In November 2006, the
Trustee sold the Property to PDCM for $1.75 million as part of Debtors’ chapter 7 liquidation.

The claims in the complaint arise from the alleged breach of a lease agreement signed by
Debtors and Pitusa and sets forth the following causes of action: (Cause I) the collection of unpaid
rents owed by Pitusa under the lease; (Cause I) damages for breach of contract: expected rents and
difference in property value, and; (Cause III) reimbursement of costs, expenses and attorney’s fees
incurred to enforce the terms of the lease. The claims against the non-Pitusa Defendants are couched
in terms of alter ego theories of liability. (Dkt. 1).

According to the complaint, on November 16, 2001 Debtors leased space to Pitusa in the

Yumuri Building. The Lease was for approximately 25,464 square feet of space in the Property, at

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the rate of $6 dollars per square foot. Pursuant to the terms of the Lease, Pitusa had an obligation to
pay rent at the rate of $12,732 per month, starting in February 2002. At all relevant times Pitusa only
paid $12,500 per month, thus accumulating $232 dollars per month in partial unpaid arrears
throughout the term of the Lease until the Property was sold in November 2006. Thus, the $13,238
dollars claimed in the first count of Cause I were accumulated from about February 2002 through
November 2006.

On June 28, 2002 the parties executed an Amendment to the Lease whereby Pitusa leased
three additional spaces which added approximately 12,400 square feet to the Lease, at the same
rental rate. Under the Amendment, Pitusa was liable to Debtors for an extra $6,199 per month in rent
payments. (Dkt. 1 {J 26, 27). According to the complaint, Pitusa’s obligation to pay rent under the
Amendment began at the earlier of 90 days after executing the Amendment, or when Pitusa opened
for business, whichever occurred first. Pitusa also had a right to off-set from the rent payment up to
50% of the costs of improvements, subject to approval by Debtors of the construction plans. Pitusa

never exercised its off-set option. Likewise, Pitusa did not pay any rent for the additional space

leased under the Amendment.’ Plaintiff's second damage claim in Cause I of the complaint is for
$223,198, equal to thirty-six months of rent due under the Amendment. Thus, the inference from the
complaint is that Pitusa’s rent obligation under the Amendment started in November 2003, the date
in which Pitusa opened for business, and accrued until the sale of the Property in November 2006.

The complaint (Dkt. 1 at 8-9) states that by 2003, the Debtors added fifteen new rental
spaces to the Property which would be leased at the rate of $650 dollars per month per space (or the

expectation of a maximum of $9,750 per month). The response to the new spaces was “extremely

> The additional space under the Amendment was designated as spaces B, C and D. Originally, space D was
to remain available to Debtors to lease to third parties. However, Pitusa took possession of space D and used the space
at all times, thus the Trustee claims Pitusa is liable for the rents corresponding to that space.

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positive” and soon eleven of the fifteen spaces were leased under five separate lease agreements with
entities other than Pitnsa. (the “non-Pitusa leases” or “tenants”). However, shortly thereafter, the new
spaces began experiencing “critical” condensation problems described as “rain” dripping from the
ceiling that affected the non-Pitusa tenants’ use of the Property. Pitusa hired an engineer to study the
problem in February 2004. The engineer reported his findings in a written report given to Pitusa in
March 2004. After extensive negotiations, Pitusa gave Debtors a copy of the report in “late” 2004.
The report identified the source of the condensation and dripping problem to be coming from the
cooling system (or “freezers”) installed on the second floor of the Property leased by Pitusa.
According to the report, the freezers for Pitusa’s supermarket were installed without first covering
the floor with insulation. (See report at Case No. 03-09166, Dkt. 119 at Exh. A). The freezers kept
the floor surface cold. The floor where Pitusa’s freezers sat was also the ceiling for the lower-level
spaces rented to the non-Pitusa tenants. The hot air generated by the business operations of non-
Pitusa tenants reacted with the cold surface above and condensed, causing a constant “rain” in the
lower level of the Property. The report made several recommendations to repair the condensation
problem and favored one that would cost approximately $44,000 to implement. [t appears that Pitusa
never fixed the problem while Debtors still owned the Property.

As aresult of this “rain” and Pitusa’s failure to repair the problem, Debtors lost the new non-
Pitusa tenants and could not rent the new spaces. (Dkt 1 § 39). Cause II of the complaint seeks
$351,000 in damages for this claim, which adds up to thirty-six months of lost rent from the non-
Pitusa leases (36 x 9,750). Thus, the loss of the non-Pitusa tenants should cover the period from
November 2003, when Pitusa opened for business, to November 2006 when the Property was sold
to PDCM.

The second count in Cause II is for approximately $1.7 million dollars—the difference

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between the sales price of the Property, $1.75 million, and its appraised value of $3.4 million.
Under the Lease, Pitusa could make any improvements to the Property that did not reduce

or affect its commercial value; Pitusa could not conduct any activity that could affect the nghis of

other tenants to the peaceful enjoyment of their respective premises; and Pitusa would reimburse

Debtors for the legal costs and expenses, including attorney’s fees, incurred by the Debtors in

enforcing Pitusa’s obligations under the Lease. (Dkt. 1 at 4-5).

The complaint alleges that the Defendants “decided to take advantage of the situation” that
Debtors were in chapter 11 due to financial difficulties. (Dkt. 1 4 45). Defendants began designing
and implementing a plan or conspiracy to “stran ele” the Debtors financially and impair the viability
of Debtors’ chapter 11 plan and concomitant rehabilitation, and otherwise defraud the Debtors. The
reduced rental income from the Property due to Pitusa’s incomplete payments and damage to the
Property, alleged as part of Defendants’ wrongful acts, impeded Debtors from complying with a
reorganization plan, caused Debtors’ case to be converted to chapter 7 hquidation in February 2006
and forced the sale of the Property to Defendants for half of its appraised value.

From the facts and allegations in the complaint and Plaintiff's other briefs in support of his
claims, we glean that the Defendants’ fraudulent or tortious objective was to obtain a benefit by
avoiding payment of the full rent owed by Pitusa and by acquiring Debtor’s Property on the cheap.
Apparently, the Defendants’ acts diminished the value of the Property compared to its appraisal
value, which the Defendants then acquired in the bankruptcy proceeding. The Trustee claims that
the actions executed by the Defendants against the Debtors were masterminded by Kopel, and
executed by, or through, his direct participation in or instructions to his co-Defendants. As evidence
of the plan or conspiracy, the Trustee claims that he “had” to sell the Property to PDCM, an entity

allegedly related to Pitusa and owned and controlled by Kopel, for a mere $1,750,000 in November

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2006; whereas the Property was appraised at more than $3.4 million over three years before the sale.
The reason was that no one offered more than $1.7 million due to the inadequate rental income and
the damage to the lower level of the Property allegedly caused by Pitusa’s freezers and its failure to
repair the problem. (Dkt. 1 at 7, 9-10). Pitusa’s failure to pay the full rent due, and to repair the water
damage caused by its freezers, constitute the underlying breach of the Lease agreement.

The complaint (Dkt. 1 at 7) also raises the inference that there was a fraudulent plan to strip
Pitusa of its valuable assets, perhaps so that it could not face its obligations under the Lease. In that
regard, the Trustee alleges that in September 2003, citing an alleged “corporate reorganization”,
“Pitusa” gave notice that it “would” assign the Lease to PR Retail, an entity purportedly owned by
Kopel and affiliated with Pitusa. According to records in the Commonwealth of Puerto Rico
Department of State, PR Retail was (or is) a non-existent entity. The notice of assignment to PR
Retail came with reassurances that Kopel “owned 100% of the shares” of PR Retail and that Pitusa
would remain liable for the obligations under the Lease.

The Trustee claims that Kopel should be held personally liable for the damages to the
Property. The basis for Kope!’s personal liability is that he acted as a control figure and/or that the
Defendants are in fact Kopel’s a/ter egos or business conduits, and the proceeds of their illegal and
wrongful acts against the Debtors accrued to Kopel’s exclusive and personal benefit. In the
alternative, Plaintiff claims that Kopel and the other Defendants are part of a conspiracy to defraud
Debtors and are ltable for those acts. (Dkt. 1 at 10-11). The Trustee 1s essentially asking the court
to pierce the Defendants’ corporate veil in order to assign liability to all Defendants, especially
Kopel.

Standard for Rule 12(b)(6) Motion to Dismiss

When considering a motion to dismiss, “(1) the complaint is construed in the light most

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favorable to the Plaintiff, (2) its allegations are taken as true, and (3) all reasonable inferences that
can be drawn from the pleading are drawn in favor of the pleader.” In re Conley, 369 B.R. 67, 72 (1"
Cir. BAP 2007) citing 5B Wright & Miller, Federal Practice and Procedure: Civil 3d § 1357 at 417;
Correa-Martinez v. Arrillaga-Belendez, 903 F.2d 49, 51 (1 Cir. 1990). The test set forth in the

leading case of Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99 (1957) was “that a complaint

should not be dismissed for failure to state a claim unless it appears beyond doubt that the Plaintiff
can prove no set of facts in support of his claim which would entitle him to relief.” See also In re
Diamond, 346 F.3d 224 (1* Cir. 2003). However, as recently stated by the U.S. Supreme Court, the
oft quoted “no set of facts” passage in Conley “has earned its retirement” after puzzling the legal
profession for 50 years. See Bell Atlantic Corp. v. Twombly, 550 U.S. __, 127 §.Ct. 1955, 1969
(2007). The reason is that, taken literally, under the “no set of facts” standard “a wholly conclusory
statement of claim would survive a motion to dismiss whenever the pleadings left open the
possibility that a plaintiff might later establish some “set of undisclosed facts” to support recovery.
{...] It seems fair to say that this approach to pleading would dispense with any showing of a
“reasonably founded hope” that a plaintiff would be able to make a case [because a plaintiff's]
optimism would be enough. /d. at 1968-69 (citations omitted).

The Twonbly Court enunciated this new standard ever mindful of the simple “notice”
pleading requirements embodied in Rule 8. The Jwombly standard does “not require heightened fact

pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face. [If

Plaintiffs fail to nudge] their claims across the line from conceivable to plausible, their complaint
must be dismissed.” 127 S.Ct. at 1974. In that regard, “[b]ecause a dismissal terminates an action
at the earliest stages of the litigation, without a developed factual basis for decision, the court must

carefully balance the rule of simplified civil pleading against the need for something more than

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conclusory allegations. Washington Legal Found v. Massachusetts Bar Found, 993 F.2d 962, 971
(1* Cir. 1993). However, the court will not accept unsupported conclusions or interpretations of the
law. Id.

Piercing the corporate veil under Puerto Rico law

To impose liability on the non-Pitusa Defendants for the tortious or fraudulent conduct
alleged in the complaint, the Plaintiff will need to pierce the Defendants’ corporate veil in order to
establish the necessary causal nexus between their acts, and the damages. “The doctrine of piercing
the corporate veil is equitable in nature. [D]isregard of the corporate entity may be refused where the
court determines that the complaining party can be adequately compensated with money damages.”
William Meade Fletcher, 1 Fletcher Cye. Corp. § 41.25 (Thompson/West 2008). Also, “where no
fraud is shown, a plaintiff must show that an inequitable result involving fundamental unfairness
would result... [A]/though corporate existence can be disregarded without a specific showing of
fraud, it is necessary to show that an injustice would result if the corporate form were left intact.”
Id.

Under Puerto Rico law, corporations are presumed to be “separate from its stockholders,
directors, officers, employees and/or any controlling entity.” Colon v. Rinaldi, MD, et al, 2006 WL
3421862, *6 (D.P.R. 2006) (unreported opinion). However, claims for piercing the corporate veil
are actionable in Puerto Rico. The plaintiff must show that piercing the corporate veil is necessary,
proper or justified in order to proceed. /d. The burden is on the party seeking to pierce the corporate
veil. Absent proof of fraud or substantial injustice, the standard to pierce the corporate veil is by
“strong and robust evidence”. San Miguel Fertil. Corp. v. P.R. Drydock, 94 P.R.Dec. 424, 430
(1967). The corporate fiction will be disregarded and liability will be imposed upon related corporate

entities upon a showing of “strong and robust evidence showing the parent corporation to have that

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degree of control over the subsidiary as to render the latter a mere shell for the former.” Milan v.
Centennial Comm. Corp., 500 F.Supp.2d 14, 26 (D.P.R. 2007) (citing Fleming v. Toa Alta
Development Corp., 96 P.R.Dec. 240 (1968)). The corporate veil may be pierced if a company “is
being used to sanction fraud, evade obligations, defeat public policy, justify inequity, protect fraud
or defend crime.” Milan, 500 F.Supp.2d at 26. The facts or evidence must show that the entities
allegedly involved in the fraudulent or inequitable conduct “acted as a single business enterprise
under Puerto Rico law.” /d. at 27.

Discussion

The Motion presents two basic legal issues. The first issue is whether the entire complaint
should be dismissed for failure to establish “any contractual connection” between Debtors, PDCM
and the Kopels. (Dkt. 16 at 7) (“privity of contract”). The second issue is whether Cause 1 for breach
of contract should be dismissed as to ali Defendants because the Trustee lacks standing to bring this
claim. The court finds that Defendants fail in both.

The complaint sets forth contract, tort and fraud theories ofrecovery which may be actionable
against the non-Pitusa Defendants by piercing the corporate veil of the Defendants’ business group.
These legal theories do not require privity of contract to exist among all parties for Plaintiff's claims
to be actionable. Furthermore and despite its label, Cause LU can fairly be interpreted to plead a post-
petition claim in the nature of'a tort to property of the estate derived from, but not necessarily based
on, the Lease between Debtors and Pitusa. As such, the claims belong to the estate and the Trustee
is the party with standing to bring these post-petition claims on behalf of the chapter 7 estate.
Privity of Contract

The first part of the Motion presents a discrete legal issue, that is, lack of privity of contract

as the basis to dismiss the complaint. The Kopels and PDCM claim that the complaint should be

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dismissed as to them because they were not in privity of contract with the Debtors. The Motion and
Defendant’s Reply do not attack the sufficiency of the pleadings in terms of the facts and allegations
supporting the fraud, conspiracy and corporate veil piercing (alter ego) theories of recovery
underlying the complaint.*

Privity of contract among or between the parties to the action is not a requisite element for
what are essentially tort claims against third parties to a contract. Plaintiff claims that the Defendants
acted in concert with Pitusa to cause the damages complained of, or were Kopel’s alter egos or
business conduits used to perpetrate the fraudulent or tortious acts that caused Pitusa’s default and
the damages to the estate, and therefore are all liable in damages to Plaintiff. (Dkt. 1). Consequently,
privity of contract between Debtors and the Kopels and PDCM is not the issue. The issue is whether
the complaint establishes a causal nexus between the alleged conduct of the actors that may have
caused the damages complained of. That nexus between the damages and the conduct imputed to the
non-Pitusa Defendants may be established by piercing the Defendants’ corporate veil.

Lack of Standing

The Motion seeks to dismiss Cause II of the complaint as to all Defendants for lack of
standing of the Trustee to bring this claim. This defense is groundless. The damage claims in Cause
II are alleged to be the consequence of Pitusa’s post-petition failure to repair the water damage to
the Property pursuant to its obligations under the Lease, which constitutes a breach of contract. The
breach is alleged to have been induced or caused by the acts of the non-Pitusa Defendants or as a
result of a conspiracy between ali Defendants.

The filing of a petition under title 11 creates an estate. 11 U.S.C. § 541(a), Pursuant to §

4 The Defendants’ Reply takes issue with the fraud allegations in the complaint. (Dkt. 22). However,
Defendants’ Reply merely recites the basic elements for pleading fraud in this district and the evidentiary standard under
local Jaw. (Dkt. 22 a 3-4). Otherwise, Defendants’ Reply supports the Motion as originally prayed for, that is, lack of
privity of contract and lack of standing.

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1 || 541(a)(1) the estate is comprised of all of debtor’s legal or equitable interests in property as of the

commencement of the case. The Lease contract authorized by the court in the 2001 case is property

of the estate as of the commencement of the 2003 case. The Property (its commercial and monetary

5 value) is also property of the estate as of the commencement of the case, and the leases to the non-

6 || Pitusa tenants were post-petition assets acquired by the estate during the 2003 case.

7 The weight of authority supports the conclusion that claims and causes of action arising from

8 | the post-petition breach of a contract with a debtor, or for post-petition torts committed against

7 property of the estate, including alleged frauds committed during or as a consequence of the sale of
. property of the estate, are interests of the estate under section 541(a)(6) “proceeds, products or
12 profits”. See, In re Stephen Grosse P.S., 44 B.R. 200 (Bkrtcy.D.Pa. 1984) (claim for difference in

13 || value of property of the estate tortiously and fraudulently converted by defendants was core

14 proceeding; the claim was a post-petition “product” of the estate within the meaning of § 541(a)(6));

IS Inre Acton Foodservices Corp., 39 B.R. 70, 72 (Bkrtcy.D.Mass. 1984) (post-petition fraud claims

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are section 541(a)(6) & (7) property of chapter 7 estate which may only be pursued by chapter 7
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18 trustee). The claims in Cause II can also be categorized as after-acquired property of the estate under

19 || section 541(a)(7) of the Code. /d. Under section 541(a)(7), contracts such as the Lease with Pitusa

20 || and the leases with non-Pitusa tenants became property acquired by the chapter 11 estate after the

21 commencement of the case. 9A Am. Jur. 2d Bankruptcy § 1280 (Thompson/West 2008). Therefore

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the post-petition claims in the complaint are after-acquired proceeds or products of the estate

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oA pursuant to section 541(a)(6). Id. “Where a case is converted from Chapter 11 to Chapter 7, the

95 || Chapter 7 estate [...] include[s] property which was acquired by the Chapter 11 estate after the filing

26 || of the Chapter 11 case.” 8A C.J.S. Bankruptcy § 563 (Thompson/West 2008) citing /n re Acton

27 | Foodservices Corp. 39 B.R. 70,
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Thus, under a combined reading of sections 541, 323 and Bankruptcy Rule 6009, “the trustee
may, in [the] exercise of his sound judgment and discretion, attempt to reduce to judgment causes
of action which are property of debtor’s estate[.]” 2 Bankr. Service L. Ed. § 15:61 (Thompson/West
2008).

The Trustee asserts that he did not abandon or waive any of the causes of action stated in the
complaint. In approving the sale of the Property, the court did not order the Trustee to abandon or
waive any claims of the estate connected to the Lease or the Property. (Dkt. 25 at 6-7). “Property is
deemed abandoned if the trustee affirmatively abandons it...” fn re Conroy, 2006 WL 1005065, *3
(Bkrtcy.N.D.Tl. 2006) (citing § 544; dismissing counter-claim asserted by debtor against a creditor
holding that the chapter 7 trustee was the proper party with standing to pursue the counter-claim for
breach of contract); see also Bankruptcy Rule 6007 (unless the court orders otherwise, abandonment
of property of the estate requires notice and a hearing). Therefore, the Trustee “stands in the shoes
of the debtor” for purposes of pursing these claims on behalf of the estate. 3 Lawrence P. King,
Collier on Bankruptcy { 323.03([2] (15" Ed. 2007). Furthermore, “[t]he trustee, as representative of
the estate, has the exclusive capacity to sue and be sued on behalf of the estate[.]” Jd. at § 323.03

For the foregoing reasons, the chapter 7 Trustee has standing to pursue the claims in Cause
Il and the part of the Motion to dismiss Cause II as to all Defendants for lack of standing is denied.
Core Proceeding jurisdiction

The Defendants claim that Cause II is not a core proceeding and they do not consent to a final
determination of said cause of action by this court. The nature and origin of the damage claims in
Cause II has been discussed above.

Bankruptcy courts have core jurisdiction over proceedings “arising under” title 11 and

proceedings “arising in” a case under title 11. Ifthe nature of the proceeding is one that could only

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arise within the bankruptcy context because it involves a right created by federal bankruptcy law,
then it is a core proceeding. A proceeding “arises under” title 11 if the action is based on the
provisions of the Code. However, the determination of whether a controversy is core or non-core is
a function of the bankruptcy judge which does not depend on the federal or state basis for the claim.
Ifan action would survive outside of bankruptcy and in the absence of bankruptcy would have been
initiated in a state or a district court, then it mvolves a non-core matter. See, e.g., Jn re Arnold Print
Works, Inc., 815 F.2d 165, 168-71 (1* Cir. 1987); fa re Wood, 825 F.2d 90, 97 (Sth Cir. 1987); In
re Mec Steel Bldgs., Inc., 136 B.R. 606, 608-09 (Bkricy.D.P.R. 1992).

Based on the foregoing, this action “arises in” a case under title 11 and the court has core
proceeding jurisdiction under section 28 U.S.C. § 157(b)(2)(A), (M) and/or (O). See, e.g., In re
Arnold Print, 815 F.2d at 168 (action by debtor to recover post-petition account receivable is a core
proceeding arising in a case under title 11 and concerning the administration of the estate, §
157(b)(2)(A), and affecting the liquidation of estate assets, § 157(b)(2)(O)); Matter of O’Sullivan’s
Fuel Oil Co., Inc., 88 B.R. 17 (D.Conn 1988) (favorably discussing the Arnold Print case and
holding that an action predominantly asserting post-petition torts and claims for tortious interference
with business opportunities “arises in” a case under title 11 and is a core proceeding under §
157(6)(2) which chapter 7 trustee alone can bring).” In re Nutri/System, Inc., 159 B.R. 725, 727
(E.D.Pa. 1993) (action for post-petition breach and tortious interference with contract is “core
proceeding” under 28 U.S.C. § 157(b)(2)(A) (relating to matters concerning the administration of

the estate), (M) (relating to orders approving the use of property of the bankruptcy estate) and (O)

> The fact that a portion of Plaintiff's rent claims in Count I of the complaint are pre-petition claims does not
warrant a finding that this proceeding is non-core. “When the postpetition acts complained of heavily dominate [when]
compared to the prepetition acts, a proceeding brought to attach liability based upon the totality of such acts will be
considered a core matter.” O Sullivan's Fuel, 88 B.R. at 20-21. Furthermore, Defendants have not raised any “core”
objections to Causes I and II, and their core objection as to Count II is misplaced.

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1 | (relating to proceedings affecting liquidation of the assets of the bankruptcy estate)).

Conclusion
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The Motion is hereby denied. Privity of contract is not required when claiming in tort against
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5 non-parties to a contractual relationship. Furthermore, the claims asserted in the complaint are

6 || property of the estate pursuant to section 541. The bulk of the damages complained of took place

7 || post-petition, and the tortious acts complained of were directed at property of the estate created by

8 ll virtue of the Code upon the filing of the petition. Pursuant to section 157(b) and applicable case law,
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this action is a core proceeding “arising in” a case under title 11. Finally, it is hornbook law that the
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Hl trustee in bankruptcy, particularly a chapter 7 trustee, has standing to sue and be sued on behalf of

2 debtors and their estates.

13 IT IS SO ORDERED.
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In San Juan, Puerto Rico, this day of April, 2008.
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19 ENRIQUE 8. LAMOUTTE
U.S. Bankruptcy Judge

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