Opinion
CASE NO. 97-14400.
August 23, 2007
OPINION AND ORDER
Before the court is the motion of Liberty Mutual Insurance Co. ("Liberty") (dkt. #708) to alter or amend this court's order of September 20, 2006 (dkt. #701) and deny the motion by Westernbank Puerto Rico ("Westernbank") for additional withdrawal from the proceeds of the sale of the debtor's 13.5 cuerdas property in Barrio Canas, Ponce, Puerto Rico (dkt. #698), as well as Westernbank's opposition (dkt. #727) to Liberty's request, and Liberty's reply thereto (dkt. #746). A hearing was held on these matters on December 5, 2006; subsequently, Liberty filed apost-hearingmemorandum on January 25, 2007 (dkt. #780), Westernbank filed a supplemental brief on February 8, 2007 (dkt. #782) and Liberty filed an opposition thereto on March 7, 2007 (dkt. #795).
See also the requests of Westernbank to withdraw funds deposited with the court as proceeds from the sale of debtor's property (dkts. #636, 637), and the opposition (dkt. #664) thereto, as well as Liberty's motion to alter or amend this court's order of February 14, 2006 (dkt. #604), which granted Westernbank's request (dkt. #603) for clarification of the court's order of January 31, 2006 (dkt. #598) approving the sale of the property and the proposed payments to Westernbank.
For the reasons set forth below, Liberty's motion is hereby granted.
Background
Debtor, Alfonso Hernandez Ortiz ("Hernandez Ortiz"), filed a petition for reorganization under chapter 11 of the Bankruptcy Code on December 5, 1997. Debtor and his father, Alfonso Hernandez Torres ("Hernandez Torres") were principals of Empresas Inabon, Inc. ("Inabon") and, in that capacity, guaranteed many of the debts of said corporation. Inabon filed a petition for reorganization under chapter 11 of the Bankruptcy Code on August 8, 1996, case no. 96-06038, which was subsequently converted to one under chapter 7 of the Code on August 31, 2005 (dkt. #1564 in case no. 96-06038). Likewise, Hernandez Torres filed a petition for reorganization under chapter 11 of the Bankruptcy Code on December 5, 1997, case no. 97-14399; his petition was subsequently converted to one under chapter 7 of the Code on July 14, 2006 (dkt. #310 in case no. 97-14399). The instant case was converted to chapter 7 on December 13, 2006 (dkt. #s 760,762).
According to debtor's disclosure statement, "Dr. Alfonso Hernandez Ortiz is the sole stockholder and chairman of the Board of Directors of Empresas Inabon, Inc., and in that capacity guaranteed a series of the company's debts with his signature and properties." See dkt. #358 at p. 2.
Westernbank's Claims
Westernbank originally filed two claims in this bankruptcy proceeding. Claim no. 4 was filed on January 27, 1998, in the secured amount of $1,387,851.46, based upon loan #2726; claim no. 5 was filed on that same date in the secured amount of $1,602,909.01, based upon loan #3670.
On February 27, 2001, debtor and Westernbank filed a stipulation regarding claim #3 (now claim #4) and claim #4 (now claim #5) (dkt. #344). As per the stipulation, claim #3 was disallowed, as it had been paid in full; as to claim #4, it was agreed that the balance owed, after partial payment, was $1,125,654.87 as of February 20, 2001. No objections were filed and the stipulation was approved by order of the court on March 9, 2001 (dkt. #344).
This amount includes $976,481.93 in principal and $149,172.94 in accrued interest; at the time the per diem was $284.81, which fluctuates as it is set at 2% over the Citibank prime rate. The claim is based upon a note ending in #3670 in the amount of $1.5 million, dated September 19, 1995 and due September 19, 1996.
The Disclosure Statement and Plan of Reorganization
The disclosure statement (dkt. #358) and plan of reorganization (dkt. #359) were filed on March 16, 2001. The disclosure statement provides that claim #3 (now claim #4) has been paid in full, and that claim #4 (now claim #5) has an outstanding balance of $1,125,654.87, the total paid on the claim so far amounting to $2,545,257.17. See exhibit 1 to dkt. #358. The disclosure statement further provides that the balance owed on claim #4 (now claim #5) is to be paid through the sale of the 13.3022 cuerdas property (otherwise identified as the Barrio Canas property). See exhibit 2 to dkt. #358. Finally, exhibit 4 to the disclosure statement provides that Westernbank is owed $1,125,654.87 with a per diem of $284.81, secured by both the 13.3022 (Remnant I) and 6.34 (Remnant II) cuerdas Barrio Canas properties. The plan provides that Class 5 is composed of secured debts incurred by Inabon and guaranteed by Hernandez Ortiz, including Westernbank in the amount of $1,125,654.87 + interest, and Liberty in the amount of $1,000,000.00. It further provides that Class 6 is composed of unsecured debt incurred by Inabon and guaranteed by Hernandez Ortiz, including Liberty in the amount of $4,055,372.99 and Insurance Company of North America (INA) in the amount of $3,100,000.00.
An addendum to the disclosure statement was filed on May 3, 2001 (dkt. #374), including the settlement agreements reached by Hernandez Ortiz with Liberty and INA.
A hearing on the disclosure statement and addendum was held on May 25, 2001 (dkt. #391), at which the disclosure statement was approved. An order was entered to that effect on June 28, 2001 (dkt. #408), and the confirmation hearing was scheduled for September 10, 2001.
An amended plan of reorganization was filed on June 25, 2001 (dkt. #406). The only changes regarding Westernbank, Liberty and INA are contained in Class 6, which as amended provided that Liberty's claim is in the amount of $4,055,372.99 "+ interest + adjustments", INA's claim is in the amount of $3,100,000.00 "+ interest", and an unsecured claim for Westernbank in the amount of $500,000.00 + interest was added to the class.
A note indicates "[t]his debt had not been considered in the Disclosure Statement. Westernbank informed the undersigned that the Debtor in Possession had signed a guarantee for a debt incurred by Alfonso Hernandez Torres and Llanos del Sur Corp. For this reason it is included herein but will be paid in the plan to be proposed by Alfonso Hernandez Torres and his spouse." See dkt. #406, fn. 2. It was subsequently clarified that this is the debt pertaining to loan #3279. See Westernbank's opposition to Liberty's motion to alter or amend, dkt. #727 at p. 17, para. 55; and transcript of hearing held 12/5/06, dkt. #759 at p. 46.
On August 17, 2001, Liberty filed an objection to the amended plan of reorganization and its confirmation, arguing that debtor did not covenant against new encumbrances on his properties while payment to Class 6 creditors is pending (dkt. #427). A stipulation was later entered into, resolving Liberty's objection, on August 28, 2001 (dkt. #432), which was approved by the court on September 10, 2001.
On August 28, 2001, debtor filed an "Addendum and Modification to Amended Plan of Reorganization" (dkt. #433), incorporating the settlement with Liberty. Also, at Westernbank's behest, debtor clarified footnote 2 on p. 3 of the amended plan to indicate that the debt of reference was incurred solely by Llanos del Sur corporation and guaranteed by Hernandez Ortiz and Hernandez Torres.
A confirmation hearing was held on September 10, 2001; at that time, it was affirmed to the court that the three estates (Empresas Inabon, Hernandez Torres and Hernandez Ortiz) would generate enough to pay all claims of all the estates in full (see minutes, dkt. #447 and transcript, dkt. #450). The court entered an order on September 29, 2001, confirming the debtor's plan of reorganization, as amended (dkt. #451).
INA `s Motion to Convert to Chapter 7
On August 7, 2005, INA filed a motion for an order to show cause why the case should not be converted to chapter 7, alleging debtor has failed to comply with the chapter 11 plan of reorganization (dkt. #541). On September 12, 2005, INA filed a request for conversion to chapter 7 (dkt. #548). Debtor filed an opposition thereto on September 14, 2005 (dkt. #551). On October 28, 2005, the court scheduled a hearing for January 10, 2006 on the motion to convert (dkt. #561). In anticipation of the hearing on its motion to convert, on December 30, 2005, INA filed proposed findings of fact and conclusions of law (dkt. #586).
On January 10, 2006, a hearing was held to consider the request for conversion to chapter 7; the parties agreed that the closing of the sale of the debtor's property was to take place within 45 days or the case would automatically be converted to chapter 7, as well as that the five years of interest not in controversy as owed to Westernbank would be paid at closing and any other amounts would be deposited in the court and subject to further litigation (see minutes of proceeding, dkt. #590, and transcript, dkt. #594). Additionally, the court granted INA fifteen days to supplement its proposed findings of fact and conclusions of law, and debtor was granted fifteen days thereafter to file a status report on its compliance with the confirmed plan. The hearing was continued without a date. INA filed its supplemented proposed findings of fact on January 29, 2006 (dkt. #597).
The Sale of the Llanos del Sur Property in Case No. 97-14399
On September 13, 2005, in the bankruptcy case of Hernandez Torres, a motion was filed to sell several properties at Llanos del Sur, Ponce, Puerto Rico, free and clear of liens; said motion provided that Westernbank was to be paid $525,000.00 as the first-rank mortgage note holder on all of the properties to be sold (dkt. #265 in case no. 97-14399).
On October 27, 2005, a motion was filed containing the agreements reached by Hernandez Torres with Westernbank and Robert Hatton, including an acknowledgment that the debt owed as to loan #3279 and loan #3670 amounted to $2,251,333.60 as of September 19, 2005; said motion provided that Westernbank was to be paid $525,000.00 upon the closing of the sale of the Llanos del Sur properties and any remaining amounts owed would be paid from the proceeds of a real property sale to be conducted in the case herein, as well as any proceeds to which it may be entitled as an unsecured creditor in the case of Inabon (dkt. #279 in case no. 97-14399). No objections were filed. On November 17, 2005, debtor Hernandez Torres filed an urgent motion seeking the court's authorization to sell the property; there were no objections and on November 29, 2005, the court entered an order approving the stipulation (dkt. #284 in case no. 97-14399).
Both Hatton and Westernbank had conditionally objected to the sale; see dkts. #272 and # 273 in case no. 97-14399.
The court notes that during this time all the parties were in agreement and represented to the court that the sale of all properties in the three cases would yield sufficient funds to pay all creditors in full, and allow for a refund to the individual debtors. Such assumption proved to be wrong.
The Sale of the Barrio Canas Property in the Case Herein
On November 29, 2005, debtor filed a motion to sell his property in Barrio Canas, Ponce, Puerto Rico, free and clear of liens (dkt. #566). Among the terms and conditions of the sale, debtor acknowledged that Westernbank had agreed to accept a deferred payment of the balance owed to it as a result of the sale of the Llanos del Sur property in the Hernandez Torres bankruptcy case, which would be paid from the sale of the Barrio Canas property in the herein bankruptcy case. Debtor further acknowledged that Westernbank's debts with Hernandez Torres and Hernandez Ortiz were fully secured and subject to cross-collateralization pursuant to the loan agreements and notes executed among the parties. Debtor proposed that Westernbank be paid $1,483,172.00 for loan #3670 and $268,162.00 for loan #3279. The motion provided that any party objecting to the sale should do so in writing within twenty days, or by December 19, 2005.
The agreement further provided that "Westernbank must provide a certified letter with a breakdown of the principal mount [sic] owed and the interest accumulated. Westernbank must also provide a certified document stating the amount owed for the cross collateralization, separating principal and interest payments and the daily accumulation of interest. Interest will be paid pursuant [to] P.R. Mortgage law, to wit, only 6[sic] years will be deemed secured."
On December 12, 2005, debtor filed a motion (dkt. #570) seeking to shorten the time period for filing objections to the sale to December 16, 2005. The court entered an order on December 20, 2005, granting debtor's request (dkt. #574).
On December 16, 2005, Liberty and Westernbank filed separate motions opposing the proposed distributions of the proceeds of the sale. Westernbank opposed the proposed amounts for loan #3670 (dkt. #573), arguing that the amount had long been settled as a result of the February 21, 2001 stipulation, which was never objected to and was approved by the court. Liberty disagreed with the debtor's estimates of the mortgage balances owed, and argued that the amount of tax escrows did not comply with the correct order of distribution to lien holders, and that the estimates for the power line relocation costs were not fair, reliable and reasonable. Liberty also requested the proceeds be deposited in different funds and withdrawals be made after closing (dkt. #572).
Westernbank points out that said amount also appears in the disclosure statement, plan of reorganization and amended plan of reorganization.
Debtor's Request for Approval of the Barrio Canas Sale
On January 13, 2006, debtor filed a motion requesting the court's approval of the sale (dkt. #592); the court entered an order granting debtor's request and approving the sale on January 31, 2006 (dkt. #598).
Westernbank's First Request for Distribution of Funds from the Barrio Canas Sale
On February 10, 2006, Westernbank filed an "Urgent Motion Requesting Clarification of Order and/or for Reconsideration Regarding Order Dkt. 598" which asked the court to order that upon the closing of the sale of the Barrio Canas property, it be paid $1,626,408.54 as to loan #3670 and $258,353.44 as to loan #3279 (dkt. #603).
Said amount includes $976,481.93 in principal, $499,926.61 in interest and $150,000.00 in attorney's fees, as of January 10, 2006; said loan as a per diem of 2% over prime — at the time, $250.90.
Said amount includes $0 in principal, $218,353.44 in interest and $40,000.00 in attorney's fees.
The court entered an order on February 14, 2006, granting Westernbank's motion for clarification (dkt. #604). The order stated:
The court authorized the sale upon the representations made by the parties at the hearing held on January 10, 2006 (dkt. #594). The court assumed that the parties had agreed on the payment to Westernbank and that any amounts not agreed to will be deposited with the court. The court did not modify the stipulations between the parties.
Debtor's Request for an Extension of Time to Close Sale and Avoid Conversion
On February 21, 2006, debtor filed an urgent motion requesting an order (dkt. #606), seeking an extension of time, to the 45 day period to close the sale set by the court at the January 10, 2006 hearing, for the secured creditors to accept or reject the purchaser's offer to make a $100,000.00 non-refundable deposit in exchange for a 90-day extension of time to close the sale. INA filed an objection on February 21, 2006 (dkt. #608); debtor filed a response thereto onFebruary 22, 2006 (dkt. #610); Liberty filed an opposition to debtor's request on February 22, 2006 (dkt. #611); Westernbank weighed in on February 23, 2006 (dkts. #613 and #614); and, on March 1, 2006, the court entered an order (dkt. #620). The order provided:
There is no controversy that the purchase price is reasonable and that the sale is in the best interest of the estate. The controversy lies in how the sale proceeds will be distributed amongst creditors, particularly, Westernbank Puerto Rico, Insurance Company of North America, and Liberty Mutual Insurance Company.
In view of the foregoing, the court hereby orders as follows:
1 — The sale is approved. The debtor shall proceed to close the sale as soon as possible.
2 — The debtor shall consign with the court the proceeds of the sale.
3 — Any and all parties claiming to be paid a specific amount from the proceeds of the sale shall file with the court a specific request.
4 — A hearing to consider the apportionment of the proceeds of the sale is scheduled for April 25, 2006 at 9:30 a.m.
Liberty and INA Respond to Westernbank's First Request for Distribution of Funds
On February 21, 2006 Liberty filed a response to Westernbank's urgent motion and request for further order, arguing that Westernbank should be paid no more than principal plus five year's interest on loan #3670 because (1) the allowed amount was stipulated in 2001 and did not include attorney's fees or, in the alternative, attorney's fees should be examined pursuant to 11 U.S.C. S 506(b), and (2) pursuant to the mortgage law, a deed may not provide security for more than five year's interest (dkt. #607). Further, Liberty argued that loan #3279 is not subject of a proof of claim in this case and the confirmation order had discharged it or, in the alternative, the interest rate on the loan exceeded the limit set forth in the mortgage deed.
On February 21, 2006, INA joined Liberty's response to Westernbank (dkt. #609), and on February 22, 2006, submitted a corrected citation to the Puerto Rico Supreme Court case regarding Article 166 of the Mortgage Law (dkt. #612).
On February 23, 2006, Westernbank filed a response (dkt. #613) to Liberty's urgent request for an order, informing its understanding that the court had granted full payment to Westernbank upon closing of the sale through its February 14 order (dkt. #604). On that same date, Westernbank filed an urgent motion (dkt. #615) requesting the denial of Liberty and INA's motions in opposition to the proposed distribution, arguing that their allegations were already been disposed of by the court's February 14, 2006 order (dkt. #604).
On February 23, 2006, INA filed a motion (dkt. #616) requesting reconsideration of the court's February 14, 2006 order (dkt. #604), arguing that the court should reconsider its decision in light of Liberty and INA's timely motions (dkts. #607, 609 and 612) in response to Westernbank's urgent motion (dkt. #603). According to INA, Westernbank should only be paid the amounts stipulated (dkt. #344), should only be paid allowed amounts, and should only be allowed to collect secured interest for five years under Article 155 of the Puerto Rico Mortgage Law.
On February 24, 2006, Liberty requested leave (dkt. #617) to reply to Westernbank's response (dkt. #613), alleging that Westernbank misunderstands the court's February 14, 2006 order, arguing that the order only granted Westernbank's request for clarification, but did not grant it the right to collect excessive interest and attorney's fees which are prohibited by law. According to Liberty, Westernbank is aware that it disagrees with the disbursement of any amount in excess of principal, as well as more than five years of secured interest, with regard to loan #3670, attaching a letter that it wrote to Westernbank in support thereof.
Debtor's Report of Sale of the Barrio Canas Property
On February 28, 2006, debtor filed an urgent report on sale of the Barrio Canas property, informing that at closing Westernbank had been paid $1,125,654.92, and that several checks had been consigned to the court as funds in controversy, including checks to Westernbank in the amount of $268,162.00 for the balance pending on the Llanos del Sur property, and in the amount of $357,517.08 for monies owed as per loan #3670 (dkt. #618).
This amount includes $976,481.93 in principal and $149,172.94 in interest as of February 27, 2001.
On March 8, 2006, Robert Hatton Gotay, his wife Maria de los Angeles Rentas Costas and their conjugal partnership ("Hatton") filed a motion requesting that all proceeds from the sale of the Barrio Canas properties remain deposited in court as cash collateral pending the final disposition of the adversary proceeding Empresas Inabon, Inc., et al. v. Robert Hatton Gotay, et al., adv. no. 01-0073 (dkt. #623). On that same date, Liberty requested withdrawal of $1,000,000.00 deposited in the court and owed to it (dkt. #624). On March 14, 2006, the court granted Hatton's request (dkt. #626). On March 16, 2006, Liberty requested the court reconsider or vacate its order of March 14, 2006 (dkt. #627); and on March 20, 2006, the court set Liberty's request for a hearing on April 25, 2006 (dkt. #629). On March 24, 2006, Westernbank filed an opposition to Hatton's request regarding its funds (dkt. #634). On April 5, 1006, Westernbank filed an urgent motion to continue the April 25 hearing (dkt. #638), which was opposed by Liberty on April 6, 2006 (dkt. #639). The court entered an order on April 10, 2006 (dkt. #641), granting Westernbank's motion and rescheduling the hearing for August 7, 2006; on April 17, 2006, it entered an order denying Liberty's objection thereto (dkt. #647).
Said adversary proceeding was substantially resolved by this court's opinion and order of July 13, 2006 (dkt. #94 in adv. no. 01-0073); according to the minutes of the status conference held on May 4, 2007 (dkt. #104 in adv. no. 01-0073), the parties were granted sixty (60) days to file a settlement agreement or a joint motion for a consent judgment; neither an agreement nor a motion has been filed as of this date.
Westernbank's Second Request for Disbursement of Proceeds from the Barrio Canas Sale and Background Leading to this Court's Order of September 20, 2006 (Dkt. # 701), the Order Liberty Seeks to Alter or Amend
On April 5, 2006, Westernbank filed a "Motion to Withdraw Deposited Proceeds of Sale" (dkt. #636), seeking that the court order the clerk to disburse to it $1,943,570.54, including $1,476,408.54 owed as of January 10, 2006 as to loan 7230003670 ("loan #3670"), $268,162.00 owed as to loan 7230003279 ("loan #3279"), and $190,000.00 for attorney's fees as to both loans. In the alternative, Westernbank seeks that $1,333,589.51 be allowed as to loan #3670 and the balance owed be allowed as unsecured. Westernbank argues that if the court adopts Liberty's and INA's interpretation of article 166 of the Puerto Rico Mortgage Law, 30 L.P.R.A. S 2562, it should be paid $1,333,589.51 as to loan #3670, of which $1,125,654.92 was received on the closing date of the sale of the Barrio Canas property, leaving a balance due of $207,934.59. Further, Westernbank argues that since there is no controversy or objection as to its entitlement to said amount of principal and interest, even under Liberty and INA's theory any balance due for interest in excess of five years must still be paid as an unsecured debt. In support of its motion, Westernbank filed an unsworn statement by Jose J. Mercado, manager of Westernbank's commercial credit department, stating that Westernbank is owed $357,107.84 for accrued interest on loan #3670 for the period between February 24, 2001 and February 24, 2006, along with an exhibit showing the interest accrual during that period.
Said amount includes $976,481.93 in principal and $499,926.61 in interest as of January 10, 2006.
Said amount includes $976,481.93 in principal and $357,107.58 in interest, which corresponds to the five year period immediately preceding the February 24, 2006 closing date.
On April 5, 2006, Westernbank also filed a memorandum of law in support of its motion to withdraw the deposited proceeds (dkt. #637). Westernbank argues that even under Liberty and INA's theory that secured interest on the mortgage is limited to five years, they are still entitled to receive the balance of $207,934.59 in secured interest on loan #3670 with the balance allowed as unsecured debt. Additionally, as to loan #3279, Westernbank argues that Liberty and INA are estopped from seeking reconsideration of the court's final order of November 29, 2005, in the Hernandez Torres case (dkt. #284 in case no. 97-14399), which approved the stipulation of October 27, 2005 which provided that Westernbank would be paid the balance owed to it as a result of the sale of the Llanos del Sur property in the Hernandez Torres case from the proceeds of the sale of the Barrio Canas property in the case herein. Finally, as to the request for attorney's fees, Westernbank argues that under 11 U.S.C. S 506(b) said fees are allowed if they are reasonable and provided for under the agreement pursuant to which the creditor's claim arose; according to Westernbank, the amounts claimed were part of the promissory notes signed by the debtor and are more than reasonable. In the alternative, Westernbank states that it is willing to file an application for compensation under section 506 for the court's evaluation.
On April 13, 2006, Liberty filed an opposition (dkt. #646) to Westernbank's memorandum of law and requested permission to submit evidence in support of its opposition at the hearing scheduled for April 25, 2006. On April 21, 2006, Westernbank filed a reply (dkt. #649) requesting that if Liberty was planning to present new facts or legal arguments at the hearing that it do so in writing before the hearing; the court entered an order on April 28, 2006, granting Westernbank's motion and ordering Liberty to reply within thirty days (dkt. #650).
Liberty filed a response and opposition on June 5, 2006 (dkt. #664). It argues that Westernbank is requesting payment of claims that have been discharged or paid, or are beyond the amounts expressly agreed to by the parties and approved by the court. Specifically, it argues that Westernbank's claim as to loan #3670 is limited to the stipulated principal of $976,481.93, which has already been paid; the stipulated interest of $149,172.94 as of February 27, 2001, which has already been paid; and interest at 2% over prime from February 27, 2001 to no later than September 19, 2001. It further argues that Westernbank's claim as to loan #3279 is disallowed pursuant to 11 U.S.C. S 1141(c) and (d) because it failed to file any claim as to that loan before the claims bar date and prior to the entry of the order confirming debtor's chapter 11 plan. According to Liberty, the February 27, 2001 stipulation did not provide for how long mortgage interest would accrue, and therefore it is only entitled to interest to the extent provided by law; nor did it provide for attorney's fees, and no other stipulations have been entered into or approved in this case. Liberty argued that the principal of collateral estoppel does not apply to the fact herein because neither Liberty nor Hernandez Ortiz were parties to the stipulation reached in the Hernandez Torres case, nor was said stipulation entered or approved in the Hernandez Ortiz case. Further, it argued that Westernbank's claim for attorney's fees cannot be allowed until adjudicated as reasonable under 11 U.S.C. S 506(b).
On July 5, 2006, after requesting leave to file a reply (dkt. #665) which was granted by the court (dkt. #666), Westernbank filed a "Response and Opposition" to Liberty's response and opposition (dkt. #671). As to loan #3279, Westernbank argues that Liberty is, indeed, barred by the doctrine of collateral estoppel from objecting to its payment of interest based on this claim because it did not object to the stipulation as to the sale of the Llanos del Sur property in the Hernandez Torres case (dkt. #279 in case no. 97-14399), which was referenced in the motion seeking authorization to sell the property (dkt. #283 in case no. 97-14399), which was, in turn, approved by the court (dkts. #284 and 285 in case no. 97-14399) and referenced in the herein case in debtor's motion requesting authorization to sell the Barrio Canas property (dkt. #566), subsequently approved by the court (dkt. #598). According to Westernbank, Liberty did not object to any of these proceedings. Therefore, Westernbank argues, the collateral estoppel standard has been met because the issue was the same in both the Hernandez Torres case and the case herein, namely, where the money to pay Westernbank was going to come from; the issue was actually litigated, that is, Liberty was afforded a reasonable opportunity to defend itself; the issue was determined by a valid and final judgment, that is, the court's order of November 29, 2005 (dkts. #284 and 285 in case no. 97-14399); and the issue of how Westernbank was to be paid was essential to the final judgment. Westernbank further argues that Liberty is estopped from claiming that loan #3279 was not subject of a proof of claim in the present case but, anyway, the matter becomes moot when the case is converted to chapter 7 because Westernbank will re-file their proofs of claim.
As to loan #3670, Westernbank argues that with regard to its claim for attorney's fees, it will submit its billings for the court's scrutiny for reasonableness pursuant to 11 U.S.C. S 506; and with regard to its claim for interest, if the matter is controlled by state law then the case of Campos Ledesma v. Fomento, 2001 TSPR 1, 153 D.P.R. 137 (2001) provides that the interest should be calculated five years back from the date of the sale of the property, in which case $207,934.59 is still owed, and if federal law controls then the full payment is required, citing 11 U.S.C. S 108(c) and In re Atkinson, 126 B.R. 713 (N.D. Tex. 1991).
Westernbank concludes that the complex, interrelated cases of Empresas Inabon, Hernandez Torres and Hernandez Ortiz must be viewed in conjunction with one another; that significant changes have occurred in each case over the course of these proceedings; that Westernbank has made accommodations in all three cases for the benefit of all three debtors and all creditors, including Liberty; and that Liberty has known all along of the debts and their guarantees and now, after benefitting from transactions to which Westernbank acquiesced, is objecting that Westernbank be paid in full, contrary to both law and equity.
On August 6, 2006, Liberty filed a supplement to its response and opposition to Westernbank's memorandum of law in support of their motion to withdraw the deposited proceeds from the sale of the Barrio Canas property (dkt. #677), addressing the time period that should be used for computing the five year interest limitation under Article 166 of the Puerto Rico Mortgage Law for loan #3670. It argues that the Campos Ledesma case involved an eminent domain action rather than a commercial loan/foreclosure action, and the Supreme Court of Puerto Rico stated that in the context of an eminent domain proceeding, the five year interest period is calculated back from the date the eminent domain proceeding is initiated, which, according to Liberty, since the government must consign the amounts to be paid at the same time, is the equivalent of the date of sale. Further, Liberty argues that since the Campos Ledesma case was decided, the Puerto Rico Court of Appeals issued a ruling in the case ofMatos Matos v. Rodriguez Morales, 2006 P.R. Lexis 3004 (P.R. App. Ct. 2005), where the court explained that in commercial transactions, consistent with the Campos decision, the five year period under Article 166 is calculated backwards from the date the foreclosure action is commenced. Therefore, according to Liberty, Westernbank is only entitled to interest from May 9, 1992 through May 9, 1997, the five years preceding the initiation of the foreclosure action on May 9, 1997. Further, since pursuant to the February 27, 2001 stipulation (dkt. #344), Westernbank has already been paid interest on loan #3670 through February 27, 2001, no further interest is due to it for loan #3670.
The court held a hearing on August 7, 2006 to consider the pending matters (see minutes of hearing, dkt. #682, and transcript of hearing, dkt. #683). At this hearing, Westernbank clarified that the total amount it claims as to loan #3670, based upon its senior lien on the Barrio Canas property, is $1,626,408.54, which is composed of $976,481.93 in principal, $499,926.61 in interest (from September 19, 1995 until January 31, 2006) (plus the per diem of 2% over prime until the closing date), and $150,000.00 in attorney's fees. It further clarified that believes that federal law, rather than state law, should be applied to determine how much it is entitled to collect on its lien; namely, 11 U.S.C. S 108(c) and the Atkinson case. As to loan #3279, Westernbank clarified that loan was made to Hernandez Torres, secured by the Llanos del Sur property and guaranteed by Hernandez Ortiz, based on a pledge agreement which was part of the proofs of claim filed in the Hernandez Torres case. Westernbank was also the senior lien holder on that property, and stipulated to receive a lower amount than it was due on the sale of that property in order to facilitate its sale, with the understanding that it would receive the balance due upon the sale of the Barrio Canas property in the case herein. Said understanding, and the amounts claimed, were submitted to the court in the notice of sale of the Barrio Canas property in this case. According to Westernbank, the amounts claimed as to loan #3279 were set forth in dkt. #265 in case no. 97-14399, and the stipulation as to the sale of the property, dkt. #279 in case no. 97-14399, explains the transaction, which was further discussed in dkt. #283 in case no. 97-14399, and approved by the court in dkt. #284 in case no. 97-14399. As a result of these transactions in the Hernandez Torres case, which were set forth in dkt. #566 in the case herein, Westernbank argues that Liberty is collaterally estopped from objecting to its claim based upon loan #3279 because it was involved in that proceeding and did not object to the agreement or the court's order, which is now final.
Westernbank points out that the court entered an order granting the debtor's urgent motion seeking authorization to sell the Barrio Canas property (dkt. #598), of which Westernbank later sought clarification (dkt. #603) which was granted by the court (dkt. #604). The amounts which Westernbank seeks were set forth in the debtor's urgent motion notifying the Barrio Canas sale and consigning the funds therefrom (dkt. #618) and in Westernbank's motion to withdraw deposited proceeds of sale (dkt. #636); Westernbank was paid the principal owed for loan #3670, and the amount owed for interest for the five-year period in dispute, as well as the balance owed from the sale of the Llanos del Sur property, were deposited with the court. First, Westernbank argued that it is owed $503,390.91, which includes $146,283.33 as the balance owed from the sale of the Llanos del Sur property (re: loan #3279), and $357,107.58 owed from the sale of the Barrio Canas property (re: loan #3670). Later, Westernbank argued that it is owed a total of $1,626,408.54 as of January 10, 2006; of that amount, $1,125,654.92 was paid at closing, leaving abalance due of $759,107.06, which includes $500,753.62 as to loan #3670 and $258,353.44 as to loan #3279.
Liberty clarified that it is a junior lienholder with a secured claim for $1 million over the Barrio Canas property, arising from a pre-petition judgment and attachment, subject of a stipulation entered and approved in this case and included in the debtor's confirmed plan of reorganization. (dkt. #624).
INA clarified that it is an unsecured creditor, and stated that its position is that Westernbank's secured indebtedness is limited to five years of interest as to loan #3670, and its interest as to loan #3279 is unsecured. INA raised the issue that the debtor has not complied with the court's order to file a status report as to its compliance with the chapter 11 plan.
Counsel for creditor Robert Hatton clarified that he holds a second, third and fourth mortgage over the Barrio Canas property. Counsel for Liberty stated that Hatton's claims are based on loans with a principal amount of $475,000.00, $343,000.00 and $100,000.00, respectively, with interest calculated in the amount of $79,000.00, $27,000.00 and $18,000.00, respectively.
Debtor's counsel stated that the proceeds from the sale of the Barrio Canas property were consigned with the court so that it can determine what is owed to who, and why, and that the controversy is not ripe because there is evidence missing; she asked that the court grant a short period of time for the parties to support their claims. She clarified that Westernbank was paid $1,250,000.00 upon the sale of the Barrio Canas property, which pertains to principal and five years interest.
The court identified the following uncontested facts: (1) a property owned by Hernandez Ortiz, located in Barrio Canas, Ponce, Puerto Rico, property #11039, was sold to SF Ponce II Limited Partnership in the amount of $5,228,293.97; (2) Westernbank is the first lienholder on that property; (3) Westernbank received $1,125,654.92 from the sale of that property and the balance was deposited with the court, including the disputed balances potentially owed to Westernbank and Hatton.
The court granted Westernbank sixty days to file a motion in support of the reasonableness of its request for attorney's fees, and thirty days to file evidence of its security interest relative to loan #3279. The court noted that the issue of the five year limitation on interest has been briefed by the parties. Debtor was granted ten days to file a motion as to his compliance with the confirmed plan of reorganization. The court indicated that it would schedule a hearing on INA's pending request for conversion of the case to chapter 7.
Debtor filed his "Motion in Compliance with Order to File Status Report" on September 13, 2006 (dkt. #697). Debtor indicates that he has sold a 4 cuerdas property for $1,750,000.00, a 9.4611 cuerdas property for $3,724,258.00, and the 13 cuerdas Barrio Canas property at issue herein for $5,228,293.97, and has deposited with the court a total of $10,284,817.33. He further indicates that he has settled Citibank's secured claim for $500,000.00 (secured by another property in process of being sold) and Hatton's claim for $2,000,000.00, and has agreed to pay another (unspecified) claim for $343,235.13. Finally, he states that Hatton will not seek payment from the proceeds of the Barrio Canas property at issue herein.
On August 24, 2006, after requesting leave and an extension of time to do so (dkt. #681), Westernbank filed a reply to Liberty's supplement to response and opposition (dkt. #685). It argues that Liberty's supplement to its opposition (dkt. #677) should be denied because the Matos case it cites is factually distinguishable from the case herein and should therefore be disregarded by the court. According to Westernbank, the Matos case is only a court of appeals case and is therefore only persuasive, but not precedential, while the Campos case was a decision of the Puerto Rico Supreme Court. It argues that inCampos the court found that interest is calculated backwards from the culmination, not the commencement, of the eminent domain proceedings. Further, in the Matos case the loan's interest rate was fixed and therefore it was irrelevant how it was calculated; indeed, according to Westernbank, that was not even an issue in the appeal. In the case herein, however, the interest rate varies at 2% over prime and is therefore significantly affected by the manner in which the interest is calculated.
On September 13, 2006, after requesting an extension of time (dkt. #691) which was granted by the court (dkt. #692), Westernbank filed its motion in compliance with the order of August 7, 2006, presenting evidence of its security interest in its claim as to loan #3279, as well as the balance owed to it on loans #3279 and #3670 (dkt. #698). It submits the unsworn statement of Jose Rivera, Vice President of the Commercial Credit Department of Westernbank, accompanied by copies of ten guarantees and pledge agreements, in support of its claim that the amount owed as to loan #3279 is secured. Further, it submits the unsworn statement of Jose J. Mercado, manager of the Commercial Credit Department of Westernbank, as well as two interest accrual worksheets, in support of its claim that it is due $363,781.83 as to loan #3670 and $218,353.44 as to loan #3279, both amounts excluding attorneys fees. According to Westernbank, the amounts it is owed as of January 10, 2006, are accurately reflected in the minutes (dkt. #682) and transcript (dkt. #683) of the hearing held on August 7, 2006; it just adds to loan #3670 the interest accrued from January 11, 2006 to February 24, 2006, the closing date of the sale. Further, it states that its request for attorneys fees are subject to a future determination. Therefore, it asks the court to grant its request for withdrawal of the balance owed to it at this time, which amounts to $582,135.27.
Westernbank actually requests $582,185.27; the same amount is repeated in Exhibit A to Exhibit 2; however, if one adds $363,781,83 and $218,353.44, the total is $582,135.27, which is the amount reflected on page 2 of exhibit 2 (unsworn statement of Jose J. Mercado).
On September 20, 2006, the court entered an order (dkt. #701) stating "[t]he motion filed by Westernbank in compliance with [sic] Court's order of August 7, 2006 (dkt. #698) is hereby granted."
On September 25, 2006, Liberty filed a reservation of rights as to Westernbank's motion in compliance with court order (dkt. #704). Liberty states that it expected it would have an opportunity to oppose Westernbank's motion (dkt. #698) within the eleven days allowed under Local Bankruptcy Rule 9013(a); alleges that its arguments as to the calculation of interest on mortgage liens under Puerto Rico law, as set forth in dkts. #664 and 677, as well as at the hearing held on August 7, 2006, were not addressed by Westernbank in its motion nor the court in its order; and states that it intends to file a motion to alter or amend the order (dkt. #701) and for amended findings of fact and conclusions of law pursuant to rules 7052 and 9023.
On September 27, 2006, the court entered an order stating "[t]he motion filed by Liberty Mutual Insurance Company (dkt. #704) is hereby granted. Westernbank shall file a reply within twenty (20) days."
Liberty's Motion to Alter or Amend Judgment — The Motion Before the Court
On October 2, 2006, Liberty filed motion to alter or amend the court's order (dkt. #701) granting Westernbank's request to withdraw deposited proceeds of funds (dkt. #708) pursuant to Rules 7052 and 9023 of the Federal Rules of Bankruptcy Procedure. Liberty argues that, notwithstanding its numerous oppositions to Westernbank's motions to withdraw funds, both in pleadings and at the hearing on August 7, 2006, on September 20, 2006 the court entered an order (dkt. #701) granting Westernbank's motion in compliance with the August 7, 2006 order (dkt. #698), which was filed on September 14, 2006, without allowing Liberty or any other creditor time to respond pursuant to Local Bankruptcy Rule 9013(a).
According to Liberty, through its motion Westernbank is seeking to collect amounts above and beyond to what it is entitled pursuant to Puerto Rico law, or amounts that have already been discharged. Specifically, it argues that Westernbank is trying to collect interest for eleven years while Puerto Rico law limits the extent and validity of its secured claim for interest to five years prior to the date of the foreclosure action; and, further, that Westernbank is trying to collect interest on a loan that was never subject of a proof of claim and, therefore, was discharged through the confirmation of the chapter 11 plan in this case. Therefore, Liberty asks that the court limit Westernbank's claim to $976,481.93 as the stipulated principal for loan #3670, which has already been paid, and $149,172.94 in interest for loan #3670 as of February 27, 2001, which has already also been paid, and not allow any payment as to loan #3279.
On October 6, 2006, the court set a hearing on Liberty's motion to alter or amend (dkt. #708) for December 5, 2006 (dkt. #710).
After filing three motions requesting an extension of time to respond (dkts. # 715, 719 and 725) which were granted by the court (dkts. #716, 720 and 726), Westernbank filed an opposition to Liberty's motion to alter or amend order on November 7, 2006 (dkt. #727). As to loan #3670, Westernbank argues that it is entitled to the full payment of all interest owed to it by the debtor pursuant to 11 U.S.C. S 108(c) which, according to Westernbank, directly conflicts with Article 166 of the Puerto Rico Mortgage Law, and provides that the calculation of interest is controlled by federal, not state law. Further, Westernbank argues that several events in this case have constituted a recognition of the debt and therefore tolled the statute of limitations under state law. In the alternative, if the court decides to apply Puerto Rico law, Westernbank argues that the interest on its claims should be calculated five years back from the date of closing of the sale of the property.
As to loan #3279, Westernbank reiterates that Liberty has waived its right to object to the payment of the balance owed to it from the sale of the Llanos del Sur property from the proceeds of the Barrio Canas property, that the debt was provided for in the plan, and that it has submitted the evidence requested by the court to establish its security interest in the property at issue regarding this loan.
Westernbank attaches to its opposition the unsworn statements of Jose Rivera and Jose Mercado, the latter with exhibits, including spreadsheets re: loan #3670, all of which were previously submitted as exhibits to dkt. #698; however, this time they also include a spreadsheet as to loan #3279.
Liberty filed a motion requesting leave to reply to Westernbank's opposition on November 14, 2006 (dkt. #733), seeking time to respond to the new factual assertions and legal arguments raised by Westernbank. Westernbank replied to Liberty's request on November 15, 2006 (dkt. #734), asking that Liberty's response be limited to ten pages and the new matter raised; on November 21, 2006, the court entered an order granting Westernbank's request (dkt. #735).
Liberty filed their reply to Westernbank's opposition on November 29, 2006 (dkt. #746). Liberty argues that Westernbank raised three issues in their opposition for the first time in these proceedings; namely (1) that the motion to alter or amend does not comply with Fed.R.Civ.P. 59(e); (2) that, as to loan #3670, section 108(c) of the Code tolls the limitations on the accrual of secured interest imposed by Article 166 of the Puerto Rico Mortgage Law; and (3) that the plan of reorganization confirmed in the case included the debtor's liability as to loan #3279 and the same is secured by the first mortgage on the real property subject of this controversy.
Liberty asserts that there has been a "manifest error of law" under Fed.R.Civ.P. 59(e) because, despite it's numerous oppositions, the court ruled on Westernbank's motion to withdraw without giving it, or any other creditor, an opportunity to respond as provided by Local Bankruptcy Rule 9013(a). Further, Liberty argues that section 108(c) of the Code does not affect, limit, set nor toll the accrual of interest on a claim. Finally, according to Liberty, Westernbank has, at most, an unsecured claim as to loan #3279, and treating it as a secured claim would have required a modification of the chapter 11 plan of reorganization. Additionally, Liberty objects to the exhibits attached to Westernbank's opposition because the declarant, Jose Rivera, has no personal knowledge of the facts averred and has not been established as an expert; because the legal conclusions expressed are beyond his knowledge and expertise; because he does not calculate interest accruals on the lien; and because he does not identify from where comes the November 16, 1999 payment of $372,481.00 in interest and $523,516.07 in principal, leaving open the possibility that the lien was fully extinguished on or before the payment received on February 24, 2006 upon the closing of the sale of the property.
On December 4, 2006, Liberty filed a correction to their reply (dkt. #749), noting that while they stated in their reply that the maximum interest rate that Westernbank could accrue for loan #3670 is 10.5%, it is actually 2 points over the Citibank prime rate.
Conversion to Chapter 7 (Sequel) and the Motion to Alter or Amend
On October 6, 2006, the court scheduled a hearing to consider Liberty's motion to alter or amend order (dkt. # 708) and related matters, including the motion to convert to chapter 7 filed by INA.
In anticipation of the hearing scheduled for December 5, 2006, Liberty filed a "disclosure of detail for argument" on December 4, 2006 (dkt. #750), submitting certain electronic worksheets regarding Westernbank's claim to be used at the hearing. The same were submitted after the hearing, on the same date thereof (dkt. #752). These spreadsheets, prepared by Liberty's counsel, based upon the information provided by Jose J. Mercado and Jose Rivera of Westernbank, indicate that:
1. As to loan #3279, the total interest accrued through the petition date is $129,976.66, the total amount paid is $64,181.16, and the unsecured balance due is $65,793.50.
2. As to loan #3670, the total amount of interest claimed for the period of 2/1/96 to 2/24/06 is $1,144,899.72; $781,120.90 has been paid, leaving a balance due of $363,778.82. However, if one calculates interest for the five years prior to September 19, 2001 (9/19/96 — 9/19/01), the total accrued interest would be $719,422.24, and interest has been overpaid in the amount of $62,698.46. Further, if one calculates interest for the five years prior to February 24, 2006 (the sale date) (2/24/01 — 2/24/06), the total accrued interest would be $286,170.23, and interest has been overpaid in the amount of $494,950.67.
On December 5, 2006, the court held a hearing on INA's motion to convert the case to one under chapter 7 of the Code (see minutes, dkt. #760, and transcript, dkt. #759). Wigberto Lugo Mender, the trustee in the Empresas Inabon case, testified that the corporation has appoximately $10 to $11 million in assets and $17 to $18 million in liabilities. The debtor, Hernandez Ortiz, testified that he still owes the debts included in his confirmed amended plan of reorganization in Class V and Class VII, the latter of which includes Liberty's claim of approximately $4 million and INA's claim of approximately $4 million, as well as $2 million to Robert Hatton and $1.5 million to Citibank. He further testified that he owns a 15 cuerdas property worth approximately $2 million, a 3 cuerdas property worth approximately $2 million, and three apartments worth approximately $650,000, $175,000 and $350,000.00. In other words, he has assets of approximately $5 million and liabilities of approximately $11.5 million. Furthermore, pursuant to debtor Hernandez Ortiz' confirmed amended plan, he is responsible for paying the $6 — $8 million shortfall in the Empresas Inabon case.
In finding cause to convert the case, the court concluded that the debtor has insufficient assets to pay all claims in full, that debtor was unable to substantially consummate the confirmed chapter 11 plan, and that the debtor had incurred in a material default by encumbering his property in breech of covenants that were made part of the plan.
Secondly, the court addressed the distribution of the proceeds from the sale of debtor's property amongst Liberty, Westernbank and the other creditors. The court granted the parties and the new chapter 7 trustee twenty days to supplement their legal briefs as to the issue. Liberty and Westernbank agreed that there are no factual issues to be determined and they are basically in agreement as to the numerical calculations; they clarified that the legal issues to be determined by the court are (1) whether Westernbank's claim as to loan #3279 is secured; that is, how is it affected by the agreements reached by Westernbank and the debtors in the related cases of Empresas Inabon and Hernandez Torres, as well as the confirmed chapter 11 plan in this case and the conversion of this case to chapter 7; and (2) whether Article 166 of the Puerto Rico Mortgage Law applies to the calculation of interest on Westernbank's claim(s) and, if so, how should it be calculated.
Wigberto Lugo Mender was appointed as interim trustee (dkt. #751). The notice that the case was converted to chapter 7 was entered on December 21, 2006 (dkt. #762). Both Liberty (dkt. #780) and Westernbank (dkt. #782) submitted briefs; neither the trustee nor the debtor, INA, nor any other creditor so filed.
Liberty filed their post-hearing memorandum on January 25, 2007 (dkt. #780). They argue that the chapter 11 discharge remains effective even after the conversion of the case to chapter 7 and that the conversion does not disrupt confirmation or revoke the discharge of pre-confirmation debt; therefore Westernbank may not claim pre-confirmation debt after conversion because the same was already discharged. They further argue that if the court decides that Puerto Rico Mortgage Law does not control the calculation of interest on mortgage loans related to Westernbank's claims, then the court may apply the equitable doctrine of marshaling of assets to limit Westernbank's lien. They ask that the court grant their motion (dkt. #624) for the withdrawal of $1,000,000.00 corresponding to paragraph 3-E of the "Urgent Motion Notifying Sale of Real Property and Depositing Funds" (dkt. #618).
Westernbank filed their supplemental brief in support of their motion to withdraw consigned funds on February 8, 2007 (dkt. #782). They review the procedural history of the case and reiterate their previous arguments regarding the effect of the stipulation entered into on February 27, 2001 (dkt. #344) and approved by the court on March 9, 2001 (dkt. #344); and the effect of the stipulation filed on September 13, 2005 in the Hernandez Torres case (dkt. #265 in case no. 97-14399), encompassed in an agreement filed on October 27, 2005 (dkt. #279 in case no. 97-14399), and referenced in an urgent motion seeking authorization to sell property (dkt. #283 in case no. 97-14399), which was granted by the court on November 29, 2005 (dkt. #284 in case no. 97-14399). According to Westernbank, Liberty was a party to, and notified of, each of these matters and did not object, seek reconsideration or appeal; therefore, they have waived their right to do so.
Further, Westernbank argues that Liberty's motion to alter or amend the order granting its motion to withdrawal funds (dkt. #708) does not present any new evidence, nor establish a manifest error of law or fact to induce this court to reconsider its prior decision. According to Westernbank, the calculation of interest on its claim is controlled by 11 U.S.C. S 108(c) but, if the court determines it is controlled by Puerto Rico law, said law provides that interest should be calculated for five years back from the date of the closing of the sale of the property.
Westernbank disputes that the chapter 11 confirmation order discharged its claim as to loan #3279, which it argues is secured; it points out that the September 13, 2005 motion to sell the Llanos del Sur properties in the Hernandez Torres case was approved after the amended plan in the case herein (dkts. #284 and 285 in case no. 97-14399). According to Westernbank, this was a post-confirmation event which altered the relationship between the parties and the treatment of Westernbank under the plan, was the result of a good faith effort by Westernbank to allow recovery of funds by the junior lienholders, and was not objected to at the time by Liberty, who has, consequently, waived their right to object and is estopped from doing so.
Finally, Westernbank argues that once a case is converted to chapter 7, Fed.R.Bank.P. 1019 provides a new time period for filing claims in the converted case, and the parties must revert to chapter 7 to distribute any remaining property of the estate. According to Westernbank, Liberty misunderstands the doctrine of marshaling of assets and the same does not apply herein. Westernbank argues that the cases of Hernandez Ortiz, Hernandez Torres and Empresas Inabon are extensive, litigious and have been dealt with in an interrelated manner by the parties, noting that they and others have made concessions to allow the sale of properties for the benefit of all with the money being guaranteed from sources other than the specific case being dealt with. Westernbank asks that the court deny Liberty's motion to alter or amend and reaffirm its order granting Westernbank's request for the withdrawal of the balance owed to it.
Liberty filed an opposition to Westernbank's supplemental brief on March 7, 2007 (dkt. #795). According to Liberty, it does not question the validity or enforceability of the February 27, 2001 stipulation, but rather its consequences and whether further payments to Westernbank from the sale proceeds are contrary to the law. As to the sale of the Llanos del Sur property in the Hernandez Torres case, Liberty argues that the transaction was neither notified nor approved in the case herein; that the cases, although related, are neither consolidated nor jointly administered; and, therefore, an order in the Hernandez Torres case cannot constitute a modification of the confirmed plan in the Hernandez Ortiz case.
Liberty notes that it did reply and object to the debtor's November 29, 2005 request to sell the Barrio Canas property, and timely objected to the distribution of $1,125,654.87 described therein (dkts. #566 and 572). Further, Liberty argues that it did not acquiesce to the payment of "five years of interest". According to Liberty, under Puerto Rico law, Westernbank is not entitled to receive any further interest payment beyond what it has already received.
Liberty argues that the court should reconsider, alter or amend its order (dkt. #701) granting Westernbank's motion in compliance (dkt. #698) under the "manifest legal error" doctrine because (1) the payment Westernbank requests is contrary to law; (2) Liberty did not have an opportunity to oppose the motion before it was granted six calendar days after it was filed; and (3) the court did not address Liberty's previous legal arguments. Finally, Liberty reiterates its arguments under the "marshaling of assets" doctrine.
Westernbank filed an amended claim no. 5 on April 17, 2007, in the secured amount of $363,502.13, including $0 in principal and $363,502.13 in interest as of April 16, 2007, plus $150,000.00 in legal fees, as to loan #3670. On that same date, Westernbank filed claim no. 34 in the secured amount of $218,353.44, including $0 in principal and $218,353.44 in interest as of April 16, 2007, plus $40,000.00 in legal fees, as to loan #3279.
The claim indicates that it is based on mortgage note no. 3670, executed on September 19, 1995, in the amount of $1,500,000.00 on the Barrio Canas property.
The claim indicates that it is based on mortgage note no. 3279, executed on March 16, 1995, in the amount of $500,000.00 on the Llanos del Sur property.
Discussion
Standard for Granting Motion to Alter or Amend
Federal Rule of Civil Procedure 59(e) provides that a motion to alter or amend judgment should be filed within ten days of the entry of judgment. "Rule 59(e) motions are granted only where the movant shows a manifest error of law or newly discovered evidence." Kansky v. Coca-Cola Bottling Co. Of New England, ___ F.3d ___, 2007 WL 1866752 (1st Cir. 2007), citing Marie v. Allied Home Mortgage Co., 402 F.3d 1, 7 n. 2 (1st Cir. 2005) (stating that Rule 59(e) motions are generally unlikely to succeed because the movant must `clearly establish a manifest error of law' or provide newly discovered evidence).
Fed.R.Civ.P. 59 applies in cases under the Bankruptcy Code. Fed.R.Bankr.P. 9023.
Rule 59(e) includes motion for reconsideration. 11 Charles Alan Wright et al., Federal Practice and Procedure S 2810.1 (2007). Any motion seeking the reconsideration of a judgment or order is considered as a motion to alter or amend a judgment if it seeks to change the order or judgment issued. Id., citingVillanueva-Mendez v. Nieves Vazaquez, 360 F. Supp. 2d 320 (D.P.R. 2005).
Reconsideration of a judgment after its entry is an extraordinary remedy which should be used sparingly. Federal Practice and Procedure, id. "Unless the court has misapprehended some material fact or point of law, such a motion is normally not a promising vehicle for revisiting a party's case and rearguing theories previously advanced and rejected." Palmer v. Champion Mortgage, 465 F.3d 24, 30 (1st Cir. 2006).
"There are four basic grounds upon which a Rule 59(e) motion may be granted.
First, the movant may demonstrate that the motion is necessary to correct manifest errors of law or fact upon which the judgment is based.
Second, the motion may be granted so that the moving party may present newly discovered or previously unavailable evidence.
Third, the motion will be granted if necessary to prevent manifest injustice.
. . .
Fourth, a Rule 59(e) motion may be justified by an intervening change in controlling law.Federal Practice and Procedure, id. A motion for reconsideration is property when the court has patently misunderstood a party, has made a decision outside the adversarial issues presented, or has made a mistake not of reasoning but of apprehension. Gregg v. American Quasar Petroleum Co., 840 F. Supp. 1394 (D. C. Colo. 1991).
According to Liberty, the court can grant reconsideration, or alter or amend its order of September 20, 2006 (dkt. #701) under the "manifest legal error" doctrine because (1) the payment which Westernbank wants to collect is contrary to law, (2) Liberty did not have an opportunity to oppose the motion before it was granted in six calendar days; and (3) Liberty's previous legal arguments were not addressed by the court. It argues that if the court's September 20, 2006 order (dkt. #701) is left unaltered, it will allow Westernbank to collect amounts to which it is not entitled under Puerto Rico law and/or amounts which have already been discharged in this case; therefore, it asks that the court vacate its order and limit Westernbank's claims to $976,481.93 in principal and $149,172.94 in interest as of February 27, 2001, as to loan #3670, both of which amounts have already been paid. Westernbank argues that Liberty's motion to alter or amend the order granting its motion to withdrawal funds (dkt. #708) does not present any new evidence, nor establish a manifest error of law or fact to induce this court to reconsider its prior decision.
Liberty is correct in its argument that the court ruled on the motion without allowing it a meaningful opportunity to oppose, and premised on the incorrect assumption by the court that Westernbank, as first lienholder, had to be paid all amounts owed as requested and prayed for. Particularly, when the amounts to be paid to Westernbank had been placed in question. Although the motion to alter or amend has not been specifically decided until now, this court's interim rulings holding in abeyance the actual distribution of the funds to Westernbank, have in practice had such effect, that is, setting aside the order allowing the payment of funds to Westernbank as prayed for.
Collateral Estoppel
The principal of collateral estoppel bars relitigation of factual or legal issues that were actually decided in previous litigation between the same parties as those in the present dispute. American Express Travel Related Servs. v. Hernandez (In re Hernandez), 195 B.R. 824,829 (Bankr. P.R. 1996). "Under collateral estoppel, once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation." Montana v. United States, 440 U.S. 147, 153-154 (1979). "To preclude parties from contesting matters that they have had a full and fair opportunity to litigate protects their adversaries from the expense and vexation attending multiple lawsuits, conserves judicial resources, and fosters reliance onjudicial action by minimizing the possibility of inconsistent decisions. Id.
For collateral estoppel to apply, the following elements must be present:
1. The issue sought to be precluded must be the same as that involved in the prior action.
2. The issue must have been actually litigated.
3. It must have been determined by a valid and final judgment.
An issue has been "actually litigated" when a party has been "afforded a reasonable opportunity to defend himself or herself on the merits but chose not to do so." In re Daily, 47 F.3d 365 (9th Cir. 1995).
4. The determination must have been essential to the final judgment.
See In re Bilzerian, 100 F.3d 886 (11th Cir. 1996); Spilman v. Harley, 656 F.2d 224 (6th Cir. 1981); Matter of Ross, 602 F.2d 604 (3rd Cir. 1979).
Westernbank argues that the elements of the doctrine are present herein because the issue is the same — that is, where the money to pay Westernbank is going to come from; the issue was actually litigated in the Hernandez Torres case; the court's order of November 29, 2005 in the Hernandez Torres case, approving the sale with reference to the payment provisions, is a valid and final judgment; and the determination as to how Westernbank was to be paid was essential to the final judgment. According to Westernbank, the court's order of November 29, 2005 in the Hernandez Torres case (dkt. #284 in case no. 97-14399), which approved the stipulation as to the sale of the Llanos del Sur properties, was not objected to or appealed from by either Liberty or INA, both of whom were parties in that case, and, therefore, they are barred from objecting to the provisions of that stipulation, as it applies to the distribution of the proceeds of the sale of the Barrio Canas properties in this case.
Liberty argues that the stipulation reached in the Hernandez Torres case on October 27, 2005 (dkt. #279 in case no. 97-14399) does not bar it from objecting to the amounts claimed by Westernbank in this case, pursuant to the principal of collateral estoppel, because neither it nor Hernandez Ortiz, debtor herein, were parties to said stipulation, nor was said stipulation filed or approved in the bankruptcy case at bar. It cites to In re Stein, 281 B.R. 845 (Bankr. S.D.N.Y. 2002), which held that collateral estoppel did not prevent a trustee from attacking a stipulation entered into between the debtor and his landlord in a related state court action because neither the trustee nor the estate were parties to the stipulation.
The court finds that the debtor herein and Liberty were not parties to the stipulation and, consequently, the terms of the stipulation cannot bind the estate herein.
Interest Under the Bankruptcy Code
Westernbank argues that the calculation of interest on its claim is governed by 11 U.S.C. S 108(c), and cites to In re Atkinson, 126 B.R. 713 (N.D. Tex. 1991). According to Westernbank, full payment of the interest on its claim is required by section 108(c). However, according to Liberty, section 108(c) concerns the tolling of civil actions against the debtor that would otherwise expire after the petition date; it does not affect, limit, set nor toll the accrual of interest on a claim. Liberty argues that none of the cases cited by Westernbank, including the Atkinson case, concern the tolling of an interest accrual through section 108(c).
The court agrees with Liberty that section 108 and the Atkinson are inapposite to the issues herein. Section 108(c) provides that:
Except as provided in section 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of —
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.
Section 108(c) extends the time period for commencing or continuing civil actions that are stayed by sections 362, 922, 1201 or 1301 of the Code. "It provides that if an action on a claim against the debtor in a court other than a bankruptcy court is stayed due to the bankruptcy case, any time deadline for commencing and continuing the action is extended to 30 days after notice of termination of the stay, if the deadline would have occurred on an earlier date." 2 Lawrence P. King, et al., Collier on Bankruptcy ¶ 108.04 (15th ed. rev'd 2007). "It applies only to civil actions in courts on claims against the debtor"; "[c]ourts have generally held that it does apply to time periods within which a creditor must bring an action to enforce a lien before the lien expires." Id. at 108-14. This section refers to the time period for commencing or continuing a civil action and does not refer to the time period for the calculation of interest on a claim.
In Atkinson, the court noted that state law provides a six-year statute of limitations on prosecution of a promissory note, and that state courts have held that the statute of limitation on a promissory note payable on demand begins to run from the date of the note's execution. 126 B.R. at 715. Accordingly, the court held that to the extent that the state court order did not toll the statute of limitations, § 108(c) applies to extend the statute of limitations, and concluded that under S 108(c)(2) the statute of limitation on the creditor's enforcement of the note had not expired. Id. at 716. Neither the Code section nor the case cited support Westernbank's allegation that the Code requires the full payment of its claimed interest, nor its assertion that the court should not look to state law to determine the extent of interest allowed on a secured claim.
Interest on Mortgages under Puerto Rico Law
Liberty argues that the court should look to Article 166 of the Puerto Rico Mortgage Law of 1994 to determine the extent, validity and limits of Westernbank's secured claim for interest over debtor's property. According to Liberty, it is a strong and unanimous principle of bankruptcy law that the extent, validity and limits of a secured creditor's lien over property of the estate is determined by state law. See Butner v. United States, 440 U.S. 48, 55 (1979); Sturges v. Crowninshield, 17 U.S. 122 (1819); Ogden v. Saunders, 25 U.S. 213 (1827); Stellwagen v. Clum, 245 U.S. 605 (1918). Although Butner was decided under the Bankruptcy Act, it's rationale has been held to apply equally under the Bankruptcy Code. See, e.g., In re Village Properties, Ltd., 723 F.2d 441, 443 (5th Cir. 1984); In re Kurth Ranch, 110 B.R. 501, 505 n. 2 (Bankr. D. Mont. 1990); In re Multi-Group III. Ltd. Partnership, 99 B.R. 5, 7 (Bankr. D. Ariz. 1989). The first circuit, and courts within it, have held that creditor's security interest over property of the estate is determined by state law.HSBC Bank USA v. Branch (In re Bank of New England Corp.), 364 F.3d 355 (1st Cir. 2004); Underwriters at Lloyd's. London v. Chancellor Corp. (In re Adlev), 333 B.R. 587 (Bankr. D. Mass. 2005); Levitz v. Arons Arcadia Ins. Agency (In re Levitz Ins. Agency), 152 B.R. 693 (Bankr. D. Mass. 1992); Davis v. Cox (In re Cox), 274 B.R. 13 (Bankr. D. Me. 2002); In re Hazleton, 137 B.R. 560 (Bankr. D.N.H. 1992).
Article 166 of the Puerto Rico Mortgage Law of 1994 provides a five-year limitation on the accrual of interest on mortgage liens, which may only be raised by a junior lienholder, such as Liberty, against a senior lienholer, such as Westernbank. 30 L.P.R.A. S 2652. The parties agree that the seminal case on the issue is the Puerto Rico Supreme Court's decision in Campos Ledesma v. Fomento, 2001 T.S.P.R. 1, 153 D.P.R. 137 (2001); however, they differ as to its interpretation. Liberty argues that, pursuant to the Campos case, the key date for calculating mortgage interest is not the date of public sale but rather the date the action was initiated, in this case, the secured creditor's commencement of an action to foreclose on its collateral, and that, therefore, the interest is counted backwards five years from the date the foreclosure action is initiated. According to Westernbank, the Court's decision provides that secured interest is limited to five years, calculated from the date of execution of the property (in this case, the closing of the sale) back five years, which in this case amounts to $357,934.59, of which $207,934.59 is still owed, and any interest in excess of the five years should be allowed as an unsecured claim.
Liberty argues that, although Westernbank recognized this limitation it errs in its interest calculation. According to Liberty, Westernbank has assumed contradictory positions as to the interest on loan #3670; in it's "Urgent Report on Sale" of the Barrio Canas property (dkt. #618) it calculated that the interest accrues forward, beginning on the loan due date of September 19, 1996, until September 19, 2001, while in its "Motion to Withdraw" (dkt. #636) it calculates that the interest runs backwards from the February 24, 2006 closing on the sale of the real estate. Liberty argues that since the interest on loan #3670 has already been calculated, and paid, through the date of the February 27, 2001 stipulation (dkt. #344), it is only entitled to collect interest from February 27, 2001 through September 19, 2001 which, according to Liberty, amounts to $49,556.46. (See Exhibit B to Liberty's "Response and Opposition to Westernbank's Memorandum of Law in Support of Motion to Withdraw Deposited Proceeds of Funds", dkt. #664.) Liberty argues that if Westernbank is allowed to collect interest in the amount of $363,781.83, as requested in its motion in compliance with order (dkt. #698), it will be receiving interest as a secured claim for the period of September 19, 1995 through February 24, 2006 — that is, eleven years.
According to Liberty, in the Matos Matos v. Rodriguez Morales, 2005 P.R. Lexis 3004 (P.R. App. Ct. 2005), the Puerto Rico Court of Appeals explained that in commercial transactions, the five year period under Article 166 is calculated backwards from the date the foreclosure action is commenced. In this case, Westernbank initiated the foreclosure action on May 9, 1997; therefore, according to Liberty, it is limited to interest for the five year period from May 9, 1992 through May 9, 1997. Liberty concludes that Westernbank's claim should be limited to the $976,481.93 in principal already paid as per the 2001 stipulation and accrued interest of $149,172.94 as of the 2001 stipulation, which has also already been paid. However, according to Liberty, even if one calculates the mortgage interest going back five years from the date of the public sale, Westernbank would be entitled to $286,170.23 in interest and has already received $781,120.90. Therefore, Liberty argues, Westernbank's mortgage lien as to loan #3670 was fully paid and satisfied, and it not entitled to any further payment from the proceeds of the sale of the Barrio Canas property (13.5 cuerdas, Remnant I).
The principal of the mortgage upon which loan #3670 is based has already been paid; Westernbank received $523,518.07 on October 19, 1999, and an additional $976,481.93 on February 24, 2006; therefore, the principal amount of $1,500,000.00 has been fully paid. See transcript of hearing held 12/5/06, dkt. #759 at pp. 61-62. Westernbank does not dispute that the principal amount has been paid.
Westernbank argues that the Matos case is factually distinguishable from the case herein and should therefore be disregarded by the court. According to Westernbank, the Matos case is only a court of appeals case and is therefore only persuasive, but not precedential, while the Campos case was a decision of the Puerto Rico Supreme Court. It argues that inCampos the court found that interest is calculated backwards from the culmination, not the commencement, of the eminent domain proceedings. Further, in the Matos case the loan's interest rate was fixed and therefore it was irrelevant how it was calculated; indeed, according to Westernbank, that was not even an issue in the appeal. In the case herein, however, the interest rate varies at 2% over prime and is therefore significantly affected by the manner in which the interest is calculated.
The Puerto Rico Supreme Court decision in Campos Ledesma controls the determination of the extent of interest that may be paid to the secured creditor with a lien over real property. The secured creditor may collect the full amount of the principal and up to five years of accumulated interest prior to the date of the expropriation of the property. The decision in terms of the facts before us applies to the five years prior to the sale of the property.
The Campos Ledesma decision was criticized by Professor Enid Martinez Moya [now also a Superior Court Judge] in a learned exposition published in the University of Puerto Rico law review. Enid Martinez Moya, "Derecho Registral Inmobiliario", 71 Revista Juridica UPR 607 (2002). As it applies to this case, the main argument espoused by Professor Martinez Moya is that Article 166 imposes a limitation to the secured creditor on the amount of interest that may be charged when there are third parties with an interest over the real property. If there are third parties, the total amount of the principal, and interest for the last two years plus the current year, may be claimed. According to Professor Martinez Moya, Article 166 further provides that the parties may agree to increase the two years of interest up to five years. The balance of the interest is still owed but not secured. Professor Martinez Moya's position is that if there are no third parties claiming an interest over the property, the secured creditor can claim the full amount of principal plus all interests accrued and not prescribed. The intent of Article 166 in limiting the amount of interest when there are third parties involved is to facilitate the sale of real properties.
Even when this court is constrained to follow the Puerto Rico Supreme Court decision in Campos Ledesma, the compelling analysis by Professor Martinez Moya is also met in this case. The real property in question was sold while the debtor was a debtor in possession. The debtor in possession is a separate entity from the debtor. 7 Lawrence P. King, et al., Collier on Bankruptcy ¶ 1101.01[3]. The debtor in possession as a separate entity is a third party with an interest over the real property which is property of the estate. Ascribing the separate entity theory to the debtor in possession does not divest the secured creditor from any right it may have under state law, as set forth inCampos Ledesma. Moreover, there are junior lienholders with an interest over the real property in question, and as such, are third parties.
In view of the above, the court finds that the amounts owed to Westernbank are the total amount of principal and five years of interest up to the date of the sale on loan #3670.
Claims in Chapter 11 and Chapter 7, the Effect of a Chapter 11 Plan Confirmation Order, and the Effect of Post-Confirmation Conversion to Chapter 7 on Claims
Section 1141(d)(1)(A) of the Bankruptcy Code provides that the confirmation of a plan "discharges the debtor from any debt that arose before the date of such confirmation." Pursuant to this section, "all preconfirmation debts owed by the [debtors] to their creditors, including the [movant creditor] were discharged upon confirmation of the Chapter 11 plan. . . . `Once the reorganization plan is approved by the bankruptcy court, each claimant gets a "new" claim, based upon whatever treatment is accorded to it in the plan itself.'" Murdock v. Holquin, 323 B.R. 275, 282 (N.D. Cal. 2005), quoting In re Benjamin Coal Co., 978 F.2d 823, 827 (3d Cir. 1992); see also, Nat'l City Bank v. Troutman (In re Troutman), 253 B.R. 8, 11 (6th Cir. BAP 2000) ("Confirmation, then, had the dual effect of discharging the Petitioning Creditor's preconfirmation debt and replacing it with their Plan Claims."). The court in Murdock noted that:
A case converted from a Chapter 11 reorganization to a Chapter 7 liquidation after confirmation of a plan is fundamentally different from a straightforward Chapter 7 liquidation. . . . [C]onfirmation of a Chapter 11 plan vests all of the property of the estatein the debtor, except as otherwise provided for in the Plan or as may be otherwise excepted as a matter of law. Similarly, since all pre-confirmation debts are discharged, only the claims provided for under the Plan or arising as part of its administration may be asserted in the converted proceeding. Thus, a Chapter 7 estate which comes into existence upon conversion of a confirmed Chapter 11 consists of only those assets `provided for' in the plan or includable as a matter of law in order to effectuate the plan.
The conversion of a case to chapter 7 does not disrupt the chapter 11 confirmation or "revoke the discharge of pre-confirmation debts." See Troutman Enterprises, 253 B.R. at 11; Bank of Lousiana v. Pavlovich (In re Pavlovich), 952 F.2d 114 (5th Cir. 1992); In re Chattanooga Wholesale Antiques, Inc., 930 F.2d 458 (6th Cir. 1991). Conversion under the Bankruptcy Code is not designed to change what has already happened, but rather to leave matters as they existed on the date of conversion. SeeConfederated Tribes v. White (In re White), 139 F.3d 1268, 1272 (9th Cir. 1988); In re Ramirez, 188 B.R. 413, 415 (9th Cir. BAP 1995).
When a debtor defaults on his confirmed chapter 11 plan, a creditor will be unable to revoke or claim debt that was discharged by the confirmed plan. See In re Depew, 115 B.R. 965 (Bankr. N.D. Ind. 1990); see also, InreRodwell, 280 B.R. 100 (Bankr. N.J. 2002); In re Cronk, 124 B.R. 759 (Bankr. N.D. Ill. 1990).
Liberty argues that since Westernbank's claim as to loan #3279 was provided for as an unsecured claim in its amended chapter 11 plan of reorganization it cannot now be treated as a secured claim based upon agreements that Westernbank reached in the related bankruptcy cases of Empresas Inabon and Hernandez Torres. Further, Liberty argues that any claim Westernbank may have as to loan #3279 in the Hernandez Ortiz case was discharged while the case was under chapter 11 and cannot be revived by filing a claim once the case is converted to chapter 7.
Westernbank argues that Liberty is estopped from arguing the matter, and, further, that the issue becomes moot upon the conversion of the case to chapter 7, because Fed.R.Bankr.P. 1019(2) provides a new time period for filing claims in the converted case, and it filed a timely secured claim as to loan #3279. It argues that once a chapter 11 plan is aborted and a case converted, the parties must revert to chapter 7 to distribute any remaining property of the estate, In re Reef Petroleum Corp., 99 B.R. 355,360 (Bankr. Mich. 1989), and the arrangements and obligations of the confirmed plan likewise become meaningless, In re MFI, Inc., 1989 Bankr. LEXIS 1600).
Westernbank notes that it submitted documental proof of its security interest in the Barrio Canas property related to loan #3279 on September 14, 2006 (dkt. #698). Further, it argues that the September 13, 2006 motion to sell the Llanos del Sur properties in the Hernandez Torres case occurred after the confirmation of the amended plan herein and, therefore, served to alter the relationship between the parties as well as the treatment of Westernbank under the plan. According to Westernbank, if Liberty objected to the treatment of its claim as provided in the Hernandez Torres stipulation, it should have objected at the time, and it is now barred by the doctrine of collateral estoppel from opposing the agreement.
Liberty counters that an order in the case of Hernandez Torres cannot constitute a modification of the confirmed plan in the Hernandez Ortiz case, nor a revocation of the discharge under the confirmed plan. However, Westernbank argues that the cases of Hernandez Ortiz, Hernandez Torres and Empresas Inabon are interrelated and have been extensive and subject to much litigation, and all three, although they had confirmed plans of reorganization, have been converted to chapter 7. Concessions have been made by parties, including Westernbank, in order for sales to go through, and payments have been guaranteed from sources other than the specific case being dealt with. Westernbank argues that Liberty has been an active participant in all cases and cannot claim ignorance of these events or agreements.
The court finds that the amounts owed to Westernbank on loan #3279 are unsecured as that was the treatment given in the confirmed plan. The parties cannot by stipulation grant secured status where none was existent pre-petition. The confirmed plan contemplated payment in full of all claims. However, the plan could not be consummated as there were no sufficient assets to be liquidated to pay all creditors in full. This insufficiency led to the post confirmation conversion of the case to chapter 7.
Attorney's Fees
Section 506(b) of the Bankruptcy Code provides that "[t]o the extent that an allowed secured claim is secured by property the value of which . . . is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose." When fees are provided for in the underlying agreement, allowance of the attorney's fees is mandatory. In re Auto Specialties Mfg. Co., 18 F.3d 358, 362 (6th Cir. 1994); In re K.H. Stephenson Supply Co., 768 F.2d 580 (4th Cir. 1985); In re Williams, 174 B.R. 307 (Bankr. D. Kan. 1994); Lawrence P. King, et al., Collier on Bankruptcy P 506.04[3] (15th ed. rev'd 2007). In determining whether fees are reasonable under section 506(b), courts "generally require the party seeking allowance of attorney's fees to carry the burden of demonstrating reasonableness by providing a detailed description of services rendered, supporting documentation, or other evidence prior to making a determination on an application for payment." 4 Lawrence P. King, et al.,Collier on Bankruptcy P 506.04[3][a][iii] (15th ed. rev'd 2005).
According to Westernbank, attorney's fees were contractually agreed to in the promissory notes and, therefore, are part of the amounts to which Westernbank is entitled. Westernbank argues that its requested fees are "more than reasonable" but, in the alternative, it will submit a fee application for the court's scrutiny.
According to Liberty, the February 21, 2001 stipulation did not provide for any attorney's fees and, further, any said fees cannot be allowed until evidence is provided and they are examined by the court and found to be reasonable.
The court finds that since Westernbank as first lienholder is an over secured creditor and the contract provides for attorney's fees it may be allowed reasonable fees. However, the court has not been placed in a position to determine the reasonableness of the fees. This court follows the lodestar method in determining the reasonableness of attorney's fees. In re Boston and Maine Corporation, 778 F.2d 890 (1st Cir. 1985); In re C.P. del Caribe. Inc., et als, 143 B.R. 11 (Bankr. D. P.R. 1992). The fees set forth in the contract are not necessarily reasonable. The movant has the burden of demonstrating that they are.
Conclusion
In view of the foregoing the court rules as follows:
1. The motion to alter or amend is hereby granted.
2, The amount of interest owed on loan #3670 is limited to five years prior to the date of the sale. Balance of interest owed is unsecured. Any corrections to conform to this ruling will be filed within twenty (20) days.
3. Amounts owed in loan #3279 are unsecured as to this case, thus, Westernbank may not be paid from the proceeds of the sale of the Barrio Canas property until all secured interests are satisfied.
4. The request for attorney's fees is hereby denied without prejudice to filing an application following the lodestar method in order to place the court in a position to pass upon their reasonableness.
SO ORDERED.