Opinion
Bap No. PR 03-032, Bankruptcy Case No. 78-00095-ESL, Bap No. PR 03-033, Bankruptcy Case No. 78-00099-ESL, Bap No. PR 03-034, Bankruptcy Case No. 81-00420-ESL, Bap No. PR 03-035, Bankruptcy Case No. 81-00466.
March 15, 2004
Andrew R. Herron, Esq., and Francisco O. Sanchez, Esq. of Homer Bonner, P.A., and Charles P. Gilmore, Esq., of O'Neill Fernandez Gilmore Perez-Ochoa, on brief for the Appellants.
Robert T. Collins, Esq., of Acevedo Acevedo Law Offices, on brief for the Appellees.
Before FEENEY, ROSENTHAL, and KORNREICH, U.S. Bankruptcy Appellate Panel Judges.
Appeal from the United States Bankruptcy Court for the District of Puerto Rico (Hon. Enrique S. Lamoutte, U.S. Bankruptcy Judge).
I. INTRODUCTION
The appellants are Ariel E. Gutierrez and his brother, Enrique H. Gutierrez (collectively, the "Gutierrez Brothers"), Chapter 7 debtors who, together with their spouses, filed bankruptcy petitions in July of 1981 (Case Nos. 81-00420 and 81-0466, respectively). The Gutierrez Brothers were and are real estate developers in Puerto Rico and Florida. Significantly, for purposes of this appeal, the Guiterrez Brothers were majority shareholders of two corporations which filed bankruptcy petitions in 1978, EHG Enterprises, Inc. ("EHG") and Parque San Patricio, Inc. ("PSP"), a wholly owned subsidiary of EHG (Case Nos. 78-00099 and 78-00095, respectively). The appellees are Compania Franco Panamena de Inversiones ("CFI"), the Commonwealth of Puerto Rico (the "Commonwealth"), and the Puerto Rico Electric Power Authority ("PREPA"). CFI holds a claim against the Gutierrez Brothers, which arose out of a forceful expropriation proceeding by the Commonwealth involving land once owned by PSP.
The Gutierrez Brothers appeal a decision of the bankruptcy court, entered on April 10, 2003, in which the court denied their Motion for Reconsideration of an earlier order, dated April 23, 2001, in which it refused to reopen the 1978 cases of EHG and PSP. The Gutierrez Brothers also appeal the bankruptcy court's April 10, 2003 decision to sua sponte reconsider and vacate its April 23, 2001 order in which it had permitted them to reopen their 1981 Chapter 7 bankruptcy cases. The bankruptcy court justified its refusal to reopen the corporate cases and its decision to vacate its order permitting the Gutierrez Brothers to reopen their individual Chapter 7 cases on the ground of laches.
The issue presented by this appeal is whether the bankruptcy court abused its discretion in denying the Gutierrez Brothers' motion to reconsider the reopening of the 1978 corporate bankruptcy cases of EHG and PSP and in sua sponte reconsidering and vacating its decision allowing the Gutierrez Brothers to reopen their Chapter 7 cases. For the reasons set forth below, the Panel concludes that the bankruptcy court did not abuse its discretion and, indeed, had ample additional grounds to rule as it did.
II. BACKGROUND
A. Procedural Background
Pursuant to an order dated April 23, 2001, the bankruptcy court reopened the Gutierrez Brothers' Chapter 7 cases to enable them to list CFI as a creditor. In its order, it stated that its ruling did not constitute a determination of the dischargeability of CFI's debt. The bankruptcy court, however, refused to reopen the 1978 corporate cases for the following reasons:
(1) the Gutierrez' [sic] lack standing to re-open a case on behalf of a corporation which has been liquidated under the Bankruptcy Act; (2) it has not been established that this court has jurisdiction under the Bankruptcy Act to entertain such an action; and (3) this court will not relitigate the validity of the commonwealth court judgments which determined the liability of EHG Enterprises and/or Parque San Patricio in the expropriation action.
Appellants' App., Vol. 1, Tab 7.
In seeking reversal of the bankruptcy court's April 10, 2003 decision, the Gutierrez Brothers indicate that the purpose of reopening their individual Chapter 7 cases is "to file two adversary proceedings in the Bankruptcy Court, for the purpose of combating a default judgment" entered against them in 1992 in a proceeding commenced by CFI in 1990 to collect a debt. They add:
(1) that CFI's judgment is dischargeable in connection with their 1981 bankruptcy cases because CFI had actual knowledge of the cases in time to file a timely proof of claim and (2) that the judgment is unenforceable because it is based upon a void expropriation of property by the Commonwealth of Puerto Rico relief — owned [sic] by the bankruptcy estates of debtor-appellants Parque San Patricio, Inc. or EHG Enterprises, Inc.
Contrary to this statement, EHG and PSP did not file Notices of Appeal and thus are not proper appellants.
The Gutierrez Brothers argue that the bankruptcy court failed to consider the two required elements of laches, namely lack of diligence and prejudice, and also failed to consider the strong policy in favor of reopening cases for dischargeability purposes. They maintain that they have been diligent in pursuing their "bankruptcy related defenses."
While the Gutierrez Brothers' purpose in seeking to reopen their Chapter 7 cases to obtain a determination of the dischargeability of CFI's debt is readily comprehensible, if not legally justified, their purpose in seeking reconsideration of the bankruptcy court's refusal to reopen the 1978 corporate cases is not so easily understood. They assert that if the 1978 cases are reopened they intend to file adversary proceedings to obtain declaratory judgments that "the expropriation underlying CFI's claim was void because it was undertaken in violation of the automatic stay protecting the property in the 1978 Cases."
Appellants' Initial Brief at 4.
B. Factual Background
The facts surrounding this appeal are complex and convoluted. The Gutierrez Brothers and others became obligated to CFI in 1972 and 1973 as the result of execution of three promissory notes. At about that time, EHG was engaged in the development of a real estate project in Puerto Rico known as Dos Marinas and was negotiating with various officials to acquire electrical service for the project. In the early 1970s, EHG or PSP agreed to convey a parcel of real estate to the PREPA so that it could construct an electrical substation.
In 1974, CFI sued the Gutierrez Brothers and others to collect its debt. To settle the civil actions brought by CFI, EHG agreed to have PSP, the owner of the real estate parcel on which the substation had been built (the "Settlement Parcel"), convey the parcel to CFI. The parties executed a Settlement Agreement in December of 1975, and PSP executed a deed in favor of CFI. On May 14, 1976, the Superior Court of Puerto Rico, San Juan Division, entered judgment incorporating the terms of the settlement.
The judgment provided in relevant part:
The Court, based on the Settlement Agreement filed . . . decrees Judgment, declaring the two claims above abandoned With Prejudice, and orders the Clerk of the Court to hand over to the legal representative of the Plaintiff, . . . [CFI] . . ., the bearer mortgage note in the amount of $270,000 due upon presentment, interest at ten percent (10%) annually, issued by Parque San Patricio, Inc. . . .
In 1978, EHG and PSP filed bankruptcy petitions. The record does not reflect that the parcel of real estate on which the substation had been built was listed as an asset in either bankruptcy case.
In November of 1978, the Commonwealth initiated steps for PREPA to acquire the parcel of land on which the substation had been constructed through a so-called "forceful expropriation," analogous to an eminent domain proceeding. In 1980, by Resolution, the Superior Court of the Commonwealth granted the Commonwealth absolute ownership of the property and awarded CFI, which had been named as a defendant, nothing. Subsequently, in May of 1984, the Superior Court ruled that the Commonwealth was the owner in fee, a ruling it reaffirmed on February 7, 1985. In that ruling the Puerto Rican court appears to have misstated that EHG, rather than PSP, had been the record owner of the parcel. Nevertheless, it concluded that the Settlement Parcel had been conveyed to the PREPA prior to any conveyance to CFI. Neither the corporate debtors nor the Gutierrez Brothers appealed this decision. The Gutierrez Brothers, meanwhile, had filed bankruptcy petitions with their spouses in July of 1981. They received discharges in May of 1985.
In its 1985 ruling, the Puerto Rican court adopted its earlier ruling "by reference in its entirety." It stated in the May 18, 1994 ruling the following:
We found that the issue concerning the title of ownership of the land in this lawsuit has been submitted.
[CFI] interested party having accrued interest in this lawsuit, lacks legal standing to debate the title ownership of the lands in controversy, since it was not the owner of the same at the time the Electric Power Authority acquired them.
[EPA] acquired the disputed land and through a conveyance given to them by the "Corporacion E.H.G. Enterprises, Inc."
[EHG] was summoned through their [sic] trustee, and because he has not appeared, a judgment is hereby entered on the allegations made against the same. . . .
* * *
It is ordered the Commonwealth of Puerto Rico be the owner in fee simple for the use and benefit of the Electric Power Authority. . . .
Superior Court Judgement in 80-0118 (citations omitted) attached as Ex. 1 to Debtors' Motion to Disqualify [CFI] as a Petitioning Creditor (Appellants' App., Vol. 2, Tab 20).
In a Reply Brief filed in the bankruptcy court in May of 2002, the Gutierrez Brothers hinted at the real reason for the protracted litigation. They argued that the electrical substation is located on a small portion of the Settlement Parcel and that there is substantial value in the remaining portion which should not flow to the Commonwealth but to either the corporate debtors or CFI. They stated:
Reopening of these cases and entering a declaratory judgment that the Expropriation violated the automatic stay will have a number of positive effects: (a) it will enable the Gutierrez Brothers to receive the fresh start they should have received in their 1981 Bankruptcy Cases; (b) it will allow CFI to obtain the benefit of the bargain it made with the Gutierrez Brothers and Debtor Parque San Patricio in 1975; (c) subject to further court order, it may result in further distributions to creditors; and (d) it will permit a balancing of the equities and the correction of a significant injustice.
Appellants' App., Vol. 2, Tab 11, at 3-4.
In the "forceful expropriation" proceeding, CFI was named as a defendant. The Gutierrez Brothers, in their pleadings, admit that PSP executed a deed in CFI's favor as part of the settlement of its 1974 suits against them, a deed which preceded the filing of the 1978 corporate bankruptcy cases by several years.
The Gutierrez Brothers' Chapter 7 cases required the administration of assets. As previously noted, they did not receive their Chapter 7 discharges until 1985. Over five years later, in July of 1990, CFI sued them, EHG and PSP in the Puerto Rican Superior Court seeking a determination that the 1975 settlement was invalid. On April 10, 1992, the Superior Court entered a default judgment against the Gutierrez Brothers with respect to CFI's claim, which had arisen prior to the commencement of their 1981 Chapter 7 cases.
The Gutierrez Brothers admit that due to the neglect of counsel they failed to timely answer CFI's complaint and thus did not raise their bankruptcy discharges as affirmative defenses to CFI's complaint. On January 27, 1998, after years of litigation and the exhaustion of all appeals, the Supreme Court of Puerto Rico reinstated the default judgment entered on April 10, 1992. In the meantime, in 1995, involuntary Chapter 7 petitions had been filed against the Gutierrez Brothers, and the involuntary cases were pending at the time of the Supreme Court's ruling. An issue in the involuntary cases was whether CFI could be added as a petitioning creditor because of the absence of three petitioning creditors. In August of 1998, the United States District Court for the District of Puerto Rico reversed the bankruptcy court's dismissal of the involuntary petitions for lack of a sufficient number of petitioning creditors, remanding for consideration of the propriety of CFI joining the other petitioning creditors. See 11 U.S.C. § 303(b)(1) and (c).
Approximately four months after the Supreme Court reinstated the default judgment in favor of CFI, the Gutierrez Brothers, on May 11, 1998, moved for the first time to reopen their individual Chapter 7 cases, although the involuntary petitions were still pending against them. The bankruptcy court denied that motion on August 27, 1998, just two weeks after the district court ruling. The Gutierrez Brothers moved for reconsideration. The bankruptcy court did not rule on their reconsideration motion for over 15 months, finally issuing its ruling on December 21, 1999. In its decision, the bankruptcy court determined that it was more appropriate for the Gutierrez Brothers to litigate CFI's claim in the context of their pending involuntary Chapter 7 cases rather than in the 1981 Chapter 7 cases. The Gutierrez Brothers did not appeal this ruling. More significantly, they did not seek a determination of the dischargeability of CFI's debt in the context of the involuntary Chapter 7 petitions pending against them.
The bankruptcy court stated:
[A]lthough debtors' arguments that CFI's debt is a prepetition debt under the analysis set forth in Woburn Associates v. Kahn (In re Hemingway Transport, Inc.), 954 F.2d 1 (1st Cir. 1992) is persuasive, this court finds that under the §§ 105 and 350 rationale set forth above, it should not re-open the captioned case to schedule CFI's claim and litigate its dischargeability. Rather, in light of the state court proceedings which have transpired since the closing of debtors' prior case in 1991 and the filing of the debtors' involuntary petitions in 1995, it is more appropriate to litigate CFI's claim (i.e. CFI's standing as an involuntary petitioner) in the pending involuntary proceeding.
Appellants' App., Vol. 2, Tab 18.
In the meantime, on March 29, 1999, the Gutierrez Brothers, employing a two track approach to resolution of CFI's claim, sued the Commonwealth, PREPA and CFI in the Court of the First Instance, seeking a determination that the judgment of expropriation entered on February 7, 1985 was invalid, that the default judgment entered in CFI's 1990 collection action also was invalid and that, as a result, the judgment entered in CFI's 1974 collection action pursuant to the Settlement Agreement should be deemed satisfied. They also moved in the bankruptcy court in December of 1999 for dismissal of the involuntary petitions pending against them.
On July 28, 1994, the Legislative Assembly enacted the Judiciary Act of Puerto Rico of 1994. It provided that the Court of First Instance would be a court of original jurisdiction empowered to act on all civil and criminal matters. It also provided for the Circuit Court of Appeals to act as an intermediate court between the Court of the First Instance and the Supreme Court. The judges of the Court of First Instance were to be known as Superior Judges.
In May of 2000, the Court of First Instance granted the motion for summary judgment filed by the Commonwealth, PREPA, and CFI and dismissed the Gutierrez Brothers' complaint. It stated:
It was not until March 1999, 15 years after the judgment was issued in the request for forceful expropriation, that the invalidity of the judgment issued in case KEF 80-0118 was alleged for the first time.
There is a final, binding and unpealeable [sic] judgment of the Supreme Court (93-333) [sic], which clarifies the invalidity of the stipulation of December 1975 and reinstated the effectiveness of the debt entered by the plaintiffs of this case and Franco Panamena.
The Court of the First Instance also determined that EHG was served in the expropriation proceeding through its bankruptcy trustee, stating "said notice was a mere formality because the property already belonged to the Commonwealth, by virtue of the aforementioned transfer. In spite of said notice, EHG never appeared at the expropriation case." The court also found that the automatic stay did not apply, stating:
[a]t the time of the expropriation, EHG and San Patricio were subject to a voluntary bankruptcy proceeding, but the property to be expropriated was not part of its estate, because it had been transferred to PREPA prior to the filing of the bankruptcy. Therefore, we conclude that the automatic stay regarding the property at issue did not procede [sic] and the expropriation judgment is valid.
On the other hand, the Federal Court has ruled that Rule 11-44(a) of the Bankruptcy Act does not stay automatic regulatory proceedings under the police power.
* * *
In this case, the expropriation court had jurisdiction over the matter, over the land and the parties with interest; and met with the due process of law when it entered the expropriation judgment.
Id. at 11-12 (emphasis in original). The court added: "The forceful expropriation did not affect the estate of the Gutierrez brothers" [sic], in their personal capacity, or of EHG and San Patricio, because the property had been previously transferred by them to obtain a benefit (service) to perform a lucrative economic activity of their business, the Dos Marinas Project."Id. at 14 (Appellees' Supp. App., Tab 3: Certified English Translation of Exhibit A referenced in Appellants' App., Tab 12).
Following the entry of summary judgment, the Gutierrez Brothers appealed. In the same year, the bankruptcy court, on December 12, 2000, dismissed the involuntary petitions pursuant to the motions filed by the Gutierrez Brothers. The Gutierrez Brothers never requested the bankruptcy court to rule on the issue of whether CFI's claim had been discharged prior to the dismissal of the involuntary cases.
Shortly after entry of the bankruptcy court's dismissal of the involuntary petitions, the "Appellate Circuit Court, Regional Circuit of San Juan," on December 27, 2000, affirmed the decision of the Superior Court, albeit on different grounds. The appellate court concluded that the Gutierrez Brothers lacked standing to challenge the invalidity of expropriation judgment on behalf of EHG or PSP.
Appellees' Supp. App., Tab 4: Certified English Translation of Exhibit B referenced in Appellants' App., Tab 12. Relevant portions of this decision are quoted in the discussion section infra.
Having finally obtained dismissal of the involuntary petitions, and having unsuccessfully litigated issues involving the expropriation judgment, CFI's default judgment and other matters in the Commonwealth courts, the Gutierrez Brothers, on February 7, 2001, filed their second "Motion to Reopen Case, to Schedule Omitted Creditor, and to Discharge Indebtedness" in the bankruptcy court in which they sought to reopen their individual cases, as well as the 1978 corporate cases. Additionally, in April of 2001, they filed a Motion to Reopen Case, in Order to File Adversary Proceeding for Injunctive Relief and an "Urgent Motion" for prompt consideration of that motion.
On April 23, 2001, the bankruptcy court entered an order permitting the Gutierrez Brothers to reopen their individual cases, but not the corporate cases. The Gutierrez Brothers' Motion to Reconsider that order generated this appeal, as did the bankruptcy court's sua sponte decision to vacate the order so far as it permitted the reopening of the individual cases.
III. DISCUSSION
A. The Bankruptcy Court's Decision and the Standard of Review
The bankruptcy court began its discussion of the merits of the Gutierrez Brothers' Motion for Reconsideration with an examination of § 350(b) of the Bankruptcy Code, 11 U.S.C. § 350(b) ("[a] case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause"), as well as § 2a(8) of the Bankruptcy Reform Act of 1978, which governed the cases filed by EHG and PSP. The bankruptcy court correctly recognized that the standards applicable to reopening cases filed under the Bankruptcy Act and the Bankruptcy Code do not differ markedly, that its decision to reopen was within its sound discretion, see In re Sheerin, 21 B.R. 438, 440 (B.A.P. 1st Cir. 1982) ("The bankruptcy court's refusal to reopen a closed case can be overturned only upon a showing that the failure to reopen was an abuse of discretion"), and that it could weigh equitable concerns, including the time between the case closings and the requests to reopen. Citing, inter alia, In re Winburn, 196 B.R. 894, 897 (Bankr. N.D. Fla. 1996), it observed that laches is a valid ground for denial of a motion to reopen if the delay was unreasonable and had prejudiced the party opposing reopening.
Section 2(a)(8) of the Bankruptcy Act enabled the court to "reopen estates for cause shown." Additionally, former Rule 515 of the Rules of Bankruptcy Procedure provided that "a case may be reopened on application by the bankrupt or other person to administer assets to accord relief to the bankrupt or for other good cause." A motion to reopen filed in an Act case was addressed to the sound discretion of the court. In re Stanke, 41 B.R. 379, 380 (Bankr. W.D. Mo. 1984) (citing In re Johnson, 291 F.2d 910 (8th Cir. 1961); In re Forman, 45 F. Supp. 295 (E.D.N.Y. 1942)).
In its decision, the bankruptcy court adopted the arguments made by CFI, the Commonwealth, and PREPA, which it summarized as follows:
The Commonwealth and PREPA argue that the Gutierrez brothers are barred by the doctrine of laches from re-opening the corporate cases to challenge the expropriation order. They point out that the Parque San Patricio case has been closed for almost 20 years and the EHG Enterprises case has been closed for almost 14 years and that this is too long for the Gutierrez brothers' stated purpose in re-opening the cases, so they should be barred from doing so. They point out that the Gutierrez brothers do not offer any explanation as to why they have waited so long to try to re-open these cases, as they have known of the expropriation orders since at least 1990.
The bankruptcy court also noted that the Commonwealth and the PREPA had argued that the Gutierrez Brothers had unclean hands because the Gutierrez Brothers gave the parcel of land in question to CFI in 1975 when they had known since 1973 that PREPA was going to require the transfer of the land to the Commonwealth as a condition precedent to the provision of electrical service for the Dos Marinas project. They argued that the Superior Court found that expropriation was no longer necessary as the parcel had already been taken by the Commonwealth as a quid pro quo for the provision of electrical facilities. The Commonwealth and the PREPA argued they were required to commence expropriation proceedings in 1980 when CFI refused to execute a deed and that the expropriation order did not violate the automatic stay.
The bankruptcy court also noted that the Commonwealth and the PREPA argued that they would be prejudiced if the cases were reopened and the expropriation order declared null and void because of the existence of an operating substation and the likelihood that the government would be forced to incur legal fees and expenses to litigate whether CFI was entitled to compensation for the Settlement Parcel which had been expropriated in 1984.
With respect to its decision to sua sponte reconsider its decision reopening the Gutierrez Brothers' Chapter 7 cases, the bankruptcy court stated "the same should not have been re-opened because of laches."
This Panel reviews the decision of the bankruptcy court for abuse of discretion. See In re Weinstein, 217 B.R. 5, 6 (D. Mass. 1998), aff'd, 164 F.3d 677 (1st Cir.), cert. denied, Patriot Portfolio, LLC v. Weinstein, 527 U.S. 1036 (1999) ("The Bankruptcy Court's decisions (1) to reopen the Appellee's bankruptcy case under 11 U.S.C. § 350(b) and (2) to reverse itself, sua sponte, are within its discretion. Hence, this Court reviews those decisions only to determine if the Bankruptcy Court abused its discretion."); see also Sheerin, 21 B.R. at 440.
To succeed on the affirmative defense of laches, CFI, the Commonwealth, and PREPA were required to show that the Gutierrez Brothers exercised a lack of diligence in seeking to reopen their Chapter 7 cases, as well as the 1978 corporate cases, and that they have been prejudiced by the Gutierrez Brothers' undue delay.See Costello v. United States, 365 U.S. 265, 282 (1961). While undue delay is readily pegged to the time elapsed between awareness of the need for relief and appropriate steps taken to obtain that relief, prejudice is found when an objector has changed its position. Winburn, 196 B.R. at 899.
The Panel finds that the bankruptcy court did not abuse its discretion in adopting the arguments made by the Appellees and was justified in finding both undue delay and prejudice with respect to the Gutierrez Brothers' motions to reopen their Chapter 7 cases and the corporate cases in which they were shareholders.
B. Analysis
1. Reopening the 1978 cases
The Gutierrez Brothers seek to reopen the 1978 corporate cases to obtain declarations that the expropriation of the Settlement Parcel violated the automatic stay and that the expropriation order entered by the Puerto Rican Superior Court is void. Specifically, they maintain that the May 16, 1984 expropriation order violated the automatic stay because it determined property rights of EHG's bankruptcy estate based upon the language in the expropriation order ("[t]he Electric Power Authority acquired the disputed land . . . through a conveyance given to them by the `Corporacion E.H.G. Enterprises, Inc.'"). Making a classic bootstrap argument, the Gutierrez Brothers presume that, if the expropriation order is declared void, CFI's judgment in the 1990 case will be nullified and that, if CFI is declared the rightful owner of the Settlement Parcel, its claims against them must be deemed satisfied. For the reasons set forth below, the Panel finds the position of the Gutierrez Brothers is without merit.
The Gutierrez Brothers stated that PSP's case was closed in 1982 and EHG's case was closed in 1989. On May 11, 1998, they moved for the first time to reopen their 1981 individual Chapter 7 cases, but they did not move to reopen the corporate cases until February 7, 2001. Although the Gutierrez Brothers cite In re Fuller, 146 B.R. 633 (Bankr. S.D.N.Y. 1992), for the proposition that the length of time a case has been closed should not be determinative, the case fails to support their position.
Appellants' Amended Initial Brief at 3.
Interestingly, in Fuller, the bankruptcy court closed a case that it had reopened on the ground of laches. It stated:
The issues of abandonment and settlement were raised by . . . [the movant] . . . as a basis for re-closing this case. Under the Bankruptcy Code as it is applied today, property is not deemed abandoned by operation of law merely because the trustee failed to administer it, unless the property was formally scheduled before the case was closed. This is so even if the trustee actually knew of the property's existence when the case was closed. However, in the instant case, the court is unable to address the issue of abandonment because there is no proof that the property ever came into the bankruptcy case or that the representatives of the estate ever attempted to include the property either in the administration of the estate or as a result of an alleged settlement with . . . [the bankrupt's] . . . widow.
Although the Bankruptcy Code provides no time limit for an application to reopen an estate, such reopening should be conditioned upon a showing that the public interest and the purpose of the Bankruptcy Code would be served by further administration of the estate. It is questionable whether a desire to clear title is a sufficient ground to reopen a bankruptcy case. Significantly, [the holder of a potential claim against the estate] has an alternative remedy in the state which he pursued and which is still pending. Therefore, there appears to be little justification for invoking this court's jurisdiction to resolve his clouded title problem. Further administration in this court as to title to property allegedly under a cloud for over one hundred twenty years creates a risk that the estate might succeed at the price of injustice to adverse parties.
* * *
In the instant case, the only known creditor . . . and its successors in interest . . . have had over one hundred twenty years to assert a creditor's claim, but did nothing. In considering the unreasonableness of the delay, it must be concluded in the interest of fairness and equity that an entombment of one hundred twenty years should not be disturbed. This court grants . . . [the movant's] . . . motion to reinter this exhumed corpus and will allow the parties to continue their litigation as to title to the property in question in the state court where their litigation is pending. The motion to re-close this case under the Bankruptcy Act of 1867 is granted. . . .
Id. at 639-40 (citations omitted).
Because the Gutierrez Brothers were aware of the effect of the 1984 expropriation order no later than 1990, when CFI sued them in the Superior Court, this Panel concludes that the bankruptcy court did not abuse its discretion in finding undue delay to justify its refusal to reopen the corporate cases. Moreover, the bankruptcy court did not abuse its discretion in recognizing prejudice to the Appellees if they were to be required to relitigate either ownership of the Settlement Parcel or damages as a result of the expropriation.
In addition to laches, however, the record contains additional and compelling grounds which support the bankruptcy court's refusal to reopen the corporate cases. In the first place, the Gutierrez Brothers' contention that the expropriation order violated the automatic stay is unsupported by the record. Prior to the 1978 bankruptcy cases, the Settlement Parcel was conveyed, either to CFI pursuant to the Settlement Agreement, as the Gutierrez Brothers contend, or to an entity of the Commonwealth, as the Superior Court found in the expropriation order entered in 1984. In any event, neither PSP nor EHG had either a legal or equitable interest in the property. Accordingly, the automatic stay could not have been violated. The Gutierrez Brothers' reliance upon the expropriation order to establish some type of property interest on the part of EHG is too tenuous to support reopening the 1978 corporate bankruptcy cases, as the record is devoid of any evidence that either PSP or EHG even listed an ownership interest in the Settlement Parcel when they filed their bankruptcy petitions in 1978.
The Rooker-Feldman doctrine also precludes the Gutierrez Brothers from prevailing on the Motion to Reconsider the bankruptcy court's refusal to reopen the 1978 corporate cases. InMills v. Harmon Law Offices, P.C., 344 F.3d 42, 44 (1st Cir. 2003), the First Circuit explained the doctrine:
The Rooker-Feldman doctrine precludes courts from exercising subject matter jurisdiction where the issues presented in the case are "inextricably intertwined" with questions previously adjudicated by a state court, such that the federal district court would be in the unseemly position of reviewing a state court decision for error. See Hill v. Town of Conway, 193 F.3d 33, 39 (1st Cir. 1999) (noting that a federal claim is "inextricably intertwined" with a state-court claim "if the federal claim succeeds only to the extent that the state court wrongly decided the issues before it."); see generally D.C. Ct.App. v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983); Rooker v. Fid. Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923); Wilson v. Shumway, 264 F.3d 120 (1st Cir. 2001).
On March 29, 1999, prior to moving to reopen the 1978 corporate bankruptcy cases, the Gutierrez Brothers elected to sue the Commonwealth, PREPA, and CFI in the Court of the First Instance in San Juan. The Superior Judge summarized the relief requested in granting the motion for summary judgment filed by Commonwealth, PREPA, and CFI as follows:
Ariel H. Gutierrez and Enrique E. Gutierrez filed a complaint before this court wherein they claimed the invalidity of the Judgment entered in cases KEF 80-0188, regarding forceful expropriation, and KCD 90-0709, regarding collection of monies and other matters. Consequently the plaintiffs requested the Judgment entered in the cases of collection of monies of 1974, Civil No. 74-1080 and 74-1081 be deemed satisfied.
* * *
The plaintiffs allege that the Expropriations Court did not have jurisdiction because they were in a voluntary bankruptcy proceeding and the provision of the Bankruptcy Act were applicable. Based on the above, because the judgment entered in the case of 1990, KCD 90-0709, confirmed by the Supreme Court, is based on the expropriation of land granted, the plaintiffs further request the invalidity of the judgment in the case of 1990.
See note 10, supra.
The court in granting summary judgment determined that the forceful expropriation did not effect EHG or PSP "because the property had been previously transferred by them to obtain a benefit (service) to perform a lucrative economic activity of their business, the Dos Marinas Project."
The Gutierrez Brothers appealed that decision to the Appellate Circuit Court, arguing that the lower court erred in determining that the expropriation proceeding did not violate the automatic stay and that the expropriated parcel of land was not part of the bankruptcy estate of EHG. The appeals court affirmed, although for reasons other than those articulated by the Court of the First Instance. Specifically, the appeals court found that the Gutierrez Brothers lacked standing to seek relief on behalf of PSP or EHG. Observing that the Gutierrez Brothers were attempting to vindicate the constitutional and statutory rights of EHG and PSP, the court concluded the Gutierrez Brothers had not established that they were empowered under law or equity to bring an action on behalf of EHG or PSP and that they must be "prohibited from evading the consequences of incorporation at their convenience."
Appellate Circuit Court Judgment dated December 19, 2000 at 18.
The Panel concludes that the Gutierrez Brothers' request to reopen the 1978 corporate cases raises issues identical to those raised in the Court of the First Instance and in the Appellate Circuit Court. Both Commonwealth courts refused the Gutierrez Brothers' requests to invalidate the expropriation order, as well as the Supreme Court's amended judgment reinstating the default judgment entered by the Superior Court in April of 1992.
In seeking to reopen the 1978 corporate cases, the Gutierrez Brothers, in effect, requested the bankruptcy court to reverse the decisions of the appellate court and the Court of the First Instance. The bankruptcy court did not address the Rooker-Feldman doctrine in its decision, but alluded to it in its April 23, 2001 order. The Panel concludes that had the bankruptcy court considered the Rooker-Feldman doctrine it would have determined that it lacked subject matter jurisdiction to enter the relief requested. The Panel concludes that the Rooker-Feldman doctrine provides a compelling ground for affirming the decision of the bankruptcy court as that court lacked subject matter jurisdiction. If it had reopened the 1978 cases, it would have been required to review decisions of the Commonwealth courts for error, an exercise proscribed by the First Circuit in Mills.
2. Reopening the 1981 Chapter 7 cases
The bankruptcy court in In re James, 184 B.R. 147 (Bankr. N.D. Ala. 1995), discussed the manner in which debtors can litigate dischargeability after a case is closed. It stated:
First, if a creditor pursues a lawsuit on the claim the debtor can assert the bankruptcy discharge as an affirmative defense and the court with jurisdiction over the lawsuit can decide whether the debt falls within any of the exceptions to discharge. Second, under Bankruptcy Rule 4007(b) either the debtor or the creditor can move to reopen the case for the purpose of filing a complaint to determine dischargeability. Third, the debtor can bring an action in this Court to enforce the discharge injunction against the creditor attempting to collect discharged claims, which is contained in § 524(a) of the Bankruptcy Code. Fourthly, the debtor may be able to remove the collection effort to the bankruptcy court. 28 U.S.C. § 1334. The virtue of any of these procedures, as opposed to a motion to reopen to amend and add creditors, is that it will focus on the real dispute between the parties — the dischargeability of the debt.
When CFI commenced its action against the Gutierrez Brothers in 1990 seeking a determination of the validity of the Settlement Agreement, the Gutierrez Brothers failed to answer or raise the affirmative defense of bankruptcy. Despite years of litigation and appeals, the Supreme Court of Puerto Rico on January 27, 1998 issued an amended judgment reinstating the default judgment entered on April 10, 1992.
In the present case, the Gutierrez Brothers moved to reopen their Chapter 7 cases twice — the first time in May of 1998 while the involuntary petitions were pending against them and the second time in February of 2001. The first motion was filed less than four months after the Supreme Court of the Commonwealth issued its amended judgment reinstating the default judgment entered in April of 1992. In denying reconsideration of its decision denying the motion to reopen, the bankruptcy court, in its December 21, 1999 order, indicated that it was "more appropriate" to litigate CFI's claim in the involuntary cases. Rather than commence an action to determine the dischargeability of CFI's claim in the context of the involuntary cases, the Gutierrez Brothers failed to withdraw their motions to dismiss and/or abstain, which were filed in early December of 1999. They never filed pleadings to obtain a determination of the dischargeability of CFI's debt in the involuntary cases, and the bankruptcy court eventually dismissed the involuntary petitions on December 12, 2000.
The record contains sufficient facts for the bankruptcy court to have found that the Gutierrez Brothers waived a determination of the dischargeability of CFI's debt by their conduct on at least two occasions prior to filing, on February 7, 2001, their present motion to reopen their 1981 Chapter 7 cases. They waived a determination of dischargeability by failing to raise their 1985 discharges as an affirmative defense in CFI's 1990 action against them, cf. Tit. 32(A) App., P.R. Laws Ann., III, R.6.3, and they waived such a determination again by failing to file appropriate pleadings in the context of the involuntary petitions when they were pending against them. This latter waiver is especially evident because the bankruptcy court intimated that it would consider the issue in the involuntary cases where CFI's claim was disputed in the context of its joinder as a petitioning creditor, a dispute that was the subject of an appeal to the United States District Court for the District of Puerto Rico.
Rule 6.3 provides the following: "When answering a preceding pleading, the following defenses shall be set forth affirmatively: . . . discharge in bankruptcy. . . ."
A waiver is "[t]he intention or voluntary relinquishment of a known right, or such conduct as warrants an inference of the relinquishment of such right. . . ." Black's Law Dictionary at 1417 (5th ed. 1979); cf. In re Calore Express Co., Inc., 288 F.3d 22, 38 (1st Cir. 2002). The record reflects that the Gutierrez Brothers on two separate occasions failed to obtain a determination of the dischargeability of CFI's debt, electing instead to proceed with litigation in the Commonwealth courts. Under these circumstances, the bankruptcy court would have been justified in reconsidering and vacating its April 23, 2001 order on the ground that the relief requested by the Gutierrez Brothers was futile in light of their repeated waivers of determinations of the dischargeability of CFI's debt.
IV. CONCLUSION
Upon consideration of the foregoing, the Panel AFFIRMS the decision of the bankruptcy court.