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Asociación De Titulares De Condominio Castillo v. Dimarco

United States Bankruptcy Appellate Panel of the First Circuit

February 8, 2018


         Appeal from the United States Bankruptcy Court for the District of Puerto Rico (Hon. Enrique S. Lamoutte, U.S. Bankruptcy Judge)

          Rafael A. González Valiente, Esq., on brief for Appellant.

          Thomas E. Chandler, Esq., and Anna M. Baldwin, Esq., on brief for Appellee, United States of America.

          Alvin M. Ramos Miranda, Esq., on brief for Appellees, Joanna DiMarco and Mona DiMarco.

          Before Feeney, Harwood, and Fagone, United States Bankruptcy Appellate Panel Judges.

          Harwood, U.S. Bankruptcy Appellate Panel Judge.

         Asociación de Titulares de Condominio Castillo, d/b/a Castillo Condominium Association (the "Asociación"), appeals from the bankruptcy court's February 7, 2017 order dismissing the Asociación's chapter 7 petition ("Dismissal Order"), and the March 23, 2017 order denying reconsideration of the Dismissal Order ("Order Denying Reconsideration"). In dismissing the petition, the bankruptcy court ruled that the Asociación was ineligible to file a petition under § 109, [1] and lacked a legitimate bankruptcy purpose for the filing. For the reasons set forth below, we DISMISS the Asociación's untimely appeal of the Dismissal Order, and AFFIRM the Order Denying Reconsideration.


         I. Pre-Petition Events

         The Asociación is a condominium association originally comprised of all of the homeowners of the Castillo Condominium, a 22-unit condominium building located in San Juan, Puerto Rico. Prior to the petition date, the United States Department of Housing and Urban Development ("HUD") filed a "charge of discrimination" against the Asociación under the Fair Housing Act after the Asociación forced a condominium resident, Carlos Giménez Bianco, to vacate and sell his unit because he was keeping a dog in violation of the "no pets" bylaw. See Castillo Condominium Ass'n v. United States, 821 F.3d 92, 95 (1st Cir. 2016). Ultimately, the Secretary determined that the Asociación's refusal to allow Mr. Giménez to keep an "emotional support dog" in his unit as a reasonable accommodation for his disability violated the Fair Housing Act, awarded $20, 000.00 in damages to Mr. Giménez, and assessed a civil penalty of $16, 000.00 against the Asociación. Id. at 96. The Asociación appealed, and on May 2, 2016, the United States Court of Appeals for the First Circuit affirmed the Secretary's decision. See id.

         II. The Bankruptcy Case

         Shortly thereafter, in June 2016, the Asociación filed a voluntary chapter 7 petition, [2] and Wigberto Lugo Mender was appointed as trustee (the "Trustee"). In its original schedules of assets and liabilities, the Asociación reported $14, 048.12 in assets and $104, 515.00 in liabilities.[3]It listed both HUD and Mr. Giménez as unsecured creditors, as well as a third judgment creditor, Charles Fitzwilliams, with a $60, 000.00 claim. It also listed appellees, Mona DiMarco and Joanna DiMarco (collectively, the "DiMarcos"), as unsecured creditors with contingent and/or disputed claims for "allege[d] damages" valued at $1.00 each.[4] Although the Asociación listed 17 unsecured creditors in total, the three judgment creditors (HUD, Mr. Giménez, and Mr. Fitzwilliams) accounted for the majority of its liabilities.

         A. The Creditors' Meeting

         At the first creditors' meeting on August 31, 2016, Gloria Rosado, president of the Asociación, testified on the Asociación's behalf. She explained that when the Asociación filed its bankruptcy petition, it ceased management of the property and the homeowners created a new homeowners' association to assume the day-to-day management responsibilities, including the collection of dues from the homeowners. Ms. Rosado also revealed that the new homeowners' association had paid or planned to pay all of the Asociación's debts, except for the amounts owed to the judgment creditors and the disputed claims of the DiMarcos. She stated that the intent behind the creation of the new association and the filing of the bankruptcy petition was to avoid collection of those judgments. The Trustee questioned Ms. Rosado about the Asociación's purpose in commencing the bankruptcy case, noting that it could not receive a discharge of its debts, and that the horizontal property regime applicable to the Castillo Condominium "exists perpetually, " so it could not be liquidated. The Asociación's attorney responded on behalf of Ms. Rosado that he expected the Trustee to liquidate the Asociación's few assets and then the "entity will either cease to exist or will remain there inoperative."

         Also at that creditors' meeting, the Trustee asked the Asociación to amend its schedules to accurately reflect its assets, liabilities, and financial condition, and to submit accounting information for the two years preceding the petition date. Accordingly, the Trustee continued the meeting to September 28, 2016. The record does not include a transcript of the continued creditors' meeting. Moreover, while the relevant entries on the bankruptcy court docket indicate that the Asociación amended its schedules and statement of affairs in November 2016, those amendments appear to have been rendered ineffective by the Asociación's failure to comply with Bankruptcy Rule 1008. See Docket Nos. 21, 22, 24, 25, and 26.[5] Therefore, the record does not reflect what transpired at the meeting or whether the Asociación complied with the Trustee's requests.

         B. Motion to Dismiss

         On October 22, 2016, the DiMarcos filed a motion to dismiss the bankruptcy petition, asserting two basic grounds for dismissal under § 707(a) ("Motion to Dismiss").[6] First, they argued that there was cause to dismiss the case pursuant to § 707(a)(1) because the Asociación had "unjustifiably delay[ed] the proceedings" by failing to amend its schedules to reflect its true financial condition. Second, they alleged the Asociación used the bankruptcy filing for improper purposes, namely: (1) "as a subterfuge" to extinguish the horizontal property regime with respect to "selected creditors" without obtaining the consent of all of the owner members as required by Puerto Rico law; and (2) as a strategy to obtain the benefit of the automatic stay to avoid execution of the judgments against it. As to their "improper purposes" argument, the DiMarcos maintained that the Asociación was effectively operating as a debtor-in-possession, having created a new homeowners' association composed of the same owner members as its predecessor, and which continued to maintain the condominium's operations using the dues originally paid to the Asociación. They argued that the Asociación created the new homeowners' association to "justify the selective treatment it provided to the creditors it . . . paid post-petition" while invoking the automatic stay as to "the [other] creditors it d[id] not wish to pay" by filing the chapter 7 petition. They also stressed that the main purpose of a chapter 7 case is to liquidate the assets of an entity. Under the Puerto Rico Condominium Act (the "Condominium Act"), [7] however, a condominium association can only be liquidated by extinguishing the horizontal property regime designation, which requires the consent of all the homeowners. As not all of the homeowners in the Asociación approved the filing of the petition, they argued, the Asociación is unable to liquidate in a chapter 7 bankruptcy case.

         HUD filed a motion to join the Motion to Dismiss. In it, HUD asked the bankruptcy court to "take notice" of its joinder.

         C. Opposition to Motion to Dismiss

         The Asociación opposed the Motion to Dismiss, arguing, among other things, that: (1) it had amended its schedules and submitted the requested financial information; (2) the Trustee had not requested dismissal in connection with the Asociación's duty to provide financial information or made further requests for additional financial information; and (3) the DiMarcos could not "jump into the Trustee's shoes claiming . . . noncompliance" with the Trustee's request. The Asociación also argued that it was eligible to file for bankruptcy protection because the Condominium Act does not expressly prohibit it. According to the Asociación, although the Condominium Act prohibits the division of community property and subjects the property permanently to the horizontal property regime, it does not prohibit a homeowners' association from filing for bankruptcy relief, nor does it expressly require that all homeowners consent to the bankruptcy filing. According to the Asociación, the consent of a majority of homeowners was sufficient.

         D. Hearing on Motion to Dismiss

         On February 7, 2017, the bankruptcy court held a non-evidentiary hearing on the Motion to Dismiss. At the hearing, the DiMarcos' counsel again argued that the chapter 7 petition should be dismissed for three reasons: (1) the Asociación was not an individual and, therefore, was unable to discharge its debts; (2) the Asociación's estate could not be liquidated without dissolving the horizontal property regime, which requires the consent of all of the homeowners; and (3) the Asociación created a new homeowners' association which was essentially acting as a debtor-in-possession, and through this new entity, the Asociación had paid all of its debts, except those owed to the judgment creditors and the DiMarcos. The bankruptcy court, "go[ing] to the heart of the issue, " expressed a two-fold concern: (1) "what were the reasons leading the [Asociación] to file for bankruptcy"; and (2) "who the debtor is . . . and if that debtor may be a debtor pursuant to [§] 109."

         When the bankruptcy court questioned why the Asociación had filed for bankruptcy when it was not entitled to a discharge of its debts, the Asociación's counsel agreed that the Asociación filed for bankruptcy "to avoid payment of [ ] significant judgments issued against it." The Asociación's counsel explained:

[The judgment creditors] were trying to attach everything, so that the Asociación could not operate, and could not perform its function [ ] which is to maintain the common areas, and [ ] pay all its debts for security, garbage collection, maintenance of the elevator, maintenance of the entrance, et cetera, et cetera, in the common areas. And they could not do so because the [judgment] creditors were attaching all of their . . . assets and all of their funds.
The apartment owners know that the [judgment creditors] can go against them in their personal capacity, but at least now that this entity filed for bankruptcy and they created a new entity . . ., there's a new association that performs the duties of the old [Asociación]. Now they can continue because those funds are not attachable.

         The bankruptcy court also queried whether the Asociación can be a debtor under § 109(b) when it is not an individual, corporation, or partnership.[8] In response, the Asociación's attorney argued that the definition of "person" in the Bankruptcy Code is non-exclusive, and, therefore, is not limited to individuals, corporations, and partnerships. The bankruptcy court disagreed, indicating it read § 109 differently. According to the court, under § 109(a), only a "person" may be a debtor, and only an individual, corporation, or partnership constitutes a "person" under the Bankruptcy Code's definition. The Asociación's attorney continued to insist, however, that the Asociación was "a legal entity" which was similar to a corporation and "nothing in the Code [ ] says that it may not file."

         After hearing the parties' arguments, the bankruptcy court provided two grounds for dismissal, as follows:[9]

After considering the motions before the Court, argument by counsel, [and] argument by the Chapter 7 trustee, the Court concludes that the Asociación may not be a debtor under Section 109 of the Bankruptcy Code, and has filed a petition to avoid payment to creditors holding judgment[s] against it, claims that [ ] would not be discharged in bankruptcy . . . . So the case is dismissed.

         Thereafter, the bankruptcy court entered the Dismissal Order memorializing its ruling.

         E. Motion for Reconsideration

         Fifteen days later, on February 22, 2017, the Asociación filed a motion requesting reconsideration of the Dismissal Order ("Motion for Reconsideration"), arguing the bankruptcy court had committed clear errors of fact and law. In the motion, the Asociación cited both Rules 59(e) and 60, without specifying the rule upon which it relied. The Asociación argued the bankruptcy court erred in ruling that it was ineligible to be a debtor under § 109 and dismissing the petition for the following reasons: (1) the definition of "person" under the Bankruptcy Code is non-exclusive and may include entities other than corporations, partnerships, and individuals, such as the Asociación; (2) other homeowners' associations in Puerto Rico have filed bankruptcy petitions; (3) neither the Bankruptcy Code nor Puerto Rico law prohibits a homeowners' association from filing for bankruptcy protection; (4) the inability of a homeowners' association to obtain a discharge is not grounds for dismissal as all non-individual debtors (including corporations, partnerships, and trusts) are barred from receiving a discharge; and (5) the Asociación's filing of the bankruptcy petition to stay the collection of judgments is not grounds for dismissal as the Asociación was insolvent and unable to pay its debts.

         F. Oppositions to Motion for Reconsideration

         Both the DiMarcos and HUD filed oppositions to the Motion for Reconsideration, arguing the Asociación had simply restated the arguments it previously made to the bankruptcy court. HUD also argued the motion contained misrepresentations regarding the Asociación's purpose for the bankruptcy filing and its alleged insolvency. Specifically, HUD contended the "sole reason" the Asociación filed the bankruptcy petition and formed a new homeowners' association "was to purposely deprive the former Asociaci[ó]n . . . of its revolving income from ownership dues, so as to fabricate an insolvency and file for bankruptcy, and attempt to free itself of the judgment issued by HUD's Secretary." According to HUD, "the intent behind creating this 'new' condominium association[ ] [wa]s tantamount to fraud . . . ." "[The Asociación] became 'insolvent' not because the home owners declined to pay their home owner fees, but because [the Asociación] willfully and voluntarily declined to receive payment of the home owner[s'] dues to make [itself] insolvent." HUD claimed: "In reality, the debtor in this case had the revolving income that the current association has. It just decided not to receive any[ ]more payments, so as to become 'insolvent.'"

         G. Order Denying Reconsideration

         On March 23, 2017, the bankruptcy court, without a hearing, entered the Order Denying Reconsideration, "for the reasons stated in [the] response by the United States of America [HUD] (dkt. #52) and creditors [DiMarcos'] opposition (dkt. #53)." The bankruptcy court did not identify the statutory basis for its ruling or state whether it construed the Motion for Reconsideration as one under Rule 60(b) or 59(e).

         On April 5, 2017, the Asociación filed a notice of appeal of the Dismissal Order and the Order Denying Reconsideration.


         "A bankruptcy appellate panel is duty-bound to determine its jurisdiction before proceeding to the merits, even if the issue is not raised by the litigants." Encanto Rests., Inc. v. Aquino Vidal (In re Cousins Int'l Food, Corp.), 565 B.R. 450, 458 (B.A.P. 1st Cir. 2017) (citing Rivera Siaca v. DCC ...

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