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In re Reyes-Colon

United States Court of Appeals, First Circuit

April 24, 2019

IN RE: EDGAR A. REYES-COLON, Involuntary Debtor.
v.
EDGAR A. REYES-COLON, Appellant, Cross-Appellee. POPULAR AUTO, INC.; BANCO POPULAR DE PUERTO RICO, Appellees, Cross-Appellants,

          APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO, Hon. Gustavo A. Gelpí, Jr., U.S. District Judge

          Michael J. Fencer, with whom Lynne F. Riley, David Koha, and Casner & Edwards, LLP were on brief, for appellant and cross-appellee.

          Roberto Abesada-Agüet, with whom Sergio E. Criado, Correa-Acevedo & Abesada Law Offices, PSC, Eldia Díaz-Olmo, Díaz-Olmo Law Offices, Gerardo Pavía Cabanillas, and Pavía & Lazaro, PSC were on brief, for appellees and cross-appellants.

          Before Howard, Chief Judge, Thompson and Kayatta, Circuit Judges.

          KAYATTA, CIRCUIT JUDGE.

         Edgar Reyes-Colon ("Reyes-Colon"), a licensed plastic surgeon specializing in facial cosmetic surgery, allegedly failed to repay certain debts. In November 2006, one of his creditors, Banco Popular de Puerto Rico ("Banco Popular"), filed an involuntary bankruptcy petition that a second creditor, Popular Auto (collectively, "the Banks"), joined. Under 11 U.S.C. § 303(b), fewer than three petitioning creditors cannot force a debtor into bankruptcy unless the debtor has fewer than twelve creditors in total. So the parties embarked on what has now turned into twelve years of litigation concerning the number of Reyes-Colon's creditors and whether he might somehow be placed in bankruptcy involuntarily for "equitable" reasons. For the following reasons, we affirm the decision of the bankruptcy court to dismiss the petition for want of a third petitioner.

         I.

         Reyes-Colon obtained a loan from Popular Auto and guaranteed an affiliate's loan from Banco Popular. On November 22, 2006, after Reyes-Colon allegedly failed to pay his debts, Banco Popular filed an involuntary bankruptcy petition, forcing Reyes-Colon into bankruptcy proceedings. Popular Auto joined the petition shortly thereafter.

         In early 2007 the bankruptcy court dismissed the involuntary petition, concluding that Reyes-Colon had more than twelve eligible creditors at the time the involuntary petition was filed and that, after a reasonable opportunity, Banco Popular had failed to join a third creditor to maintain the petition under section 303(b)(1). See In re Reyes-Colon, Nos. PR 07-053, 06-04675-GAC, 2008 WL 8664760, at *1 (B.A.P. 1st Cir. Nov. 21, 2008). A year and a half later, the bankruptcy appellate panel ("BAP") set aside the dismissal and remanded the case. Id. The panel determined that all creditors should have been given notice and the opportunity for a hearing before the bankruptcy court dismissed the case. Id. at *8.

         Reyes-Colon did not appeal that panel ruling. Instead, the parties returned to the bankruptcy court for another three-plus years of proceedings. On March 2, 2011, Reyes-Colon moved for summary judgment, again seeking dismissal of the petition. The bankruptcy court partially granted the motion on May 23, 2012, holding that Reyes-Colon had fifteen qualified creditors at the time the involuntary petition was filed. In re Reyes-Colon, 474 B.R. 330, 383, 391 (Bankr. D.P.R. 2012). The court nevertheless allowed the parties to conduct discovery and present evidence on whether "special circumstances" existed to excuse compliance with section 303(b)(1)'s three-creditor requirement and whether Reyes-Colon had been paying his debts as they became due. Id. at 391.

         The bankruptcy court eventually held evidentiary hearings in late 2015. On September 2, 2016, the bankruptcy court dismissed the involuntary petition, citing Law v. Siegel, 571 U.S. 415 (2014). In re Reyes-Colon, 558 B.R. 563, 568 (Bankr. D.P.R. 2016), rev'd, No. 16-2638 (GAG), 2017 WL 6365433 (D.P.R. Aug. 9, 2017). The court found that although Reyes-Colon schemed to defraud his creditors by misrepresenting his finances, id. at 565, the court did not have the equitable power to override the provisions of section 303(b)(1), id. at 568. The Banks appealed to the district court.

         The district court reversed the dismissal order and remanded to the bankruptcy court. In re Reyes-Colon, 2017 WL 6365433, at *1. It found that the involuntary petition did not need three or more petitioning creditors because Reyes-Colon had fewer than twelve eligible creditors when the petition was filed. Id. The court also found that Reyes-Colon was generally not paying his debts as they became due, and required entry of an order of relief against Reyes-Colon on remand pursuant to section 303(h)(1). Id. This appeal and cross-appeal followed.

         II.

         Section 303(b) of the Bankruptcy Code requires that an involuntary petition against a debtor have at least three petitioning creditors if, at the time the petition was filed, the debtor had twelve or more eligible creditors. 11 U.S.C. § 303(b)(1)-(2). Reyes-Colon argues that he had twelve or more creditors at the time the petition was filed, and that the involuntary petition is therefore insufficient because there are only two petitioning creditors -- Banco Popular and Popular Auto.

         In response, the Banks raise two types of arguments. First, they claim that Reyes-Colon has procedurally waived his right to put forward the arguments that might arguably support his position. Second, they argue on the merits ...


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