IN THE UNITED STATES BANKRUPTCY COURT FOR THEDISTRICT OF PUERTO RICO

IN RE: : CASE NO. B95-02187(ESL):

ARIEL E. GUTIERREZ : CHAPTER 7:

Debtor : INVOLUNTARY PETITION____________________________________:IN RE: : CASE NO. B95-02188(ESL)

:ENRIQUE H. GUTIERREZ : CHAPTER 7

:Debtor : INVOLUNTARY PETITION

____________________________________:

OPINION AND ORDER

This case came before the court for an evidentiary hearing on August 14, 15, 16, 17, 22,

and 24. The hearing was scheduled as a result of involuntary debtors' motion to dismiss the

involuntary petition; specifically, for the court to consider whether the petitions were filed in

good faith. At the court's request, the parties gave a list of their witnesses to be presented and1

each side indicated that their cases regarding the issue of bad faith would take approximately

one-half day to present . At the close of the hearing the court granted the parties until September2

11, 1995, to file simultaneous post-hearing memoranda of law.

Procedural Background

These involuntary petitions were filed on April 7, 1995. The petitioning creditors in the

Debtors indicated that their witnesses would be Carlos Romero, Francisco Arriví, 1

Frank Cue, Sergio Camero, David McCloskey, Ariel Gutiérrez and Enrique Gutiérrez. Petitioning creditors indicated that their witnesses would be Victor Hernández, David Efrón, Dr. Ganapolsky, Mr. Bailey, and Francisco Leon.

2

See transcript of hearing held 8/14/95, dkt. #48 in 95-02187, at pp. 10-11. However, it tookthe parties six days to present their evidence.

2

case of Ariel E. Gutiérrez are Plaza Inmaculada, SE (two claims) , David Efrón (two claims) ,3 4

and Bailey, Hunt and Jones . The petitioning creditors in the case of Enrique H. Gutiérrez are5

Plaza Inmaculada, SE (two claims) and David Efrón (two claims) . Debtors filed motions to6 7

dismiss the involuntary petitions on April 13, 1995. Debtors' motion for joint administration of

the cases was granted, while petitioning creditors' motion for substantive consolidation of the

cases was denied.

Upon consideration of debtors' motions to dismiss, the court found that the issue of bad

faith is fact intensive and that it was unable to make a determination of bad faith on the pleadings

and exhibits. See Order dtd. July 21, 1995, dkt. #31 in 95-02187. Thus, the court scheduled a

hearing on an expedited basis for August 14, 1995, and ordered the parties to exchange witness

lists and premark exhibits.

A flurry of motions followed the court's order. Debtors' urgent motion to reschedule the

hearing was denied, as was their motion to reconsider said denial. At the close of the hearing the

parties were granted until September 11, 1995, to file simultaneous post-hearing memoranda.

After several requests by debtors for extensions of time to file their brief, which were

granted by the court, debtors' post-hearing memorandum was filed on September 28, 1995. The

Claim I1 for repairs and interest in the amount of $3,030,300.00, and claim #2 for 3

payment of fees to M. Martínez in the amount of $29,325.00.

Claim #3 for payment to Banco Santander in the amount of $260,000.00, and claim 4

#4 for note assigned by Dr. Ganapolsky in the amount of $324,000.00.

Claim #5 for legal fees in the amount of $22,459.55.5

See footnote 3.6

See footnote 4.7

3

memoranda of Plaza Inmaculada and David Efrón, as well as that of Bailey, Hunt and Jones,

were filed on September 26, 1995. The court granted the petitioning creditors' motion to strike

part of debtors' post-hearing memorandum, and also granted them leave to reply to debtors' brief.

Plaza Inmaculada and David Efrón's reply brief was filed on December 12, 1995, while Bailey,

Hunt & Jones' reply brief was filed on December 15, 1995.

Factual Background

The first witness heard was Francisco Arriví, who testified on August 14, 1995. He is a

senior vice president of Interstate General Co., and was the head of the real estate department of

Chase Manhattan Bank from 1986 to 1988. While at Chase he underwrote the loan for Phase I of

Plaza Inmaculada, which was financed by Chase. Mr. Arriví analyzed the Gutierrez' application

and recommended that the loan be made.

Mr. Arriví testified that Henry Gutiérrez, Ariel Gutiérrez and Sergio Romero were the

original partners in the development of the first phase of Plaza Inmaculada, but that they sold

their participation, or part of it, to José Efrón. He testified that Chase Manhattan did not have

any particular requirements regarding ownership of projects financed, and that it did not place

conditions on ownership upon the Gutiérrez', but that a sale of the project would require bank

approval. Mr. Arriví examined exhibits 2, 3 and 4 , and identified the same as related to the sale8

of stock by the Gutiérrez' to Efrón. He testified that it was not the policy of the bank, nor his

policy, to force recipients or guarantors of a loan to sell their shares, thus disagreeing with the

Exhibit 2 is a letter from Ariel E. Gutiérrez to Francisco Arriví dated 12/13/88. 8

Exhibit 3 is a reply letter from Francisco Arriví to Ariel Gutiérrez dated 12/15/88. Exhibit 4 is a letter from the guarantors of the Chase loan to Francisco Arriví dated 12/16/88.

4

sworn statement of David Efrón to the effect that Chase had forced the sale of the Gutiérrez'

interest to José Efrón.9

Upon cross-examination, Arriví testified that there was some objection within the bank to

granting the loan, based upon the type of loan (the first condominium financed in many years)

and concerns about problems the Gutiérrez' had in the 1970's. The only problems he recalled

with the project were the timing of the construction and the correction of some problems on the

first floors, as a result of which the contractor, Continental Construction, agreed to name a new

project supervisor. He clarified that the project was owned by Advisors Investment Group, not

the Gutiérrez', along with the Cameros, each holding a 50% interest.

Mr. Arriví recalled that, although Chase financed the first tower of Plaza Inmaculada, it

did not finance the second tower because the bank had suffered significant losses with

construction loans in the 1970's and there was much objection within the bank to financing

condominium construction. He testified that Chase financed two other projects with the

Gutiérrez', i.e., Candina Reef condominium and some houses in Carolina. Others were involved

with the Gutiérrez' in these projects and, in each case, pursuant to bank policy, Chase required

the personal guarantees of the owners of the projects.

The second witness heard was Sergio Camero, who testified on August 14, 1995. He

testified that he was an investor with the Gutiérrez brothers in Plaza Inmaculada in 1988. As a

result of that relationship he is one of a group of plaintiffs who filed an action in superior court

against David Efrón. The parties to this hearing stipulated that the plaintiffs in that action were

See exhibit 1, sworn statement of David Efrón dated June 1, 1995, originally filed in 9

support of his opposition to the motion to dismiss.

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Enrique Gutiérrez, Ariel Gutiérrez, Advisors Investment Group, Gutiérrez & Gutiérrez and the

Cameros, and that a counterclaim was filed against all plaintiffs except the Cameros.

Upon cross-examination, Mr. Camero testified that at the beginning his only role was as

an investor in the project, but after their interest was sold to José Efrón he was to serve as a

consultant. Pursuant to the consulting agreement, he and the Gutiérrez' were to provide services

and be compensated; however, they never had the opportunity to provide services because after

José Efrón died their role was eliminated. Camero testified that this was his first involvement in

the construction and development business, and that he (and his son) were to be involved in

marketing and sales. Although he had no particular experience with real estate, he felt it was no

different than other marketing. Camero testified that under the consulting agreement, all parties

were to recover their costs; thereafter, Efrón would receive the first $2.5 million in profit and the

balance of profit would go to the Gutiérrez' and Cameros. Based upon the project's financial

statements they expected at least $2.5 million in profits.

The third witness was attorney Carlos A. Romero, Jr., who testified on August 14, 1995.

He is admitted to practice law in Florida, Puerto Rico and Illinois. He has represented Ariel

Gutiérrez over the years and, while working at the law firm of Gaston, Snow, Ely & Bartlett, was

his attorney in the Verde Capital case in Florida. In 1986 Romero left Gaston, Snow and

continued to work on the case. Later the firm of Hughes, Hubbard & Reed became involved in

the case. Subsequently, upon his recommendation, Ariel Gutiérrez engaged the law firm of Guy

Bailey, on behalf of Systems Concept International, Inc. (SCI). Attorney Sarah Soto of the

Bailey firm handled the case. Bailey was paid an hourly fee; ten percent of the fees he collected

were paid to Carlos Romero, and his invoices were forwarded to the same on a regular basis.

6

The Verde Capital litigation ended in 1992 or 1993.

Romero testified that Ariel Gutiérrez contacted him in April 1995, informing him of the

involuntary petition and that Bailey was one of the petitioning creditors. Romero offered to

speak with Guy Bailey and did so. Bailey told him that he was participating in the involuntary

petition because he was owed money by Ariel Gutiérrez for a long time, that he had to collect the

money because he owed money to David Efrón, that he discussed the situation with Efrón, and

that Efrón came up with the idea for the involuntary petition in order to collect the debts owed.

Romero testified that Bailey told him he could not be persuaded to withdraw the petition and that

he didn't know why Romero was dealing with crooks.

Romero testified that in his opinion the Gutiérrez' did not owe any money to Bailey.

Based upon his review of the invoices he determined that the Gutiérrez' actually overpaid Bailey.

Upon cross-examination Romero testified that he reviewed some of Bailey's invoices on a

periodic basis . He stated that he received a copy of a letter that Ariel Gutiérrez wrote to Bailey10

in the spring of 1992 . In response, Bailey wrote a letter to the Gutiérrez' in June or July of11

1992 , accompanied by invoices, detailing the entire billing history and amounts owed. 12

However, Romero noticed a discrepency between the invoices, which total approximately $375

Romero identified exhibits 5 through 11 as some of the invoices sent by Bailey to 10

Ariel Gutiérrez in the summer of 1992, accompanying a letter to Ariel Gutiérrez summarizing the amounts owed.

See exhibit D, letter dated 3/18/92 from Ariel Gutiérrez to Guy Bailey, referring to 11

Guy Bailey's letter of 3/4/92, disputing the amount owed, and proposing a payment plan.

Romero later identified exhibit CC as the cover letter, dated June 11, 1992, actually 12

written by Raul Arencibia, a partner of Guy Bailey.

7

and contain several write-offs, and the amount claimed in the cover letter, which totals

approximately $16,000. He mentioned this discrepency to Ariel Gutiérrez sometime between

1992 and 1993, but he did not discuss the discrepency with Guy Bailey. Romero testified that

he did not recall participating in the negotiation of the 1993 settlement between Bailey and the

Gutiérrez'. He identified a letter sent by Ariel Gutiérrez to Guy Bailey concerning their

understanding to satisfy Bailey's invoices . He testified that the Gutiérrez' partially complied13

with the payment plan set forth therein, which provided for three installments of $5,000;

however, they did not make the payment due July 31, 1993. Romero testified that he sent a

$5,000 check to Bailey on behalf of Ariel Gutiérrez, having received the funds from Ariel

Gutiérrez, but he did not recall when this occurred. Romero testified that he became involved in

the fee dispute between Bailey and the Gutiérrez' because he was concerned about duplicity of

work and excessive fees, and that he spoke with Sara Soto at Bailey's firm about the same.

Upon further cross-examination, Romero testified that there were three groups involved

in the Verde Capital litigation, the Caguas Central group, the Manuel Dubón group, and the

Gutiérrez group. The latter included SCI, DGST Two, Inc., Transglobe & Manufacturing Corp.,

Enrique Gutiérrez, Ariel Gutiérrez and Frank Brunet Calaf (Ariel Gutiérrez' father-in-law).

Romero testified that all of these corporations were controlled by the Gutiérrez' and that all the

parties in the Gutiérrez group were represented by the Bailey firm.14

The fourth witness was Guy B. Bailey, Jr., who testified on August 14, 1995. He testified

See exhibit B, letter dated 6/21/93 from Ariel Gutiérrez to Guy Bailey.13

Romero identified exhibits AA and BB and the complaint and judgments in the Verde14

Capital case.

8

that his law firm represented the Gutiérrez', as well as others, in the Verde Capital case. He

stated that firm maintained two accounts for the Gutiérrez', and that the balance owed to the firm,

without regard to the settlement agreement or interest, was $12,400 on one account and $4,800

on the other; in total, approximately $21,000 to $22,000 with interest. Bailey testified that the

settelement agreement that they reached provided for the payment of $15,000 in three payments

of $5,000. However, since the agreement was not honored, in that the Gutiérrez' did not pay on

the schedule agreed to, in Bailey's opinion the debt reverted to the original amount owed, less the

one payment of $5,000 which was made.

Bailey recalled differently the conversation with Carlos Romero; he says that Romero

told him that the Gutiérrez' would do anything to avoid the claim and that he should drop it.

Bailey testified that he responded that if the Gutiérrez' were going to behave like crooks he would

deal with them in court, that he wouldn't back down because he was threatened.

Bailey testified that he never disclosed any confidential information in relation with this

mattter, nor did he breach any canons of ethics. He stated that he filed the petition because he

had not been paid for a long time, he understood that the Gutiérrez' had some assets, and he

thought that if a petition were filed there would be a marshaling of assets and the matter would

be resolved. He did not assign his debt to Efrón, nor did he tell Romero that he had done so.

Upon cross-examination, Bailey testified that the term "write-off" contained in some

exhibits refers to the law firms internal accounts receivable, not to the fact that the debt was

forgiven as to the Gutiérrez'. He stated that his collection efforts after June of 1993 included

threatening to withdraw from the case and file a collection suit, but that he had not done so.

David Efrón approached him with the idea of filing an involuntary petition, which sounded good

9

to Bailey; he agreed to participate to see if there were any assets to be marshalled and to resolve

the situation.

Bailey testified that he is owed money by David Efrón, for legal representation in three

lawsuits, and that he owes money to Efrón's companies, based upon an amount borrowed after

the filing of the involuntary petition.

The fifth witness was David Efrón, who initially testified on August 15, 1995. He

returned to the witness stand on August 22 and August 24, 1995. He is a real estate developer

and, until 1989, was a full-time attorney with limited participation in the family business. He is

admitted to practice law in Puerto Rico, New York and the District of Columbia. He testified

that, although he always knew of the Gutiérrez brothers, he became better acquainted with them

when they began their relationship with his father in 1988. As to how the Gutiérrez' became

involved with his father, Efrón testified that his father was talking with a group from New York,

managed by Joseph Monticello, the former regional director of HUD, to whom he was introduced

by Cleofe Rubi. They asked Efrón to join them as an investor in Plaza Inmaculada. However,

Monticello and Rubi backed out of the Plaza Inmaculada project and decided to invest in another

project, Embassy Suites. Efrón decided to go forward with Plaza Inmaculada and his interest

increased from 50% to 100%. The financing could be obtained only with his full guaranty and

complete interest in the project.

The stock purchase agreement , by which José Efrón acquired the shares of Inmaculada15

Tower, Inc. from the Gutiérrez brothers, as well as the consulting agreement , by which the16

See exhibit 19.15

See exhibit 20.16

10

Gutiérrez' and Cameros were to provide services to Plaza Inmaculada for the sale of the property,

were executed on December 13, 1988. The consulting agreement was an exhibit to the stock

purchase agreement. The consulting services were never provided and no compensation was

ever paid. Efrón testified that he was not part of the stock purchase agreement, nor did he

participate in its creation, although he inherited his father's rights and obligations thereunder.

Efrón testified that his business relationship with the Gutiérrez' began on December 18,

1989, when his father died and he, as the only child, had to take over the family business, with

which he was acquainted but not actually involved. Although he preferred to practice law, when

his father died he had to dedicate most of his time to the family business. He felt he had to be

careful as there were $30 million in loans with a huge service debt. In addition to Plaza

Inmaculada, there were a dozen other projects in various stages of development which required

his attention. He testified that he was committed to the Plaza Inmaculada project but would not

give his personal guaranty. However, he planned to continue with the project as originally

conceived and proposed as it was a major investment He testified that it was in everyone's

interest to do the project quickly and successfully. His motive was to comply with his

obligations, to the project and to the bank, and do the right thing. Efrón testified that when his

father died the most urgent problem was visiting their banks and assuring them that they had

sufficient equity and guarantees and that all pending obligations would be honored. He stated

that he made no changes regarding the Plaza Inmaculada project and that he was not in a position

to make any changes if he wanted to. There was already a construction contract and financing

was in place; Ariel Gutiérrez was the project supervisor and Enrique Gutiérrez the architect.

When his father died Efrón inherited his assets, including one hundred percent of the

11

shares of Inmaculada Towers, Inc., a one hundred percent interest in the special partnership Plaza

Inmaculada SE, and the accompanying obligations of guaranty - $8 million to Banco Popular de

Puerto Rico, related to the construction loan for the second tower, and $500,000 to Banco

Santander, related to a loan to the Gutiérrez brothers. The special partnership was constituted in

May of 1989 for the purpose of developing the second tower of the project; at that time, the first17

tower was under construction and the second one was in the planning stages. Further, there was

to be a third phase on some adjacent land. The special partnership has certain tax advantages

under Puerto Rico law, such as allowing the partners to report the income and deduct the

expenses of the partnership He testified that, along with Norfe Development (a wholly owned18

company of Efrón) he owns a one hundred percent participation in the special partnership.

Victor Hernández is the vice president of Norfe Development, which is the managing partner of

Plaza Inmaculada; Efrón is the president of Norfe Development.

Efrón testified that on January 6, 1990, the Gutiérrez' came to his home in Miami with

various plans and contracts to explain their business relation with his father. They claimed to be

involved in various businesses with his father, which surprised Efrón as he did not know of any

other than Plaza Inmaculada. At that time they pressed him to make immediate decisions as to

what he was going to do; however, he refused to do, feeling that he needed time to evaluate the

situation. Efrón testified that he told the Gutiérrez' that he wanted a good relation with them for

both of their benefit, but that he needed time before making any decisions because his father had

just died, he was under a lot of pressure from the banks, and he needed to evaluate the economic

See exhibit 13.17

See 13 L.P.R.A. §3331.18

12

situation of the business and talk to his staff and the banks. Efrón testified that the Gutiérrez' did

not have a good reputation and that people were alarmed that his father was doing business with

them. However, his father was under the impression that he could control and rehabilitate them.

Efrón stated that the Gutiérrez' could have made a lot of money with him if they would have done

the right thing and been loyal to him. Efrón stated that he was willing to give them a chance

because they are extremely talented but he was watching them carefully because he was aware of

their reputation and the comments of others.

He testified that he wanted a good relationship with the Gutiérrez' because it was in

everyone's best interest, given their joint interests and large exposure. His ability to pay off his

father's guarantee, cover the losses from the first tower and make some profit, as well as the

Gutiérrez' ability to recover their fees, depended upon the successful develoment of the project.

His father had estimated $900,000 in profit with the building of Phase II, which was enough to

cover the losses of Phase I and pay the loans. He testified that he tried to avoid personal

confrontations with the Gutiérrez'. For example, with regard to the construction problems,

although he knew that the Gutiérrez' were providing monthly certifications even though the

construction was not in compliance with the plans and building code, he spoke with the

contractor instead of the Gutiérrez'. Regarding the problems which arose with the Banco

Santander financing, he avoided the Gutiérrez' and looked to the bank because it shouldn't have

disbursed the funds; he didn't include the Gutiérrez' in his lawsuit against Banco Santander, and

even tried to reach an agreement between the Gutiérrez' and the bank to pay off the loan.

Regarding Phase III, he realized he had an obligation to develop it, and intended to do so, but he

did not have an obligation to lose money, so he gave the Gutiérrez' every opportunity to develop

13

the project . Efrón already had close to $10 million in guarantees on the project and, although19

he was willing to subordinate his interest in the property to a construction loan, he was not

willing to personally guarantee the loan as he did not think the project was economically viable

and he was not legally obligated to do so.

Efrón testified that although he maintained a civil relationship with the Gutiérrez' until

they sued him in 1991, their relationship began to deteriorate during the end of 1990. In the

Plaza Inmaculada project, Efrón realized that whenever a conflict arose between himself, as

owner, and Continental Construction, the contractor, the Gutiérrez' "always went the other way",

although they were supposed to represent him as owner. Efrón felt the Gutiérrez' were not

complying with their obligations. Subsequently, during the course of litigation in 1993, he

discovered a conflict of interest between the Gutierréz' and the contractor in that the Gutiérrez'

owed in excess of $1.5 million to the owner of Continental Construction, which the Gutiérrez'

denied until confronted with the notes.

Efrón hired Nicolás del Valle as a technical advisor; he lacked engineering expertise and

therefore needed an in-house head of engineering. He chose del Valle because he was an

experienced engineer whom he trusted to be loyal. However, del Valle did not substitute the

Gutiérrez' as project supervisor. He chose del Valle because he had been in the industry for

many years, was a successful constructor, a hands-on builder, showed leadership and had good

references regarding his personal integrity and honesty. He testified that although the Gutiérrez'

had problems with del Valle many years before that that did not affect his decision, in that just

because they had problems didn't mean that they were enemies In his opinion del Valle did not

See exhibit 28.19

14

have a hostile relationship with either of the Gutiérrez'; although they had differences of opinion

and argued at meetings, they were on civilized terms. He told del Valle they had to go forward

with the project and do things right and not cause problems unnecessarily; if something was

minor they let it go, but matters involving safety and security or compliance with the building

code were different.

In 1990 the dispute regarding the cross-ties arose. Efrón testified that the Gutiérrez' took

a back seat and let the contractor and Efrón deal with the problem. In March of 1990, during the

construction of tower II, they had a meeting at the project regarding the cross-ties. There had

been a $480,000 change order to comply with the new building code. Del Valle was stopping by

the project to observe the work and noticed that the cross-ties were not being installed as

contracted for and as required by the building code and permits. When questioned by del Valle,

the contractor gave excuses about the cross-ties being installed later. Efrón brought in a

structural engineer, David McCloskey, as an independent consultant, who concurred with del

Valle that the problem with the cross-ties had to be corrected. However, McCloskey did not help

them further with the project. Efrón subsequently learned, during the course of arbitration

proceedings, that McCloskey was working on two other projects with the Gutiérrez' and

Continental Construction Company. As a result Efrón filed a complaint against McCloskey

before the Colegio de Ingenieros for violating the canons of ethics.20

Efrón testified that pursuant to the architectural contract the Gutiérrez' were supposed to

be paid their fees after the completion of each phase of the Plaza Inmaculada project; however,

the fees for the whole project were pledged to guaranty the $500,000 loan with Banco Santander

See exhibit 25.20

15

which Efrón's father had guaranteed. Therefore, when the time came to pay the fees he couldn't

because said fees were pledged; instead they were used to pay down the loan and correspondingly

reduce the guaranty. Efrón obtained a loan for $1 million from Banco Santander, using $240,000

to pay toward the loan with that same institution, and also paid Banco Nacional and some

subcontractors which were owed by the project. Since the $500,000 was not paid in full, Banco

Santander could not return the guaranty of José Efrón; although the bank indicated it would send

a letter confirming the guarantee was paid down, Efrón never received it. Subsequently, Banco

Santander changed the loan into a line of credit and gave the Gutiérrez' more money based upon

the guarantee.

Efrón testified that eventually he was involved in litigation with the Gutiérrez'. Efrón

sued Banco Santander for a declaratory judgment in early 1991. Later the Gutiérrez' sued Efrón

claiming two causes of action: 1) that Efrón's suit against Banco Santander damaged their credit

worthiness, and 2) that Efrón's failure to proceed with phase III of Plaza Inmaculada caused them

to lose expected profits. Although Efrón filed a counterclaim against the Gutiérrez', he testified

that he did not file a counterclaim against the Cameros because he did not have a cause of action

against them . This case was consolidated with Efrón's lawsuit against Banco Santander. 21 22

There is a final partial judgment in this case. Efrón won a summary judgment against Banco

Santander. The only unresolved matter is the Gutiérrez' and Camero's claim of $145,000 as a

return on their investment; Efrón claims that under the contract they only recover their

See exhibit 14 (complaint in lawsuit filed by Gutiérrez', Cameros, Gutiérrez & 21

Gutiérrez and Advisors Investment Group against Plaza Inmaculada, SE) and exhibit 15(answer and counterclaim).

See exhibit 14.22

16

investment after Efrón recovers all of his investment and all loans are paid. The only thing

pending is the resolution of a motion for summary judgment and the determination of damages.

The case had been scheduled for trial many times and was set for trial for April 24 for four days

but, according to Efrón, that was not a consideration in the filing of the petition, and the only

things pending are unrelated to the bankruptcy. Efrón did not request that the proceedings be

continued, but his attorney did file a motion on April 12, 1995, informing the local court of the

filing of the involuntary bankruptcy petition and, in fact, the case was continued He testified23 24

that it was not to his advantage to stay the state court proceeding. According to him, the

Gutiérrez' had requested the continuance of the state court proceedings many times since the

action was begun in 1992.

As to other litigation involving Plaza Inmaculada, he had an arbitration proceeding with

the contractor which arose during negotiations with the contractor to repair the building and

return the money charged for the change orders. At the same time there was a proceeding before

ARPE. The issue as to the building's compliance with the code was referred to ARPE by the

Superior Court, as it was a technical construction matter. The court enjoined the arbitrators from

entering into the issue of the certificability of the building to avoid contradictory orders between

ARPE and the arbitrators . ARPE issued an order on July 9, 1993, declining to issue a use25

permit for failure to comply with the Code, but allowing the submission of a proposal to correct

See exhibit 16.23

See exhibit 17.24

See exhibits Y and Z. 25

17

the problem . As a result the court ordered the architects, then both parties, to submit proposals26

to correct the problem, which they did . ARPE denied the Gutiérrez' proposal because it did not27

comply . The Gutiérrez' and Gutiérrez & Gutiérrez appealled ARPE's order to the superior28

court, which confirmed ARPE's order . They then appealled to the supreme court, which denied29

their appeal and subsequently denied their motions for reconsideration .30 31

Other controversies arose regarding the Plaza Inmaculada project. Continental

Construction Co. filed an arbitration proceeding against Plaza Inmaculada for failure to pay their

retainage. Efrón alleges that the retainage was not paid because Continental Construction did not

fulfill their obligations under the contract, in that they did not finish the building and obtain an

use permit as required by the contract. This proceeding was not related to Plaza Inmaculada's

claim that the Gutiérrez' acted negligently regarding the cross-ties. The Gutiérrez' were witnesses

on behalf of Continental Construction in that proceeding, testifying that Continental Construction

had complied with their obligations. Continental Construction was awarded a lesser amount than

they claimed.

Efrón filed a complaint against Ariel Gutiérrez before the Colegio de Ingenieros accusing

See exhibit a.26

See exhibit b.27

See exhibit c.28

See exhibit d.29

See exhibit e.30

See exhibit f.31

18

him of fraudulently certifying plans . Further, a complaint which was filed by Nicolás del Valle32

against Ariel Gutiérrez . Del Valle also filed a complaint against Enrique Gutiérrez before the33

Colegio de Arquitectos. Efrón filed a complaint against David McCloskey, who was hired as an

independent consultant by Efrón; according to Efrón, McCloskey admitted under oath to

violating the Canons of Ethics .34

Efrón testified that in another litigation, the Gutiérrez' sued him and Dr. Israel

Ganapolsky claiming damages as a result of Ganapolsky's assignment of a promissory note

signed by the Gutiérrez' to Efrón . In 1989 José Efrón had re-introduced Dr. Ganapolsky to the35

Gutiérrez' and suggested that he loan them $300,000. The Gutiérrez' executed a promissory note

on behalf of Advisors Investment and Villa Marina Village, Inc., as well as personal guarantees;

these were subsequently assigned to David Efrón . In that action a motion for summary36

judgment is pending .37

Efrón testified as to several matters regarding his good faith (or lack of bad faith) in filing

the petition. He stated that although he has a public relations person, Elsa Fernández Miralles, he

has not seen any press releases regarding this involuntary petition, nor has he submitted any to

the press. He does not know if she has issued any press releases to the news media. He further

See exhibit 24; see also exhibit DD.32

See exhibit 23.33

See exhibit 25.34

See exhibits 26, 27 and 30.35

See exhibit g.36

See exhibit h.37

19

testified that he was not interviewed by any reporter about the involuntary petition . He stated38

that he had read an article published in El Vocero on April 11, 1995, on this matter .39

Efrón testified that he signed the bankruptcy petition as prepared by his attorneys, and

that they included Gutiérrez & Gutiérrez on the form; at the time, he did not discuss the inclusion

with his attorney. He stated that his only dealing with Gutiérrez & Gutiérrez was on this project

and that he did not know at the time that Gutiérrez & Gutiérrez was a professional partnership,

nor did he inquire at the time the petition was filed.

Efrón testified that he loaned between $50,000 and $70,000 to Guy Bailey after the filing

of the petition and that he had loaned him money in the past. He testified that Bailey is his

general attorney in Florida and that they owe each other money. He provided Bailey the forms to

join in the petition.

Efrón testified that his filing of the petition was not intended to harass the Gutiérrez', nor

was it a substitution for an ordinary collection proceeding. He testified that the filing was

motivated by concerns that the Gutiérrez' were involved in so many lawsuits that they or their

corporations may abscond with assets. He felt that an involuntary petition would be a good way

to marshall their assets through a trustee. He noted that they had previously filed bankruptcy and

that, in his opinion, they were professional litigants who were continuously involved in disputes.

He felt that as the representative of his father's estate and the head of a corporate entity that this

was the best opportunity to collect some of the money owed, even if the amount recovered had to

be shared with other creditors. He does not know how many creditors the Gutiérrez' have

See exhibit 26.38

See exhibit E.39

20

personally. He testified that it is difficult to know if creditors are of the Gutiérrez' personally or

their corporations, and that he did not remember being told Gutiérrez & Gutiérrez was a seperate

and distinct partnership. He identified some of the Gutiérrez' corporations as Transglobe, Waste

Tech, Advisors and AIG. He testified that he consulted with his attorneys before filing the

petition and that they determined that the claims upon which the petition is based are not subject

to bona fide disputes.

Efrón testified that he does not know how much Advisors Investments, nor Gutiérrez &

Gutiérrez, owes him, although both are parties in the state court litigation. However, he believes

that Ariel Gutiérrez owes him the amount claimed in the petition. He testified that, as to the

other creditors of the Gutiérrez with whom he spoke, he did not ask them to join in the petition,

nor did they ask to join. He stated that none wanted to be a petitioning creditor, although they

indicated that they would file a claim.

As to how he decided to file the involuntary petition, Efrón testified that after

investigating and researching he found that the Gutiérrez' had a reputation for generally not

paying their debts and were always short of cash. In addition to their reputation and standing in

the community, he knew that they were having economic problems and were financially

irresponsible. He was not sure to whom they owed money, nor the relationship between them

and their corporations and their respective creditors and debts. However, he knew they had

previously filed bankruptcy and had creditors which were not discharged. He further testified

that financial statements obtained during discovery in this case led him to conclude the Gutiérrez'

are insolvent, do not have any assets and have various liabilities .40

See exhibits i, j, k and l. 40

21

Efrón further testified as to his diligence regarding other personal creditors of the

Gutiérrez'. He discovered a loan of Banco Popular de Puerto Rico, attorneys' fees owed to

Fiddler, Bailey and Teodoro Peña, as well as personal loans from Manuel Fernández and

Benjamín Rodríguez Ramón. He spoke with these creditors before filing the petition and was

told that they were owed money and that the payments were past due. He also spoke with Mr.

Fullana, who came to him, as did most of the creditors as a result of publicity regarding the

litigation between Efrón and the Gutiérrez'. Efrón testified that he knew that there were many

other creditors but there was no way of knowing what entity was owed, that it was difficult to

determine if they were personal creditors of the Gutiérrez' or creditors of one of their

corporations or partnership. He also testified that he was contacted by Ariel Gutiérrez' ex- wife,

who filed a claim based upon unpaid child support when informed that the involuntary petition

was filed; said claim was the subject of litigation in Caguas Superior Court at the time the

petition was filed. He stated that many of these creditors have been paid or are negotiating with

the Gutiérrez', including Fiddler, Banco Popular de Puerto Rico, Benjamín Rodríguez Ramón

and Manuel Fernández. He became aware of some of these creditors before filing the petition

and some after. He testified that he was aware that the Gutiérrez' had previously filed bankruptcy

and obtained discharges. He testified that he has a computer printout showing lawsuits pending

in Florida against the Gutiérrez', but he did not recall showing it to Frank Cue.

Efrón testified that he considered the nature of his claim and discussed the same with his

attorneys, and that he understood that he could only make claims that were not in dispute;

disputed claims were not included in the involuntary petition. Claim #1 in a claim by Plaza

Inmaculada, SE for repairs and damages caused by delays related to tower II. It is based upon the

22

state court litigation, in which all appeals have been exhausted. The other amounts claimed in

the state court litigation were not included in the bankruptcy petition, as they are still pending

resolution. Claim #2 is based upon the fees of structural engineer Dr. Milton Martínez, which

were paid by Plaza Inmaculada pursuant to the ARPE order and are to be reimbursed by

Gutiérrez & Gutiérrez pursuant to court order. As to claim #3 of David Efrón, it is based upon41

the litigation with Banco Santander, there was a final judgment by the Superior Court of San

Juan, the loan was transferred to Efrón once the guarantee was paid off, the only thing remaining

is to collect the $265,00; all notes and guarantees were endorsed by the bank. Claim #4 is based

upon the notes acquired by assignment from Ganapolsky.

Efrón testified that the Gutiérrez' contract included Phases I, II, and III, that he tried to

develop Phase III, that he made every possible effort and gave the Gutiérrez' every possible

advantage, including economic, to do so . Although he didn't know for sure that the Gutiérrez'42

couldn't obtain a construction loan for Phase III, he thought it was highly unlikely that they could

do so because they were not credit worthy and they never did a project without someone else co-

signing, but he thought they were talking to some other people to join the project. He testified

that his father was not committed to finance all three phases of Plaza Inmaculada, nor was he

obligated to obtain financing; to the contrary; the stock purchase agreement limits his investment

to $1 million, which was exceeded. The Gutiérrez' took it upon themselves to obtain financing,

but neither José nor David Efrón were obligated to guarantee said financing. The purpose of the

stock purchase agreement was to acquire the whole project from the Gutiérrez' and Cameros,

See exhibit 21.41

See exhibit 28.42

23

including phase III, and the intention was to develop the whole project, including at some point

Phase III. He testified that the agreements for the services of the Gutiérrez' were assumed in

conjunction with the stock purchase agreement . Although his father was the owner of Plaza43

Inmaculada, he was not responsible for obtaining financing. The stock purchase agreement did

not oblige José Efrón to give his personal guarantee to obtain financing for Phase III, although he

had done so for Phase II. According to Efrón, although his father envisioned the completion of

all three phases, all three phases did not have to be completed in order to make the project

economically feasible. Although he intended to complete Phase II, he did not do so because the

Gutiérrez' could not obtain financing, despite their trying to do so from many sources. He

testified that he probably could have found financing if he had tried to, backed by his personal

guaranty, but he was not willing nor obliged to do so. He testified that he intended to complete

Phase III eventually when the time was right, after disposing of Phase II.

According to Efrón, the Gutiérrez' are not owed any money for architectural and

supervision fees for the Plaza Inmaculada project because they did not certify the building nor

obtain use permits, which they were required to do under the contract. ARPE issued the use

permits to Efrón and its contractors, not to the Gutiérrez', based upon the plans of Milton

Martínez, as the Gutiérrez' plans were not approved, although the original plans were submitted

to ARPE as needing to be corrected .44

The sixth witness to testify was Mr. Frank Cue, who testified on August 16, 1995. Mr.

Cue is a civil engineer with 25 years of experience. His first job was with Gutiérrez & Gutiérrez,

See exhibit 19J, agreements dated 2/12/88, 7/6/88 and 8/21/87.43

See exhibit 22.44

24

and he has worked on several projects designed by them. His company, Continental

Construction, was the general contractor of both towers of Plaza Inmaculada. He testified that a

partnership of the Gutiérrez' and the Cameros were the owners of Phase I of Plaza Inmaculada;

the owner of Phase II was a partnership in which José Efrón was the principal.

Cue testified that in 1991 he met at least four times with David Efrón to resolve a dispute

about the construction of Phase II. During one of those meetings Efrón showed him a

computer printout to demonstrate the "kind of people" that the Gutiérrez' were, and told him that

they had been accused of fraud. He remembered that he asked Ariel Gutiérrez to clarify these

comments. He testified that this did not affect his opinion of the Gutiérrez brothers, that he

would do business with them, that he trusts them and that they are professional.

The seventh witness to testify was Ariel Gutiérrez, who testified on August 16, 1995. He

has a master of science degree in civil engineering from the Georgia Institute of Technology and

is a licensed professional engineer. In 1966 he joined his brother Enrique, an architect, to engage

in the design, development, construction and promotion of real estate projects. Together they

developed 8,000 housing units, plus three million square feet of shopping centers and

commercial buildings in Puerto Rico. They have also been involved in development and design

in Florida.

Gutiérrez testified that in 1986 he and his brother formed a joint venture with the

Cameros to develop Plaza Inmaculada. They purchased two parcels of land on Ponce de Leon

Avenue and received approval for the development of two residential towers of 28 or 29 floors

each, plus a commercial and residential area in front of the towers. The project was to be

designed by Gutiérrez & Gutiérrez. Two entities were formed, Immaculada Towers, Inc. for the

25

residential towers and Plaza Inmaculada, Inc. for the commercial and residential area.

Inmaculada Towers, Inc. completed Phase I of the project, the first residential tower.

During the construction of Phase I, José Efrón was brought in as a partner in the project.

The Gutiérrez' were acquainted with Efrón because Enrique Gutiérrez had been his architect on

numerous projects and Ariel knew him professionally and socially. In 1987 Efrón became aware

of the project, being particularly interested in developing projects in the Santurce area and

acquring FHA-insured mortgages. The Gutiérrez' began discussions with him and Joe

Monticello to become equity investors in the project to assist in financing the remaining phases.

In 1988 the Gutiérrez' and Cameros signed a stock purchase agreement with José Efrón.

Gutiérrez testified that, pursuant to the stock purchase agreement, the first $2.5 million of profit

would go to Efrón, with any excess profits to be shared by the Gutiérrez' and the Cameros.

According to Gutiérrez, the projected profits of the project were in excess of $5 million. At the45

closing of the stock purchase agreement, Efrón paid $600,000, which was used to pay various

obligations of the project, and, according to Gutiérrez, he assumed the remaining obligations

(detailed in the exhibits to the stock purchase agreement) of the project by purchasing 100% of

the stock of the corporations. Furthermore, according to Gutiérrez, Efrón undertook to finance

and provide the necessary guarantees for the development of all three phases of the project.

Gutiérrez testified that the relationship between Inmaculada, SE and the Gutiérrez' was

excellent until the death of José Efrón but that, to the contrary, they have had bad relations with

David Efrón since the beginning because, according to Gutiérrez, Efrón had an agenda. He

stated that at the time David Efrón entered the project Phase I was nearly completed, Phase II was

See exhibit 27.45

26

under construction, and Phase III, for which a construction bid had been awarded, was pending

commencement of construction.

Gutiérrez testified that during the construction of Phase II Efrón appointed Nicolás del

Valle as project engineer to represent him as the new owner, in violation of the Gutiérrez'

contract, and that he immediately began to have serious differences with both Efrón and del

Valle. Gutiérrez had worked with del Valle before, on a project called Troncal de Isla Verde, for

which del Valle's construction company was the general contractor. Problems arose during the

course of that project and it had to be abandoned. According to Gutiérrez, the consortium which

they were a part of did not accept del Valle's work for lack of proper performance and

workmanship.

The first serious problem that arose during the construction of Phase II involved the

cross-ties which were not inserted between the third and fourth floors of the building. There was

a meeting at the project among the Gutiérrez', David Efrón, engineer del Valle, Continental

Construction and David McCloskey, Mr. Efrón's structural engineer. According to Gutiérrez,

Efrón and del Valle intended to stop the project because of this problem. The Gutiérrez' and

McCloskey concluded that the project could continue, and it did until completion at the end of

1990. However, near the end of completion, Efrón claimed that the cross-ties had to placed and

that the failure to do so was negligence by Gutiérrez & Gutiérrez and, as a result, he breached his

other obligations under the contract. As a result of this controversy, according to Gutiérrez,

Efrón attempted to cancel his obligation as successor to José Efrón's personal guarantee to Banco

Santander of the line of credit to Gutiérrez & Gutiérrez. Further, he did not want to go forward

with the construction of Phase III, for which a bid had been awarded in December, 1989, prior to

27

José Efrón's death. It was very important to the Gutiérrez' and the Cameros to proceed with

Phase III because the consulting agreement provided that they would share the profit after this

phase was completed. In Gutiérrez' opinion, Efrón did not want to go forward with Phase III in

order to avoid sharing the profits. To this end, they met several times with Efrón, even offering

their personal guarantees, to atempt to proceed with the financing of Phase III.

Gutiérrez testified that he had an excellent relationship with José Efrón, and that after he

died, he tried to gain the confidence of David Efrón and work with him in the development of

Plaza Inmaculada. He felt he had a duty to resolve their differences amicably because he had

received so much personal and financial support from José Efrón. He stated that he kept trying46

to do so until he realized that they were not getting anywhere, that David Efrón would not fulfill

his obligations under the contract. Gutiérrez testified that David Efrón told him at his offices that

he wouldn't go forward with Phase III, that he would continue to use del Valle for Phase II, that

he would argue with the contractor over the cross-ties, and that he would fight every step of the

way and argue the merits of the contract that the Gutiérrez' had with José Efrón.

Gutiérrez testified as to the following disputes between the Gutiérrez' and Efrón: the state

court action for breach of contract, the "querella" by del Valle, the "querrella" by Gutiérrez, the

Ganapolsky collection action , the bankruptcy petition, ARPE (Regulation and Permit47

Authority) proceedings, and arbitration proceedings.

Gutiérrez identified exhibits 28 and 29 as letters evidencing his attempts to resolve 46

the controversies with David Efrón.

See exhibit 30, complaint filed by Enrique Gutiérrez, Ariel Gutiérrez and his wife, 47

and Advisors Investment Group against David Efrón and Dr. Israel Ganapolsky and his wife.

28

Gutiérrez testified that Efrón maintained business relations with himself and his brother,

Enrique, as well as the partnership of Gutiérrez & Gutiérrez and Advisors Investment Group. 48

Thus, according to Gutiérrez, it was bad faith on Efrón's part to include Gutiérrez & Gutiérrez in

the petition and later claim that he didn't know the partnership was a seperate entity from the

brothers themselves.

Gutiérrez identified exhibit 19H(g) which, according to him, shows liabilities which were

assumed by José Efrón under the stock purchase agreement, in addition to those liabilities set

forth in exhibit Q (liabilities toward Advisors Investment and the Cameros). According to

Gutiérrez, these amounts have not yet paid to the sellers, contrary to the testimony of David

Efrón.

He further stated that, contrary to the testimony of David Efrón, he does not owe money

to Benjamín Rodríguez Ramón, Manuel Fernández, Mr. Fullana, nor Miguel Garcia (an

employee of David Efrón). In Gutiérrez' opinion, Efrón filed the involuntary petition to avoid a

decision in the state court action which, after four years of litigation, was about to enter into the

merits of the claim. It is Gutiérrez' opinion that they would have won the Superior Court

litigation.

Upon cross-examination, Gutiérrez testified that neither he nor his brother owe any

money to Mr. Fullana nor to his company, F & R Construction. A note for $30,000 was signed

by Enrique Gutiérrez in February, 1995, which was due February 16, 1996. Their agreement was

that Gutiérrez & Gutiérrez would provide services in payment of the note and, that since the note

To evidence the same he identified exhibit 31 as a professional services contract 48

executed by David Efrón, on behalf of Dorado Country Estates, and Ariel Gutiérrez, on behalf of Gutiérrez & Gutiérrez, on March 23, 1990.

29

was subscribed, the services have been provided. Thus, it is Gutiérrez' position that the note has

been paid and that nothing is owed to Fullana or F & R construction. He testified that the note

was a business transaction between Enrique Gutiérrez and Fullana and that the note was

subscribed even though no money was owed, as a sign of good faith to a business associate. He

testified that the money was not owed as rent, but rather because of an obligation which arose as

a result of a difference of opinion at the end of a project in which Fullana was the contractor.

Gutiérrez clarified that the first problem which arose with Efrón was regarding the

commencement of construction of Phase III. According to him, on December 15, 1989, three

days before his death, José Efrón instructed the Gutiérrez' to begin construction of Phase III in

January 1990, advising them that financing was being arranged and directing them to norify the

contractor, F & R Construction. After the death of José Efrón the Gutiérrez' visited David Efrón

in Miami in January 1990 and their differences began.

Upon redirect examination, Gutiérrez testified that since José Efrón died and David Efrón

took over his estate he and his brother have been persecuted, and that David Efrón told him he

wanted to bury him financially.

The eighth witness to testify was Victor Hernández, who took the stand on August 17,

and continued his testimony on August 22, 1995. He is a certified public accountant and is the

financial manager for David Efrón's corporations, in charge of all accounting and financial

reporting. He began working for José Efrón in 1986, as vice president and controller of United

Mortgage Corporation.

He testified that in 1988 Efrón was introduced to the Gutiérrez' by Monticello, the

regional manager of HUD, as a potential investor in Plaza Inmaculada. They proposed that

30

Efrón and Eagle Capital, Monticello's firm, would invest $600,000, plus $10,000 per month for

24 months, for a 51% participation in the project. However, after a couple of months of

negotiations, Monticello and Eagle Capitol withdrew, and the Gutiérrez' wanted Efrón to

substitute Eagle Capital's participation. He testified that the Gutiérrez' were desperate for money

to complete the project and that before the Plaza Inmaculada transaction was done they

convinced Efrón to give his personal guaranty for a $500,000 loan from Banco Santander . 49

Hernández learned of this transaction after the death of José Efrón, when Banco Santander

requested the signature of David Efrón for the obligation of his father. Efrón refused; he said

that he would honor his father's guaranty but would not substitute his signature. When José

Efrón died the balance owed was $500,000. He testified that relations were good between David

Efrón and the Gutiérrez' at that time and that the Gutiérrez' were participating in the project.

Hernández testified in detail about the Banco Santander transaction and identified the

related exhibits. In July of 1988 the Gutiérrez' obtained a loan for $500,000 from Banco

Santander . The loan was guaranteed by the personal warranty of José Efrón, as well as the50

personal warranties of the Gutiérrez' and several notes representing professional fees due to the

Hernández identified exhibit N as 1) the personal warranty of José Efrón, in the amount49

of $500,000, dated 7/13/88, 2) a pledge agreement in the name of Advisors InvestmentGroup, in the amount of $500,000, dated 7/13/88, signed by Banco Santander, Gutiérrez& Gutiérrez, Ariel Gutiérrez and Enrique Gutiérrez, 3) several notes, of different amounts,signed by Ariel Gutiérrez on behalf of Advisors Investment Group, payable to BancoSantander, of different dates beginning 7/19/88.

See exhibit H, the contract of warranty and pledge for the $500,000 loan dated 50

12/13/88 and signed by Ariel Gutiérrez and Enrique Gutiérrez on behalf of Gutiérrez &Gutiérrez.

31

Gutiérrez' . The pledge agreement executed along with the loan includes professional services51

due the Gutiérrez' in relation to Plaza Immaculada . According to Hernández, it was not52

disclosed to Efrón that these notes pledging the Gutiérrez' fees were issued by La Immaculada

Towers and given to Banco Santander; Efrón found out later, after the execution of the stock

purchase agreement. Hernández identified exhibit 19(P), one of the exhibits to the stock

purchase agreement, as a list of payments due to Gutiérrez & Gutiérrez for architectural fees.

According to Hernández the stock purchase agreement does not mention that these fees were

pledged to Banco Santander.

In 1990, $240,000 was paid on the loan when 17 units of Plaza Inmaculada I were

refinanced with Banco Santander and a working capital loan of $1.5 million was obtained out of

the proceeds, thus reducing the Gutiérrez' loan to $260,000 . This payment represented53

See exhibit N, a composite exhibit consisting of the personal warranty of José Efrón 51

dated 7/13/88, in guaranty of the $500,000 loan from Banco Santander to Advisors Investment Group, as well as the pledge agreement, and notes signed by Ariel

Gutiérrez. See also, exhibit J, the personal warranty of Ariel Gutiérrez and his wife, andEnrique Gutiérrez, on the Banco Santander loan to Advisors Investment Group in theamount of $500,000.

See exhibit K, the collateral notes pledged in the contract of warranty and pledge 52

(exhibit H), including 1) a note from La Inmaculada Towers, Inc. (Tower II) to Gutiérrez & Gutiérrez in the amount of $200,000 dated 5/18/88 and due 12/30/89; 2) a notefrom La Immaculada Towers, Inc. (Tower I) to Gutiérrez & Gutiérrez in the amount of$223,842.28, dated 5/18/88 and due 6/30/89; 3) a note from La Immaculada Towers, Inc.(Tower II) to Gutiérrez & Gutiérrez in the amount of $70,000 dated 5/18/88 and due4/30/90; 4) a note from Villa Marina Village, Inc. to Gutiérrez & Gutiérrez in the amount of$160,552.77 dated 5/18/88 and due 6/30/89; and 5) a note from Candina Reef, Inc. to Gutiérrez& Gutiérrez in the amount of $133,600, dated 5/9/88 and due 3/31/89.

See exhibit F, copy of a manager's check issued by Banco Santander dated 4/19/90 in 53

the amount of $240,000, payable to Banco Santander, annotated "to be credited to line of credit of Advisors ..." in the witness' handwriting.

32

professional fees of the Gutiérrez' which were pledged to Banco Santander on the $500,000

loan . Thus, they paid the Gutiérrez' fees and at the same time used the fees to credit the54

Gutiérrez' loan and reduce the $500,000 debt to $260,000. In addition to paying the $240,000 fee

to the Gutiérrez' the money was used, in several installments, for the operation of the corporation.

The Gutiérrez' were involved in the operations at that time.

Several days after the $240,000 payment was made to Banco Santander, the Gutiérrez'

requested that the bank increase their line of credit by $240,000, back to the original amount of

$500,000. Banco Santander notified Efrón of the increase, in response to which Efrón sent a

letter informing the bank that his warranty had been decreased to $260,000 and that he was not

guaranteeing the additional $240,000. The controversy between Banco Santander and Efrón

ended up in litigation. The Superior of Puerto Rico ordered Banco Santander to reduce Efrón's

warranty to $260,000 . When this balance was paid Banco Santander delivered the originals of55 56

all warranties and notes on the $500,000 loan, endorsed to David Efrón .57

Hernández testified that the Gutiérrez' often prepared different sets of projections for

Plaza Inmaculada based upon different assumptions, and that on occassion he evaluated the

The $240,000 represented Gutiérrez & Gutiérrez' fees for Phase I, although the Banco54

Santander loan was in the name of Advisors Investment Group.

See exhibit G, partial judgement of the Superior Court of San Juan dated 5/6/93.55

See exhibit I, check dated 8/19/93 in the amount of $265,285.48.56

See exhibits L and M. Exhibit L is a list, prepared by Hernández, of all the notes 57

previously shown, amounting to $500,000, which were delivered by Banco Santander to David Efrón, including the notes in exhibit K. Exhibit M consists of the original notes delivered by Banco Santander to David Efrón, endorsed to Efrón, originally issued by Advisors to Banco Santander, related to Efrón's payment to Banco Santander on his father's warranty.

33

reasonableness of these projections. In the case of Tower III they prepared two projections on the

same day with different projected profits and costs of construction; the one with higher costs was

for the bank, while the one with lower costs was for Efrón . It is Hernández' opinion that this58

was done to obtain a higher construction loan from the bank.

Hernández testified that he was involved in the constitution of the special partnership

Plaza Inmaculada, SE. See exhibit 13. It was formed to develop Phase II of Plaza Inmaculada

and to take advantage of the special partnership law in Puerto Rico. Plaza Immaculada SE was

the purchaser of the land from La Immaculada Tower, Inc. where tower II was built .59

Hernández testified that José Efrón was in poor health from the time at which he sold

United Mortgage, in late 1987, onward. He was hospitalized several times in intensive care

while Hernández worked at United Mortgage. He further testified that, upon reviewing the

documents for the stock purchase agreement, he discovered a transaction which, in his opinion,

evidences the Gutiérrez' desperate need of cash at the time they were pursuing José Efrón for

financing. In that transaction attorney Benjamín Rodríguez Ramón gave his personal warranty

Hernández identified exhibit O as a handwritten memo dated September, 1989 from 58

Ariel Gutiérrez to himself relating to Tower III interim financing. The memo refers to two feasibility studies dated 9/11/89, identified as exhibits P and Q, prepared by the Gutiérrez', one for Efrón and one for the bank. The studies differ as to the cost of construction of the building and the estimated profits of the project. According to Hernández, Ariel Gutiérrez wanted Efrón to use the documents to propose a new

construction loan to the bank for Tower III, using the study with a higher construction cost inorder to reflect that the project had some equity and obtain a higher loan. Upon crossexamination, Hernández opined that both projections were misleading and unreasonable.

See exhibit T, deed of purchase and sale dated 5/15/89, signed by José Efrón on behalf59

of La Immaculada Towers, Inc. and by Victor Hernández as vice president of NorfeDevelopment Corp. (the managing partner of Plaza Immaculada SE) on behalf of PlazaImmaculada SE.

34

on a loan in the amount of $500,000 from Banco Santander to La Immaculada Towers or Plaza

Immaculada, Inc., in exchange for which he received a mortgage in the amount of $300,000 as a

commission on the loan. Subsequently, the Gutiérrez' (at our insistence, according to Hernández)

negotiated with him to reduce that commission to $150,000, which was paid to Benjamín

Rodríguez Ramón at the closing of the stock purchase agreement. See exhibit 19(J).

Upon cross-examination, Hernández testified that he recommended that José Efrón not

enter into business with the Gutiérrez'. He stated that although Efrón was a successful

businessman, he was in bad health at the time of the transaction. He stated that David Efrón was

not involved in the day to day operations of his father's business, but he was aware of what was

going on in that he was an officer in all of the corporations and was invited to meetings, although

he was not very active. He feels that José Efrón made a mistake with this business transaction,

and that he did so against the opposition of Hernández and David Efrón. He stated that the

relationship between the Gutiérrez' and David Efrón was good for about a year after José Efrón

died.

Upon redirect examination, Hernández testified that with regard to tower III of Plaza

Immaculada, David Efrón was willing to subordinate his interest in the property to any financing

which the Gutiérrez' could find, but that he was not willing to give his personal warranty to

finance said tower. He further testified that, as to the consulting agreement executed along with60

the stock purchase agreement, its purpose was so that any profits would be a tax deductible

expense for the special partnership by providing an adjustment in the sales price of the

corporations if certain profit margins were met; it was not intended as a service contract for the

See exhibit 20.60

35

Gutiérrez'. Hernández further stated that although there was no immediate change in the

relationship between David Efrón and the Gutiérrez' when José Efrón died, eventually the

relationship soured due to problems which arose in the construction of Phase II, the

circumstances of the Santander loan, and the Gutiérrez' obtention of an additional loan from

Banco Santander on the warranty of Efrón.

Upon further re-cross-examination and re-direct examination, Hernández testified that

José Efrón was not obligated to finance all three phases of Plaza Immaculada, and that it was not

his intent to proceed with phase III of the project. Further, he advised Efrón that phase III was

risky because the revenues would be derived from commercial and office space and the

Gutiérrez' had been unable to lease the same. He testified that the modification of phase III to

include residential space was made by the Gutiérrez' before the stock purchase agreement was

executed.

The ninth witness was Francisco A. Leon, who testified on August 22, 1995. He is a

retired senior vice president in charge of the special construction loan division of Banco Popular

de Puerto Rico, having been a vice president in charge of Banco de Ponce's construction division

for 25 years. He testified that he first became involved with Plaza Inmaculada about eight or

nine years ago, when José Efrón requested financing for the project. The initial loan request

suggested a 50% guarantee by the Gutiérrez' and 50% by Efrón. Leon's reaction to this proposal

was negative because the bank had problems before with loans to the Gutiérrez' and had

foreclosed a guarantee on such a loan. The bank's policy was to not make loans to people with

previous financial troubles with the bank. The request was resubmitted with the full guarantee of

Efrón and a mortgage on the property. In his opinion, the Gutiérrez' business reputation in the

36

industry is negative.

Discussion

Grounds for Relief

An involuntary petition may be filed under Chapter 7 or Chapter 11. 11 U.S.C. §303(a).

The filing of an involuntary petition commences a case and requires the court to either enter an

order for relief or dismiss the case. 1 William L. Norton, Jr., Norton Bankruptcy Law and

Practice 2d. §21:1 at 21-2. If the petition is contested the court should conduct a trial to resolve

any procedural issues raised and, if the court determines that the petitioners meet the procedural

and substantive requirements of an involuntary petition, it will enter an order of relief against the

debtor. Id. at 21-3.

The Bankruptcy Code provides two basis for involuntary relief - failure to pay debts as

they become due, or the appointment of a custodian to take possession of the debtor's property.

11 U.S.C. §303(h). The first ground is called equitable insolvency, and focuses strictly on the

debtor's liquidity. 1 Robert E. Ginsberg & Robert D. Martin, Bankruptcy: Text, Statutes, Rules

§2.03[b][1] at 2-42 (3rd ed. Supp. 1994). The petitioning creditors have the burden of proving

that the debtor is generally not paying its bona fide debts as they become due. Id. at 2-43. In

making such a determination, the court should not consider the failure of the debtor to pay any

debts which are subject of a bona fide dispute. 11 U.S.C. §303(h)(1). The term "bona fide" is

not defined in the Code, but courts have adopted an objective test for determining whether a

dispute is bona fide. Ginsberg at 2-45. The burden is initially on the creditor to establish a prima

facie case that a dispute does not exist, whereupon the burden shifts to the debtor to show that a

dispute does exist. Id. See also, Norton §21:3 at 21-8.

37

Creditors filing involuntary petition

The threshold issue concerning the filing of an involuntary petition is the identity of the

petitioning creditors. Ginsberg at §2.03[c]. While the language of the Code seems clear, much

of the litigation in contested involuntary petitions involves who may be a petitioning creditor and

how many creditors are required. 2 Lawrence P. King et al., Collier on Bankruptcy ¶303.08 at

303-24. There are strong policy considerations behind the rules for counting creditors, including

the fear that involuntary bankruptcy might be used by one or two creditors to harass an honest

debtor, as well as the fear that the threat of an involuntary petition would be used to force

preferential payments to one or more creditors. Id. at ¶303.08[12][a] at 303-42. See also, 2

Bankruptcy Service Lawyers Edition §12:33 at 46 (Lawyer's Co-operative Publishing Co. 1984).

The Bankruptcy Code provides that an involuntary petition must be filed by a minimum

number of creditors holding a particular kind and amount of claims. If the debtor has twelve or

more creditors, three petitioners are necessary; if the debtor has fewer creditors, only one is

necessary to file the involuntary petition. 11 U.S.C. §303(b)(1) and (2). A person holding two

seperate claims, even if they are unrelated, is considered one holder of two claims and is counted

only as a single creditor. Norton §21:5 at 21-11. See also, Bankruptcy Service, id. Similarly, a

creditor who has acquired several claims by assignment counts as only a single petitioning

creditor. In re Gilbert, 115 B.R. 458 (Bankr. S.D.N.Y. 1990). Bankruptcy Rule 1003

disqualifies any person as a petitioner who has transferred or acquired a claim for the purpose of

commencing an involuntary case. Norton, id. Furthermore, the Code excludes those creditors

holding contingent claims, as well as those holding claims subject to a bona fide dispute, from

eligibility to file an involuntary petition. 11 U.S.C. §303(b)(1). See also, In re Skye Marketing

38

Corp., 11 B.R. 891 (Bankr. E.D.N.Y. 1981); In re Reid, 107 B.R. 79 (Bankr. E.D. Va. 1989).

The debtor's assertion of a counterclaim against a petitioning creditor does not make the claim

contingent, nor subject of a bona fide dispute. Collier, ¶303.08 at 303-27.

Failure to have the required minimum number of petitioning creditors is not a

jurisdictional defect that will prevent the entry of an order for relief or void an order for relief

already entered. Collier, ¶303.08[12][a] at 303-42, fn. 75, citing In re Alta Title Company, 55

B.R. 133 (Bankr. D. Utah 1985) (the requirement of three petitioning creditors in a defense to be

pled by the debtor or waived and does not affect the bankruptcy court's jurisdiction because

subject matter jurisdiction cannot be conferred on the court or waived). See also, Id., ¶303.15[6]

at 303-78, citing In re: Earl's Tire Service, Inc., 6 B.R. 1019, 3 C.B.C.2d 205 (D. Del. 1980) (the

number of petitioning creditors in unrelated to the question of the court's subject matter

jurisdiction). See also, Ginsberg at §2.03[c][2], citing In re Hutter Associates, Inc., 138 B.R. 512

(W.D. Va. 1992). Although some courts have labeled the requirements of §303 as

"jurisdictional", the requirements are not jurisdictional in the sense of subject matter jurisdiction,

but are substantive matters which may be waived and which must be proven if put in issue.

Norton, §21:1 at 21-3, fn. 6, citing Alta Title ("The court's jurisdiction over an involuntary case is

statutory and not dependent upon the accuracy and precision of the averments made in the

petition. The filing of a petition sufficient on its face clearly gives the bankruptcy court

jurisdiction over an involuntary case.") The Supreme Court has stated that "the filing of a

petition, sufficient upon its face ... clearly gives the bankruptcy court jurisdiction of the case."

Collier, ¶303.15 at 303-79, citing Canute Steamship Co. v. Pittsburgh Coal Co., 263 U.S. 244

(1923).

39

An involuntary petition which is defective because it has an insufficient number of

petitioning creditors, or because one of their claims is disqualified, may be subject to cure as of

right. Norton, §21:8 at 21-14, citing In re Crown Sportswear, Inc., 575 F.2d 991 (1st Cir. 1978)

("[i]ntervention is a matter of right unless the Bankruptcy Court finds the petition was made in

bad faith"). The Bankruptcy Code provides that creditors may join in the petition with the same

effect as if they were a petitioning creditor. 11 U.S.C. §303(c). A creditor who wants to file an61

involuntary petition may solicit other creditors to join in the petition. Ginsberg at 2-51.

Similarly, if the claim of one of the petitioning creditors is found to be subject to a bona fide

dispute, disqualifying that creditor, the court may permit the remaining creditors to seek an

additional creditor to join the petition. Collier, ¶303.08[11][b] at 303-35, ¶303.33 at 303-115;

Ginsberg at 2-52, citing In re Kidwell, 158 B.R. 203 (Bankr. E.D. Cal. 1993); In re Johnston

Hawks, Ltd., 49 B.R. 823 (Bankr. D. Hawaii 1985). However, for joinder to be permitted, the

initial petition had to be filed in good faith. In re LaRoche, 131 B.R. 253 (D.R.I. 1991), aff'd 969

F.2d 1299 (1st Cir. 1992). See also, 8 Lawrence P. King, et al., Collier on Bankruptcy ¶1003.05

at 1003-13. Although the Code does not mention a bad faith exception to §303(c), most courts

apply one, the rationale being that public policy prohibits entertaining any case commenced upon

a petitioner's conduct which amounts to a fraud upon the court. Norton, id. at 21-15. See also,

Bankruptcy Service, §12:44 at 58.

Interestingly, one commentator notes "[s]ection 303(c) requires only that a joining 61

claim be "noncontingent"; it does not require that the claim also be "undisputed." Thus, it may be easier to join a petition after it has been filed than to qualify as an initiating petitioner. This may be the unintended result of an oversight in the 1984 amendments, which failed to conform §303(c) by adding the same "bona fide dispute" provision which was added to §§303(b)(1) and 303(h)(1)." Norton, §21:8 at 21-15, fn. 69. See also, Bankruptcy Service, §12:36 at 50.

40

If a petitioning creditor's claim is found to be contingent or subject to a bona fide dispute

the creditor may be exposed to a damage claim if the involuntary petition is subsequently

dismissed. 2 Lawrence P. King, et al., Collier on Bankruptcy ¶303.08[11][a] at 303-32.

Contingent Claim

A claim is not contingent if the duty to pay does not rest upon the occurence of a future

event, nor because the debtor disputes the claim and has asserted a counterclaim against it.

Collier ¶303.08[11][a] at 303-33. If a petitioning creditor's right to payment of his claim depends

upon his obtaining a judgment, his claim is not considered contingent because the obtention of

the judgment is a condition to payment, not to liability. Id.

Bona Fide Dispute

A petitioning creditor's claim cannot be subject to a bona fide dispute. 11 U.S.C.

§303(b)(1). The legislative history suggests that the purpose of this requirement is to prevent

creditors from using the bankruptcy court to collect legitimately disputed claims. Collier

¶303.08[11][c] at 303-38, citing In re Cates, 62 B.R. 179, 180 (Bankr. S.D. Tex. 1986);

Ginsberg, §2.03[c], citing In re West Side Community Hospital, Inc., 112 B.R. 243 (Bankr.

N.D.Ill. 1990); In re Accident Claims Determination Corp., 146 B.R. 64 (Bankr. E.D.N.Y. 1992).

Courts have formulated different standards for determining whether a debt is in bona fide

dispute. Three circuits have adopted an objective standard, i.e., whether there is a genuine issue

of material fact bearing upon debtor's liability, or a meritorious contention as to the application of

law to undisputed facts. Collier ¶303.08[11][c] at 303-39, citing B.D.W. Associates, Inc. v. Busy

Beaver Building Centers, Inc., 865 F.2d 65 (3rd Cir. 1989); Matter of Busick, 831 F.2d 745 (7th

Cir. 1987); Bartmann v. Maverick Tube Corporation, 853 F.2d 1540 (10th Cir. 1988). See also,

41

Ginsberg at 2-54, citing Bartmann v. Maverick Tube Corporation, 853 F.2d 1540 (10th Cir.

1988); In re Ramm Industries, Inc., 83 B.R. 815 (Bankr. M.D.Fla. 1988). This is the standard

which the court indicated to the parties that it would use in the case at bar. See transcript of

hearing held August 14, 1995, dkt. #48 in 95-02187 at pp. 275-276. Thus, the court must

determine whether there is a "dispute", and whether said dispute is "bona fide". In doing so, the

court need not determine the outcome of the dispute. Ginsberg at 2-56, citing Matter of Busick,

831 F.2d 745 (7th Cir. 1987); In re Caucus Distributors, Inc., 106 B.R. 890 (Bankr. E.D. Va.

1989). The most prevalant view is to look at the issue objectively and determine whether there is

a factual or legal dispute regarding the validity of the debt. Ginsberg, id., citing In re Rimell, 946

F.2d 1363 (8th Cir. 1991), cert. denied 112 S.Ct. 2275 (1992); B.D.W. Associates, Inc. v. Busy

Beaver Building Centers, Inc.. 865 F.2d 65 (3rd Cir. 1989); Bartmann v. Maverick Tube

Corporation, 853 F.2d 1540 (10th Cir. 1988). See also, Norton §21:3 at 21-8.

The debtor's assertion of a counterclaim, even a substantive one, does not make a claim

subject of a bona fide dispute; thus, creditors with claims that may be set off by a counterclaim

may still be petitioning creditors. Collier ¶303.08 at 303-27, citing In re Drexler, 56 B.R. 960

(Bankr. S.D.N.Y. 1986).

Bad Faith

The hearing in this matter began on August 14, 1995. The court determined that it would

first address the issue of bad faith on behalf of the petitioning creditors. Said issue is

determinative, in that if bad faith is found on the part of one of the petitioning creditors, then that

creditor does not qualify to file the petition, which would mean that the petitions may have been

filed by fewer than the required number of creditors required by the Bankruptcy Code.

42

Furthermore, if bad faith is found, then the court must dismiss the case in its entirety; it may not

permit the remaining creditors to find another creditor to join the petition. See transcript of

hearing held August 14, 1995, dkt. #48 in 95-02187 at p. 10. See also, transcript of hearing held

August 17, 1995, dkt. #50 in 95-02187 at p. 34-37, wherein the court decided to follow the

rationale of In re Centennial Insurance Associates, Inc., 119 B.R. 543 (Bankr. W.D. Mich.

1990). 62

An involuntary petition may be dismissed where the petition has been filed in bad faith. 1

Robert E. Ginsberg & Robert D. Martin, Bankruptcy: Text, Statutes, Rules §2.04[b] at 2-67 (3rd

ed. Supp. 1994), citing Basin Electric Power Cooperative v. Midwest Processing Company, 769

F.2d 483 (8th Cir. 1985), cert. denied, 474 U.S. 1083 (1986); In re U.S. Loan Co., Inc., 105 B.R.

676 (Bankr. M.D. Fla. 1989); Matter of Winn, 49 B.R. 237 (Bankr. M.D. Fla. 1985). There is a

presumption that creditors have filed in good faith. Ginsberg, id. at p. 2-68, fn. 334, citing

United States Fidelity & Guaranty Company v. DJF Realty & Suppliers, Inc., 58 B.R. 1008 (N.D.

N.Y. 1986). See also, Collier ¶303.33 at 303-115. The burden is on the debtor to show bad

faith. Norton, §21:8 at 21-16, citing In re Crown Sportswear, Inc., 575 F.2d 991, 993 (1st Cir.

1978). See also, Ginsberg, §2.06 at 2084, citing In re Sims, 994 F.2d 210 (5th Cir. 1993), cert.

denied, 114 S.Ct. 702 (1994); In re Hutter Associates, Inc., 138 B.R. 512 (W.D. Va. 1992). See

also, Collier, id.

The term "bad faith" has not been defined in the code and is not illuminated by the

legislative history, but various tests have been adopted by the courts in determining bad faith.

The court noted the criticism of the Centennial decision by the court in In re 62

Kidwell, 158 B.R. 203 (Bankr. E.D. Calif. 1993), citing Myron M. Navison Shoe Co. v. LaneShoe Co., 36 F.2d 454 (1st Cir. 1929).

43

Ginsberg, §2.06 at 2-84, citing In re K.P. Enterprise, 135 B.R. 174 (Bankr. D.Me. 1992); In re

Better Care, Ltd., 97 B.R. 405 (Bankr. N.D. Ill. 1989). Some courts adopt an objective test,

looking at the reasonableness of the petitioner's actions under the circumstances. Ginsberg, id,

citing In re Eberhart Moving & Storage. Ltd., 120 B.R. 121 (Bankr. N.D. 1990). Other courts

use a subjective standard, looking at the petitioner's purpose in filing, then evaluating the

appropriateness of said purpose. Ginsberg, id. at 2085, citing In re Accident Claims

Determination Corp., 146 B.R. 64 (Bankr. E.D.N.Y. 1992); In re Fox Island Square Parternship,

106 B.R. 962 (Bankr. N.D. Ill. 1989). Good faith may be found lacking when the petition is

aimed at enbarrassing or harassing the debtor, or when the creditor's actions constitute an

improper use of the Code. Collier ¶303.33 at 33-116, citing In re Johnston Hawks, Limited., 72

B.R. 361 (Bankr. D. Haw. 1987). The subjective test is similar to the "improper purpose" test,

which looks at the petitioner's motives. Ginsberg, id., citing In re Salmon, 128 B.R. 313 (Bankr.

M.D. Fla. 1991). The test which appears to be gaining in prominence is one which combines

subjective and objective elements, looking at both reasonableness and motivation. Ginsberg, id.,

citing Atlas Machine & Iron Works, Incorporated v. Bethlehem Steel Corporation, 986 F.2d 709

(4th Cir. 1993); In re K.P. Enterprise, 135 B.R. 174 (Bankr. D. Me. 1992).

At the beginning of the hearing the court advised the parties of the standard it would use

in determining the existence of bad faith in the case at bar. See transcript of hearing held

8/14/95, dkt. #48 in 95-02187 at pp. 121-123. The court stated that it would weigh the

reasonableness of the petitioner's actions and their motivation based upon the totality of the

circumstances. Specifically, the court stated:

[M]y analysis would start, first, to determine whether a reasonable person in the position

44

of the petitioning creditors would have initiated the bankruptcy proceedings. So, I wouldhave to review the pre filing considerations, inquiries into all matters, as well as the legaljustifications for the filing. And I would also, secondly, go as to whether or not theinvoluntary petition was filed to accomplish an improper motive or purpose.

Id. at p. 122. Later the court clarified that bad faith must be established seperately as to each

petitioning creditor. Id. at pp. 149-150. Thus, the parties were clearly forwarned of the court's

legal views on the issue of bad faith.

Damages

The Bankruptcy Code provides that attorneys' fees and costs may be awarded to the

involuntary debtor upon dismissal of the petition. 11 U.S.C. §303(i)(1). Furthermore, proximate

and punitive damages may also be awarded where the involuntary petition was filed in bad faith.

11 U.S.C. §303(i)(2); Ginsberg, §2.04[b] at 2-71 and §2.06 at 2084; In re Reveley, 148 B.R. 398

(Bankr. S.D.N.Y. 1992); In re McDonald Trucking Co., Inc., 76 B.R. 513 (Bankr. W.D. Pa.

1987); In re Johnston Hawks, Limited, 72 B.R. 361 (Bankr. D.Haw. 1987). However, even if

bad faith is found, courts seem cautious in awarding punitive, as opposed to compensatory,

damages. Ginsberg, §2.06 at 2-85. Some petitioning creditors have avoided punitive damages

by arguing that they relied upon the advice of counsel. Ginsberg, id., citing In re Walden, 787

F.2d 174 (5th Cir. 1986); In re Better Care, Ltd., 97 B.R. 405 (Bankr. N.D. Ill. 1989). To award

punitive damages, the traditional factors - nature, extent and enormity of the injury, intent,

circumstances and mitigating circumstances--should be analyzed. Ginsberg, id., citing In re

Salmon, 128 B.R. 313 (Bankr. M.D. Fla. 1991). In determining whether to award punitive

damages, the court should balance discouraging misuse of the bankruptcy rocess with not

discouraging its use in appropriate situations. Ginsberg, id., citing In re K.P. Enterprise, 135

45

B.R. 174 (Bankr. D. Me. 1992).

Damages, including punitive, may be obtained from any petitioner where the petition was

filed in bad faith. Collier ¶303.39 at 303-138. However, the statutes language - "any petitioner"

- not "all" petitioners, seems to limit liability to the bad faith petitioner only. Id. Petitioning

creditors who filed in good faith may be able to avoid liability by showing it was the other

petitioner(s) that filed in bad faith. Id. at 303-139. A damage claim may be asserted in debtor's

answer or motion to dismiss, but the claim cannot be heard until after the case is dismissed. Id.

at 303-137. The burden is upon the debtor to establish the extent of its damages to support an

award under §303(i)(2)(A). Norton, §21:16 at 21-38.

46

Findings of Fact and Conclusions of Law

After a thoughtful analysis of the evidence presented the court summarizes and concludes

as follows:

1. The number of petitioning creditors in Ariel E. Gutiérrez' involuntary petition, B95-

02197, meets the statutory requirements of 11 U.S.C. §303(b). Said petitioners include Plaza

Inmaculada, SE, David Efrón and Bailey, Hunt & Jones. Plaza Inmaculada, SE, a special

partnership under the laws of Puerto Rico, is considered a seperate and distinct entity from its

principal, David Efrón. 11 U.S.C. §101(15) and (41); In re New Mexico Properties, Inc., 18 B.R.

936, 942 (Bankr. D.N.M. 1982); 31 L.P.R.A. §4372 (1991)..

. 2. The number of petitioning creditors in Enrique H. Gutiérrez' involuntary petition, B95-

02198, does not, on its face, meet the statutory requirements of 11 U.S.C. §303(b). However, the

court hereby grants the motion of Bailey, Hunt & Jones to join the petition pursuant to 11 U.S.C.

§303(c). See dkt. #28, as well as opposition thereto, dkt. #31. Thus, the petitioning creditors in

the case of Enrique H. Gutiérrez include Plaza Inmaculada, SE, David Efrón and Bailey, Hunt &

Jones.

3. As the court previously found at the hearing in this matter, Bailey, Hunt & Jones did

not participate in the filing of the petition in bad faith. The evidence presented, including the

testimony of Guy Bailey and Carlos Romero, Jr., failed to establish bad faith on the part of Guy

Bailey and/or his law firm. See transcript of hearing held August 16, 1995, dkt. #47 in 95-02187

at pp. 148-149. See also transcript of hearing held August 17, 1995, dkt. #50 in 95-02187 at p.

34. See also transcript of hearing held August 24, 1995, dkt. #52 in 95-02187 at p. 202.

The testimony of Guy Bailey was to the effect that his intention in filing the petition was

47

to marshall any assets that the Gutiérrez' may have and recover the debt his law firm has been

owed for some time. He testified that he is owed approximately $22,000, and that although he

reached a settlement agreement with the Gutiérrez' to satisfy the debt for a lesser amount, the

Gutiérrez' did not honor the agreement. The court does not find persuasive the testimony of

Carlos Romero, Jr., which was the primary evidence presented in contradiction of the testimony

of Guy Bailey.

4. Furthermore, the court finds that, based upon the totality of the circumstances and the

evidence presented, David Efrón did not participate in the filing of the petitions in bad faith. The

court finds most persuasive the testimony of Efrón himself, which spanned three days and, in the

court's opinion, demonstrates no improper purpose(s) in the filing of the petitions.

The involuntary debtors argue that Efrón engaged in a pattern of conduct, consisting of

many incidents which, taken as a whole, demonstrate an ulterior motive in the filing of the

petition. In support of their allegations they presented a variety of testimony, including that of

Ariel Gutiérrez, Francisco Arriví, Sergio Camero and Frank Cue, in addition to David Efrón

himself. Said conduct includes his unwillingness to personally guarantee the financing for the

third phase of Plaza Inmaculada, the hiring of engineer del Valle, the dispute regarding the cross-

ties, the professional responsibility complaints, the press releases regarding the involuntary

petitions, the inclusion of the partnership in the petition, and the financial dealings between Efrón

and Bailey. However, while the testimonial and documentary evidence presented at the hearing

certainly demonstrates that the relationship between the Gutiérrez' and Efrón is acrimonious and

contentious, it does not establish that Efrón's actions in filing the involuntary petitions rises to the

level of bad faith.

48

The court finds persuasive Efrón's testimony as to his reasons for filing the petition;

namely:

a. the amount of money owed to Efrón and his corporations by the Gutiérrez' and theircorporations, and the history of his attempt to collect those sums;

b. the Gutiérrez' litigious nature,

c. the Gutiérrez' manner of doing business; that is, in their own names, as a partnershipand with their various corporations;

d. the number of creditors of the Gutiérrez' and their entities and the difficulty inascertaining the relationship among them;

e. his opinion of the Gutiérrez' financial reputation.

5. The court having decided the issue of bad faith of the petitioning creditors, the issue

remaining to be considered in determining the involuntary debtors' motions to dismiss is whether

any of the claims are subject of a bona fide dispute. The court specifically declined to determine

this issue at the hearing held in this matter. See transcript of hearing held August 16, 1995, dkt.

#47 in 95-02187 at p. 148.

The court notes that the parties have addressed the bona fide dispute issue in their filings

to date in this case. However, cognizant of the fact that the issue was not directly considered at

the hearing in this matter, the court will grant the parties time to brief the relevant facts on the

bona fide dispute issue before entering a final order on the motion to dismiss. The court has

already discussed the applicable law in this opinion as it applies to the evidence presented. As

has been previously stated, the court finds that the evidence presented thus far does not establish

bad faith on the part of the petitioning creditors. The court may allow time for additional

creditors to join the petition if it finds that one or more of the claims upon which the petitions

49

were filed is subject of a bona fide dispute.

Conclusion

The court finds that the involuntary debtors failed to establish bad faith on the part of the

petitioning creditors. However, a final determination of their motion to dismiss is held in

abeyance pending resolution of the bona fide dispute issue. The parties are granted twenty (20)

days to file simultaneous briefs on said issue, at which the point the court will issue a final order

on the motion to dismiss and determine whether orders of relief should be entered in the

captioned cases.

SO ORDERED.

In San Juan, Puerto Rico, this 26th day of April, 1996.

________________________________ ENRIQUE S. LAMOUTTE Chief, U.S. Banruptcy Judge