ALFONSO A HERNANDEZ ORTIZ

OCR transcription for search; preserved printed pages are authoritative

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AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
IN RE:
CASE NO. 97-14400
ALFONSO HERNANDEZ ORTIZ, CHAPTER 7
Debtor .

OPINION AND ORDER

Before the court is the motion of Liberty Mutual Insurance Co. (“Liberty”) (dkt. #708) to alter
or amend this court’s order of September 20, 2006 (dkt. #701) and deny the motion by Westernbank
Puerto Rico (““Westernbank”) for additional withdrawal from the proceeds of the sale of the debtor’s
13.5 cuerdas property in Barrio Canas, Ponce, Puerto Rico (dkt. #698), as well as Westernbank’s
opposition (dkt. #727) to Liberty’s request, and Liberty’s reply thereto (dkt. #746)'. A hearing was
held on these matters on December 5, 2006; subsequently, Liberty filed a post-hearing memorandum
on January 25, 2007 (dkt. #780), Westernbank filed a supplemental brief on February 8, 2007 (dkt.
#782) and Liberty filed an opposition thereto on March 7, 2007 (dkt. #795).

For the reasons set forth below, Liberty’s motion is hereby granted.

Background

Debtor, Alfonso Hernandez Ortiz (“Hernandez Ortiz”), filed a petition for reorganization

under chapter 11 of the Bankruptcy Code on December 5, 1997. Debtor and his father, Alfonso

Hernandez Torres (“Hernandez Torres”) were principals of Empresas Inabon, Inc. (“Inabon”) and,

‘See also the requests of Westernbank to withdraw funds deposited with the court as
proceeds from the sale of debtor’s property (dkts. #636, 637), and the opposition (dkt.
#664) thereto, as well as Liberty’s motion to alter or amend this court’s order of February
14, 2006 (dkt. #604), which granted Westernbank’s request (dkt. #603) for clarification
of the court’s order of January 31, 2006 (dkt. #598) approving the sale of the property —
and the proposed payments to Westernbank.

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1 || in that capacity, guaranteed many of the debts of said corporation’. Inabon filed a petition for
zs reorganization under chapter 11 of the Bankruptcy Code on August 8, 1996, case no. 96-06038,
3
which was subsequently converted to one under chapter 7 of the Code on August 31, 2005 (dkt.
4
5 #1564 in case no. 96-06038). Likewise, Hernandez Torres filed a petition for reorganization under
6 || chapter 11 of the Bankruptcy Code on December 5, 1997, case no. 97-14399; his petition was
7 || subsequently converted to one under chapter 7 of the Code on July 14, 2006 (dkt. #310 in case no.
8 97-14399). The instant case was converted to chapter 7 on December 13, 2006 (dkt. #s 760,762).
9
Westernbank’s Claims
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"1 Westernbank originally filed two claims in this bankruptcy proceeding. Claim no. 4 was filed
12 || 07 January 27, 1998, in the secured amount of $1,387,851.46, based upon loan #2726; claim no. 5
13 || was filed on that same date in the secured amount of $1,602,909.01, based upon loan #3670.
14 On February 27, 2001, debtor and Westernbank filed a stipulation regarding claim #3 (now
15 | cJaim #4) and claim #4 (now claim #5) (dict. #344). As per the stipulation, claim #3 was disallowed,
16
as ithad been paid in full; as to claim #4, it was agreed that the balance owed, after partial payment,
17
ig || ¥5 $1,125,654.87° as of February 20, 2001. No objections were filed and the stipulation was
19 || approved by order of the court on March 9, 2001 (dkt. #344).
20 || The Disclosure Statement and Plan of Reorganization
21 The disclosure statement (dkt. #358) and plan of reorganization (dkt. #359) were filed on
22
23 ; ;
2According to debtor’s disclosure statement, “Dr. Alfonso Hernandez Ortiz is the sole
24 || stockholder and chairman of the Board of Directors of Empresas Inabon, Inc., and in that
capacity guaranteed a series of the company’s debts with his signature and properties.”
23 | See dkt. #358 at p. 2.
26 3This amount includes $976, 481.93 in principal and $149,172.94 in accrued interest; at
7 || the time the per diem was $284.81, which fluctuates as it is set at 2% over the Citibank
prime rate. The claim is based upon a note ending in #3670 in the amount of $1.5
28 || million, dated September 19, 1995 and due September 19, 1996.
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March 16, 2001. The disclosure statement provides that claim #3 (now claim #4) has been paid in
full, and that claim #4 (now claim #5) has an outstanding balance of $1,125,654.87, the total paid
on the claim so far amounting to $2,545,257.17. See exhibit 1 to dkt. #358. The disclosure
statement further provides that the balance owed on claim #4 (now claim #5) is to ‘be paid through
the sale of the 13.3022 cuerdas property (otherwise identified as the Barrio Canas property). See
exhibit 2 to dkt. #358. Finally, exhibit 4 to the disclosure statement provides that Westernbank is
owed $1,125,654.87 with a per diem of $284.81, secured by both the 13.3022 (Remnant I) and 6.34
(Remnant Il) cuerdas Barrio Canas properties. The plan provides that Class 5 is composed of
secured debts incurred by Inabon and guaranteed by Hernandez Ortiz, including Westernbank in the
amount of $1,125,654.87 + interest, and Liberty in the amount of $1,000,000.00. It further provides
that Class 6 is composed of unsecured debt incurred by Inabon and guaranteed by Hernandez Ortiz,
including Liberty in the amount of $4,055,372.99 and Insurance Company of North America (INA)
in the amount of $3,100,000.00.

An addendum to the disclosure statement was filed on May 3, 2001 (dkt. #374), including
the settlement agreements reached by Hernandez Ortiz with Liberty and INA.

A hearing on the disclosure statement and addendum was held on May 25, 2001 (dkt. #391),
at which the disclosure statement was approved. An order was entered to that effect on June 28,
2001 (dkt. #408), and the confirmation hearing was scheduled for September 10, 2001.

An amended plan of reorganization was filed on June 25, 2001 (dkt. #406). The only
changes regarding Westernbank, Liberty and INA are contained in Class 6, which as amended
provided that Liberty’s claim is in the amount of $4,055,372.99 “+ interest + adjustments”, INA’s

claim is in the amount of $3,100,000.00 “+ interest”, and an unsecured claim for Westernbank in the

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amount of $500,000.00 + interest was added to the class‘.

On August 17, 2001, Liberty filed an objection to the amended plan of reorganization and
its confirmation, arguing that debtor did not covenant against new encumbrances on his properties
while payment to Class 6 creditors is pending (dkt. #427). A stipulation was later entered into,
resolving Liberty’s objection, on August 28, 2001 (dkt. #432), which was approved by the court on
September 10, 2001.

On August 28, 2001, debtor filed an “Addendum and Modification to Amended Plan of
Reorganization” (dkt. #433), incorporating the settlement with Liberty. Also, at Westernbank’s
behest, debtor clarified footnote 2 on p. 3 of the amended plan to indicate that the debt of reference
was incurred solely by Llanos del Sur corporation and guaranteed by Hernandez Ortiz and Hernandez
Torres.

A confirmation hearing was held on September 10, 2001; at that time, it was affirmed to the
court that the three estates (Empresas Inabon, Hernandez Torres and Hernandez Ortiz) would
generate enough to pay all claims of all the estates in full (see minutes, dkt. #447 and transcript, dkt.
#450). The court entered an order on September 29, 2001, confirming the debtor’s plan of
reorganization, as amended (dkt. #451).

INA’s Motion to Convert to Chapter 7

On August 7, 2005, INA filed a motion for an order to show cause why the case should not

4A note indicates “[t]his debt had not been considered in the Disclosure Statement.
Westernbank informed the undersigned that the Debtor in Possession had signed a
guarantee for a debt incurred by Alfonso Hernandez Torres and Llanos del Sur Corp. For
this reason it is included herein but will be paid in the plan to be proposed by Alfonso
Hernandez Torres and his spouse.” See dkt. #406, fn. 2. It was subsequently clarified
that this is the debt pertaining to loan #3279. See Westernbank’s opposition to Liberty’s
motion to alter or amend, dkt. #727 at p. 17, para. 55; and transcript of hearing held
12/5/06, dkt. #759 at p. 46.

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be converted to chapter 7, alleging debtor has failed to comply with the chapter 11 plan of
reorganization (dkt. #541). On September 12, 2005, INA filed a request for conversion to chapter
7 (dkt. #548). Debtor filed an opposition thereto on September 14, 2005 (dkt. #551). On October
28, 2005, the court scheduled a hearing for January 10, 2006 on the motion to convert (dkt. #561).
In anticipation of the hearing on its motion to convert, on December 30, 2005, INA filed proposed
findings of fact and conclusions of law (dkt. #586).

On January 10, 2006, a hearing was held to consider the request for conversion to chapter 7;
the parties agreed that the closing of the sale of the debtor’s property was to take place within 45
days or the case would automatically be converted to chapter 7, as well as that the five years of
interest not in controversy as owed to Westernbank would be paid at closing and any other amounts
would be deposited in the court and subject to further litigation (see minutes of proceeding, dkt.
#590, and transcript, dkt. #594). Additionally, the court granted INA fifteen days to supplement its
proposed findings of fact and conclusions of law, and debtor was granted fifteen days thereafter to
file a status report on its compliance with the confirmed plan. The hearing was continued without
a date. INA filed its supplemented proposed findings of fact on January 29, 2006 (dkt. #597).
The Sale of the Llanos del Sur Property in Case No. 97-14399

On September 13, 2005, in the bankruptcy case of Hernandez Torres, a motion
was filed to sell several properties at Llanos del Sur, Ponce, Puerto Rico, free and clear of liens; said
motion provided that Westernbank was to be paid $525,000.00 as the first-rank mortgage note holder
on all of the properties to be sold (dkt. #265 in case no. 97-14399).

On October 27, 2005, a motion was filed containing the agreements reached by Hernandez

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Torres with Westernbank and Robert Hatton’, including an acknowledgment that the debt owed as
to loan #3279 and loan #3670 amounted to $2,251,333.60 as of September 19, 2005; said motion
provided that Westernbank was to be paid $525,000.00 upon the closing of the sale of the Llanos
del Sur properties and any remaining amounts owed would be paid from the proceeds of a real
property sale to be conducted in the case herein, as well as any proceeds to which it may be entitled
as an unsecured creditor in the case of Inabon (dkt. #279 in case no. 97-14399). No objections were
filed. On November 17, 2005, debtor Hernandez Torres filed an urgent motion seeking the court’s
authorization to sell the property; there were no objections and on November 29, 2005, the court
entered an order approving the stipulation (dkt. #284 in case no. 97-14399).

The court notes that during this time all the parties were in agreement and represented to the
court that the sale of all properties in the three cases would yield sufficient funds to pay all creditors
in full, and allow for a refund to the individual debtors. Such assumption proved to be wrong.
The Sale of the Barrio Canas Property in the Case Herein

On November 29, 2005, debtor filed a motion to sell his property in Barrio Canas, Ponce,
Puerto Rico, free and clear of liens (dkt. #566). Among the terms and conditions of the sale, debtor
acknowledged that Westernbank had agreed to accept a deferred payment of the balance owed to it
as aresult of the sale of the Llanos del Sur property in the Hernandez Torres bankruptcy case, which
would be paid from the sale of the Barrio Canas property in the herein bankruptcy case. Debtor
further acknowledged that Westernbank’s debts with Hernandez Torres and Hernandez Ortiz were
fully secured and subject to cross-collateralization pursuant to the loan agreements and notes

executed among the parties. Debtor proposed that Westernbank be paid $1,483,172.00 for loan

*Both Hatton and Westernbank had conditionally objected to the sale; see dkts. #272 and
# 273 in case no. 97-14399.

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#3670 and $268,162.00 for loan #3279°. The motion provided that any party objecting to the sale
should do so in writing within twenty days, or by December 19, 2005.

On December 12, 2005, debtor filed a motion (dkt. #570) seeking to shorten the time period
for filing objections to the sale to December 16, 2005. The court entered an order on December 20,
2005, granting debtor’s request (dkt. #574).

On December 16, 2005, Liberty and Westernbank filed separate motions opposing the
proposed distributions of the proceeds of the sale. Westernbank opposed the proposed amounts for
loan #3670 (dkt. #573), arguing that the amount had long been settled as a result of the February 21,
2001 stipulation’, which was never objected to and was approved by the court. Liberty disagreed
with the debtor’s estimates of the mortgage balances owed, and argued that the amount of tax
escrows did not comply with the correct order of distribution to lien holders, and that the estimates
for the power line relocation costs were not fair, reliable and reasonable. Liberty also requested the
proceeds be deposited in different funds and withdrawals be made after closing (dkt. #572).
Debtor’s Request for Approval of the Barrio Canas Sale ;
On January 13, 2006, debtor filed a motion requesting the court’s approval of the sale (dkt.

#592); the court entered an order granting debtor’s request and approving the sale on January 31,

2006 (dkt. #598).

The agreement further provided that “Westernbank must provide a certified letter with a
breakdown of the principal mount [sic] owed and the interest accumulated. Westernbank
must also provide a certified document stating the amount owed for the cross
collateralization, separating principal and interest payments and the daily accumulation
of interest. Interest will be paid pursuant [to] P-R. Mortgage law, to wit, only 6 [sic]
years will be deemed secured.”

7Westernbank points out that said amount also. appears in the disclosure statement, plan of
reorganization and amended plan of reorganization.

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Westernbank’s First Request for Distribution of Funds from the Barrio Canas Sale
On February 10, 2006, Westernbank filed an “Urgent Motion Requesting Clarification of
Order and/or for Reconsideration Regarding Order Dkt. 598" which asked the court to order that
upon the closing of the sale of the Barrio Canas property, it be paid $1,626,408.54° as to loan #3670
and $258, 353.44? as to loan #3279 (dkt. #603).
The court entered an order on February 14, 2006, granting Westernbank’s motion for
clarification (dkt. #604). The order stated:
The court authorized the sale upon the representations made by the parties at the
hearing held on January 10, 2006 (dkt. #594). The court assumed that the parties had
agreed on the payment to Westernbank and that any amounts not agreed to will be
deposited with the court. The court did not modify the stipulations between the
parties.
Debtor’s Request for an Extension of Time to Close Sale and Avoid Conversion
On February 21, 2006, debtor filed an urgent motion requesting an order (dkt. #606), seeking
an extension of time, to the 45 day period to close the sale set by the court at the January 10, 2006
hearing, for the secured creditors to accept or reject the purchaser’s offer to make a $100,000.00 non-
refundable deposit in exchange for a 90-day extension of time to close the sale. INA filed an
objection on February 21, 2006 (dkt. #608); debtor filed a response thereto on February 22, 2006 (dkt.
#610); Liberty filed an opposition to debtor’s request on February 22, 2006 (dkt. #611); Westernbank
weighed in on February 23, 2006 (dkts. #613 and #614); and, on March 1, 2006, the court entered an

order (dkt. #620). The order provided:

8Said amount includes $976,481.93 in principal, $499,926.61 in interest and $150,000.00 in
attorney’s fees, as of January 10, 2006; said loan as a per diem of 2% over prime - at the
time, $250.90.

°Said amount includes $0 in principal, $218,353.44 in interest and $40,000.00 in
attorney’s fees.

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There is no controversy that the purchase price is reasonable and that the sale
is in the best interest of the estate. The controversy lies in how the sale proceeds will
be distributed amongst creditors, particularly, Westernbank Puerto Rico, Insurance
Company of North America, and Liberty Mutual Insurance Company.

In view of the foregoing, the court hereby orders as follows:

1-The sale is approved. The debtor shall proceed to close the sale as soon as
possible.

2—The debtor shall consign with the court the proceeds of the sale.
3—Any and all parties claiming to be paid a specific amount from the proceeds of the
sale shall file with the court a specific request.
4—A hearing to consider the apportionment of the proceeds of the sale is scheduled
for April 25, 2006 at 9:30 a.m.

Liberty and INA Respond to Westernbank ’s First Request for Distribution of Funds

On February 21, 2006 Liberty filed a response to Westernbank’s urgent motion and request
for further order, arguing that Westernbank should be paid no more than principal plus five year’s
interest on loan #3670 because (1) the allowed amount was stipulated in 2001 and did not include
attorney’s fees or, in the alternative, attorney’s fees should be examined pursuant to 11 U.S.C.S
506(b), and (2) pursuant to the mortgage law, a deed may not provide security for more than five
year’s interest (dkt. #607). Further, Liberty argued that loan #3279 is not subject of a proof of claim
in this case and the confirmation order had discharged it or, in the alternative, the interest rate on the
loan exceeded the limit set forth in the mortgage deed.

On February 21, 2006, INA joined Liberty’s response to Westernbank (dkt. #609), and on
February 22, 2006, submitted a corrected citation to the Puerto Rico Supreme Court case regarding
Article 166 of the Mortgage Law (dkt. #612).

On February 23, 2006, Westernbank filed a response (dkt. #613) to Liberty’s urgent request

for an order, informing its understanding that the court had granted full payment to Westernbank

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1 || upon closing of the sale through its February 14 order (dkt. #604). On that same date, Westernbank

filed an urgent motion (dkt. #615) requesting the denial of Liberty and INA’s motions in opposition
to the proposed distribution, arguing that their allegations were already been disposed of by the
5 court’s February 14, 2006 order (dkt. #604).

6 On February 23, 2006, INA filed a motion (dkt. #616) requesting reconsideration of the
7 || court’s February 14, 2006 order (dkt. #604), arguing that the court should reconsider its decision in
8 light of Liberty and INA’s timely motions (dkts. #607, 609 and 612) in response to Westernbank’s
° urgent motion (dkt. #603). According to INA, Westernbank should only be paid the amounts
7 stipulated (dkt. #344), should only be paid allowed amounts, and should only be allowed to collect

12 secured interest for five years under Article 155 of the Puerto Rico Mortgage Law.
13 On February 24, 2006, Liberty requested leave (dkt. #617) to reply to Westernbank’s
14 response (dkt. #613), alleging that Westernbank misunderstands the court’s February 14, 2006 order,

15 . te: . :
arguing that the order only granted Westernbank’s request for clarification, but did not grant it the

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right to collect excessive interest and attorney’s fees which are prohibited by law. According to
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18 Liberty, Westernbank is aware that it disagrees with the disbursement of any amount in excess of

19 || principal, as well as more than five years of secured interest, with regard to loan #3670, attaching

20 || a letter that it wrote to Westernbank in support thereof.

71 Debtor’s Report of Sale of the Barrio Canas Property
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On February 28, 2006, debtor filed an urgent report on sale of the Barrio Canas property,
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5A informing that at closing Westernbank had been paid $1,125,654.92)°, and that several checks had

75 |) been consigned to the court as funds in controversy, including checks to Westernbank in the amount

26

27
This amount includes $976,481.93 in principal and $149,172.94 in interest as of

28 || February 27, 2001.

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of $268,162.00 for the balance pending on the Llanos del Sur property, and in the amount of
$357,517.08 for monies owed as per loan #3670 (dkt. #618).

On March 8, 2006, Robert Hatton Gotay, his wife Maria de los Angeles Rentas Costas and
their conjugal partnership (“Hatton”) filed a motion requesting that all proceeds from the sale of the
Barrio Canas properties remain deposited in court as cash collateral pending the final disposition of
the adversary proceeding Empresas Inabon, Inc., et al. v. Robert Hatton Gotay, et al., adv. no. 01-
0073 (dkt. #623)". On that same date, Liberty requested withdrawal of $1,000,000.00 deposited in
the court and owed to it (dkt. #624). On March 14, 2006, the court granted Hatton’s request (dkt.
#626). On March 16, 2006, Liberty requested the court reconsider or vacate its order of March 14,
2006 (dkt. #627); and on March 20, 2006, the court set Liberty’s request for a hearing on April 25,
2006 (dkt. #629). On March 24, 2006, Westernbank filed an opposition to Hatton’s request
regarding its funds (dkt. #634). On April 5, 1006, Westernbank filed an urgent motion to continue
the April 25 hearing (dkt. #638), which was opposed by Liberty on April 6, 2006 (dkt. #639). The
court entered an order on April 10, 2006 (dkt. #641), granting Westernbank’s motion and
rescheduling the hearing for August 7, 2006; on April 17, 2006, it entered an order denying Liberty’s
objection thereto (dkt. #647).

Westernbank’s Second Request for Disbursement of Proceeds from the Barrio Canas Sale and
Background Leading to this Court’s Order of September 20, 2006 (Dkt. # 701), the Order Liberty
Seeks to Alter or Amend

On April 5, 2006, Westernbank filed a “Motion to Withdraw Deposited Proceeds of Sale”

(dkt. #636), seeking that the court order the clerk to disburse to it $1,943,570.54, including

‘lSaid adversary proceeding was substantially resolved by this court’s opinion and order
of July 13, 2006 (dkt. #94 in adv. no. 01-0073); according to the minutes of the status
conference held on May 4, 2007 (dkt. #104 in adv.no. 01-0073), the parties were granted
sixty (60) days to file a settlement agreement or a joint motion for a consent judgment;
neither an agreement nor a motion has been filed as of this date.

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$1,476,408.54? owed as of January 10, 2006 as to loan 7230003670 (“loan #3670"), $268,162.00
owed as to loan 7230003279 (“loan #3279"), and $190,000.00 for attorney’s fees as to both loans.
In the alternative, Westernbank seeks that $1,333,589.51 be allowed as to loan #3670 and the
balance owed be allowed as unsecured. Westernbank argues that if the court adopts Liberty’s and
INA’s interpretation of article 166 of the Puerto Rico Mortgage Law, 30 L.P.R.A. S 2562, it should
be paid $1,333,589.51" as to loan #3670, of which $1,125,654.92 was received on the closing date
of the sale of the Barrio Canas property, leaving a balance due of $207,934.59. Further,
Westernbank argues that since there is no controversy or objection as to its entitlement to said
amount of principal and interest, even under Liberty and INA’s theory any balance due for interest
in excess of five years must still be paid as an unsecured debt. In support of its motion, Westernbank
filed an unsworn statement by Jose J. Mercado, manager of Westernbank’s commercial credit
department, stating that Westernbank is owed $357,107.84 for accrued interest on loan #3670 for
the period between February 24, 2001 and February 24, 2006, along with an exhibit showing the
interest accrual during that period.

On April 5, 2006, Westernbank also filed a memorandum of law in support of its motion to
withdraw the deposited proceeds (dkt. #637). Westernbank argues that even under Liberty and
INA’s theory that secured interest on the mortgage is limited to five years, they are still entitled to
receive the balance of $207,934.59 in secured interest on loan #3670 with the balance allowed as

unsecured debt. Additionally, as to loan #3279, Westernbank argues that Liberty and INA are

Said amount includes $976,481.93 in principal and $499,926.61 in interest as of January
10, 2006.

Said amount includes $976,481.93 in principal and $357,107.58 in interest, which
corresponds to the five year period immediately preceding the February 24, 2006 closing
date.

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estopped from seeking reconsideration of the court’s final order of November 29, 2005, in the
Hernandez Torres case (dkt. #284 in case no. 97-14399), which approved the stipulation of October
27, 2005 which provided that Westernbank would be paid the balance owed to it as a result of the
sale of the Llanos del Sur property in the Hernandez Torres case from the proceeds of the sale of the
Barrio Canas property in the case herein. Finally, as to the request for attorney’s fees, Westernbank
argues that under 11 U.S.C. S 506(b) said fees are allowed if they are reasonable and provided for
under the agreement pursuant to which the creditor’s claim arose; according to Westernbank, the
amounts claimed were part of the promissory notes signed by the debtor and are more than
reasonable. In the alternative, Westernbank states that it is willing to file an application for
compensation under section 506 for the court’s evaluation.

On April 13, 2006, Liberty filed an opposition (dkt. #646) to Westernbank’s memorandum
of law and requested permission to submit evidence in support of its opposition at the hearing
scheduled for April 25, 2006. On April 21, 2006, Westernbank filed a reply (dkt. #649) requesting
that if Liberty was planning to present new facts or legal arguments at the hearing that it do so in
writing before the hearing; the court entered an order on April 28, 2006, granting Westernbank’s
motion and ordering Liberty to reply within thirty days (dkt. #650).

Liberty filed a response and opposition on June 5, 2006 (dkt. #664). It argues that
Westernbank is requesting payment of claims that have been discharged or paid, or are beyond the
amounts expressly agreed to by the parties and approved by the court. Specifically, it argues that
Westernbank’s claim as to loan #3670 is limited to the stipulated principal of $976,481.93, which
has already been paid; the stipulated interest of $149,172.94 as of February 27, 2001, which has
already been paid; and interest at 2% over prime from February 27, 2001 to no later than September

19, 2001. It further argues that Westernbank’s claim as to loan #3279 is disallowed pursuant to 11

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U.S.C. S$ 1141(c) and (d) because it failed to file any claim as to that loan before the claims bar date
and prior to the entry of the order confirming debtor’s chapter 11 plan. According to Liberty, the
February 27, 2001 stipulation did not provide for how long mortgage interest would accrue, and
therefore it is only entitled to interest to the extent provided by law; nor did it provide for attorney’s
fees, and no other stipulations have been entered into or approved in this case. Liberty argued that
the principal of collateral estoppel does not apply to the fact herein because neither Liberty nor
Hernandez Ortiz were parties to the stipulation reached in the Hernandez Torres case, nor was said
stipulation entered or approved in the Hernandez Ortiz case. Further, it argued that Westernbank’s
claim for attorney’s fees cannot be allowed until adjudicated as reasonable under 11 U.S.C. S 506(b).

On July 5, 2006, after requesting leave to file a reply (dkt. #665) which was granted by the
court (dkt. #666), Westernbank filed a “Response and Opposition” to Liberty’s response and
opposition (dkt. #671). As to loan #3279, Westernbank argues that Liberty is, indeed, barred by the
doctrine of collateral estoppel from objecting to its payment of interest based on this claim because
it did not object to the stipulation as to the sale of the Llanos del Sur property in the Hernandez
Torres case (dkt. #279 in case no. 97-14399), which was referenced in the motion seeking
authorization to sell the property (dkt. #283 in case no. 97-14399), which was, in turn, approved by
the court (dkts. #284 and 285 in case no. 97-14399) and referenced in the herein case in debtor’s
motion requesting authorization to sell the Barrio Canas property (dkt. #566), subsequently approved
by the court (dkt. #598). According to Westernbank, Liberty did not object to any of these
proceedings. Therefore, Westernbank argues, the collateral estoppel standard has been met because
the issue was the same in both the Hernandez Torres case and the case herein, namely, where the
money to pay Westernbank was going to come from; the issue was actually litigated, that is, Liberty

was afforded areasonable opportunity to defend itself; the issue was determined by a valid and final

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judgment, that is, the court’s order of November 29, 2005 (dkts. #284 and 285 in case no. 97-14399);
and the issue of how Westernbank was to be paid was essential to the final judgment. Westernbank
further argues that Liberty is estopped from claiming that loan #3279 was not subject of a proof of
claim in the present case but, anyway, the matter becomes moot when the case is converted to
chapter 7 because Westernbank will re-file their proofs of claim.

As to loan #3670, Westernbank argues that with regard to its claim for attorney’s fees, it will
submit its billings for the court’s scrutiny for reasonableness pursuant to 11 U.S.C. S 506; and with
regard to its claim for interest, if the matter is controlled by state law then the case of Campos

Ledesma v. Fomento, 2001 TSPR 1, 153 D.P.R. 137 (2001) provides that the interest should be

calculated five years back from the date of the sale of the property, in which case $207,934.59 is still
owed, and if federal law controls then the full payment is required, citing 11 U.S.C. $ 108(c) and In
re Atkinson, 126 B.R. 713 (N.D. Tex. 1991).

Westernbank concludes that the complex, interrelated cases of Empresas Inabon, Hernandez
Torres and Hernandez Ortiz must be viewed in conjunction with one another; that significant
changes have occurred in each case over the course of these proceedings; that Westernbank has made
accommodations in all three cases for the benefit of all three debtors and all creditors, including
Liberty; and that Liberty has known all along of the debts and their guarantees and now, after
benefitting from transactions to which Westernbank acquiesced, is objecting that Westernbank be
paid in full, contrary to both law and equity.

On August 6, 2006, Liberty filed a supplement to its response and opposition to
Westernbank’s memorandum of law in support of their motion to withdraw the deposited proceeds
from the sale of the Barrio Canas property (dkt. #677), addressing the time period that should be

used for computing the five year interest limitation under Article 166 of the Puerto Rico Mortgage

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Law for loan #3670. It argues that the Campos Ledesma case involved an eminent domain action
rather than a commercial loan/foreclosure action, and the Supreme Court of Puerto Rico stated that
in the context of an eminent domain proceeding, the five year interest period is calculated back from
the date the eminent domain proceeding is initiated, which, according to Liberty, since the
government must consign the amounts to be paid at the same time, is the equivalent of the date of
sale. Further, Liberty argues that since the Campos Ledesma case was decided, the Puerto Rico

Court of Appeals issued a ruling in the case of Matos Matos v. Rodriguez Morales, 2006 P.R. Lexis

3004 (P.R. App. Ct. 2005), where the court explained that in commercial transactions, consistent
with the Campos decision, the five year period under Article 166 is calculated backwards from the
date the foreclosure action is commenced. Therefore, according to Liberty, Westernbank is only
entitled to interest from May 9, 1992 through May 9, 1997, the five years preceding the initiation of
the foreclosure action on May 9, 1997. Further, since pursuant to the February 27, 2001 stipulation
(dkt. #344), Westernbank has already been paid interest on loan #3670 through February 27, 2001,
no further interest is due to it for loan #3670.

The court held a hearing on August 7, 2006 to consider the pending matters (see minutes of
hearing, dkt. #682, and transcript of hearing, dkt. #683). At this hearing, Westernbank clarified that
the total amount it claims as to loan #3670, based upon its senior lien on the Barrio Canas property,
is $1,626,408.54, which is composed of $976,481.93 in principal, $499,926.61 in interest (from
September 19, 1995 until January 31, 2006) (plus the per diem of 2% over prime until the closing
date), and $150,000.00 in attorney’s fees. It further clarified that believes that federal law, rather
than state law, should be applied to determine how much it is entitled to collect on its lien; namely,
11 U.S.C. S 108(c) and the Atkinson case. As to loan #3279, Westernbank clarified that loan was

made to Hernandez Torres, secured by the Llanos del Sur property and guaranteed by Hernandez

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Ortiz, based on a pledge agreement which was part of the proofs of claim filed in the Hernandez
Torres case. Westernbank was also the senior lien holder on that property, and stipulated to receive
a lower amount than it was due on the sale of that property in order to facilitate its sale, with the
understanding that it would receive the balance due upon the sale of the Barrio Canas property in the
case herein. Said understanding, and the amounts claimed, were submitted to the court in the notice
of sale of the Barrio Canas property in this case. According to Westernbank, the amounts claimed
as to loan #3279 were set forth in dkt. #265 in case no. 97-14399, and the stipulation as to the sale
of the property, dkt. #279 in case no. 97-14399, explains the transaction, which was further discussed
in dkt. #283 in case no. 97-14399, and approved by the court in dkt. #284 in case no. 97-14399. As
a result of these transactions in the Hernandez Torres case, which were set forth in dkt. #566 in the
case herein, Westernbank argues that Liberty is collaterally estopped from objecting to its claim
based upon loan #3279 because it was involved in that proceeding and did not object to the
agreement or the court’s order, which is now final.

Westernbank points out that the court entered an order granting the debtor’s urgent motion
seeking authorization to sell the Barrio Canas property (dkt. #598), of which Westernbank later
sought clarification (dkt. #603) which was granted by the court (dkt. #604). The amounts which
Westernbank seeks were set forth in the debtor’s urgent motion notifying the Barrio Canas sale and
consigning the funds therefrom (dkt. #618) and in Westernbank’s motion to withdraw deposited
proceeds of sale (dkt. #636); Westernbank was paid the principal owed for loan #3670, and the
amount owed for interest for the five-year period in dispute, as well as the balance owed from the
sale of the Llanos del Sur property, were deposited with the court. First, Westernbank argued that
itis owed $503,390.91, which includes $146,283.33 as the balance owed from the sale of the Llanos

del Sur property (re: loan #3279), and $357,107.58 owed from the sale of the Barrio Canas property

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1 || (re: loan #3670). Later, Westernbank argued that it is owed a total of $1,626,408.54 as of January

2 10, 2006; of that amount, $1,125,654.92 was paid at closing, leaving a balance due of $759,107.06,
which includes $500,753.62 as to loan #3670 and $258,353.44 as to loan #3279.

5 Liberty clarified that it is a junior lienholder with a secured claim for $1 million over the
6 || Barrio Canas property, arising from a pre-petition judgment and attachment, subject ofa stipulation
7 || entered and approved in this case and included in the debtor’s confirmed plan of reorganization. (dkt.
8 || 4624).

? INA clarified that itis an unsecured creditor, and stated that its position is that Westernbank’s
, secured indebtedness is limited to five years of interest as to loan #3670, and its interest as to loan

12 || #3279 is unsecured. INA raised the issue that the debtor has not complied with the court’s order to

13 || file a status report as to its compliance with the chapter 11 plan.

14 Counsel for creditor Robert Hatton clarified that he holds a second, third and fourth mortgage
1S over the Barrio Canas property. Counsel for Liberty stated that Hatton’s claims are based on loans
: with a principal amount of $475,000.00, $343,000.00 and $100,000.00, respectively, with interest
18 calculated in the amount of $79,000.00, $27,000.00 and $18,000.00, respectively.

19 Debtor’s counsel stated that the proceeds from the sale of the Barrio Canas property were

20 || consigned with the court so that it can determine what is owed to who, and why, and that the

21 controversy is not ripe because there is evidence missing; she asked that the court grant a short
22

period of time for the parties to support their claims. She clarified that Westernbank was paid
23
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75 || interest.
26 The court identified the following uncontested facts: (1) a property owned by Hernandez

27 Ortiz, located in Barrio Canas, Ponce, Puerto Rico, property #11039, was sold to SF Ponce II
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Limited Partnership in the amount of $5,228,293.97; (2) Westernbank is the first lienholder on that
property; (3) Westernbank received $1,125,654.92 from the sale of that property and the balance was
deposited with the court, including the disputed balances potentially owed to Westernbank and
Hatton.

The court granted Westernbank sixty days to file a motion in support of the reasonableness
of its request for attorney’ s fees, and thirty days to file evidence ofits security interest relative to loan
#3279. The court noted that the issue of the five year limitation on interest has been briefed by the
parties. Debtor was granted ten days to file a motion as to his compliance with the confirmed plan
of reorganization’. The court indicated that it would schedule a hearing on INA’s pending request
for conversion of the case to chapter 7.

On August 24, 2006, after requesting leave and an extension of time to do so (dkt. #681),
Westernbank filed a reply to Liberty’s supplement to response and opposition (dkt. #685). Itargues
that Liberty’s supplement to its opposition (dkt. #677) should be denied because the Matos case it
cites is factually distinguishable from the case herein and should therefore be disregarded by the

court. According to Westernbank, the Matos case is only a court of appeals case and is therefore

only persuasive, but not precedential, while the Campos case was a decision of the Puerto Rico
Supreme Court. It argues that in Campos the court found that interest is calculated backwards from

the culmination, not the commencement, of the eminent domain proceedings. Further, in the Matos

“Debtor filed his “Motion in Compliance with Order to File Status Report” on September
13, 2006 (dkt. #697). Debtor indicates that he has sold a 4 cuerdas property for
$1,750,000.00, a 9.4611 cuerdas property for $3,724,258.00, and the 13 cuerdas Barrio
Canas property at issue herein for $5,228,293.97, and has deposited with the court a
total of $10,284,817.33. He further indicates that he has settled Citibank’s secured
claim for $500,000.00 (secured by another property in process of being sold) and
Hatton’s claim for $2,000,000.00, and has agreed to pay another (unspecified) claim for
$343,235.13. Finally, he states that Hatton will not seek payment from the proceeds of
the Barrio Canas property at issue herein.

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case the loan’s interest rate was fixed and therefore it was irrelevant how it was calculated; indeed,
according to Westernbank, that was not even an issue in the appeal. In the case herein, however, the
interest rate varies at 2% over prime and is therefore significantly affected by the manner in which
the interest is calculated.

On September 13, 2006, after requesting an extension of time (dkt. #691) which was granted
by the court (dkt. #692), Westernbank filed its motion in compliance with the order of August 7,
2006, presenting evidence of its security interest in its claim as to loan #3279, as well as the balance
owed to it on loans #3279 and #3670 (dkt. #698). It submits the unsworn statement of Jose Rivera,
Vice President of the Commercial Credit Department of Westernbank, accompanied by copies of
ten guarantees and pledge agreements, in support of its claim that the amount owed as to loan #3279
is secured. Further, it submits the unsworn statement of Jose J. Mercado, manager of the
Commercial Credit Department of Westernbank, as well as two interest accrual worksheets, in
support of its claim that it is due $363,781.83 as to loan #3670 and $218,353.44 as to loan #3279,
both amounts excluding attorneys fees. According to Westernbank, the amounts it is owed as of
January 10, 2006, are accurately reflected in the minutes (dkt. #682) and transcript (dkt. #683) of the
hearing held on August 7, 2006; it just adds to loan #3670 the interest accrued from January 11,2006
to February 24, 2006, the closing date of the sale. Further, it states that its request for attorneys fees
are subject to a future determination. Therefore, it asks the court to grant its request for withdrawal
of the balance owed to it at this time, which amounts to $582,135.27”.

On September 20, 2006, the court entered an order (dkt. #701) stating “[t]he motion filed by

SWesternbank actually requests $582,185.27; the same amount is repeated in Exhibit A
to Exhibit 2; however, if one adds $363,781,83 and $218,353.44, the total is
$582,135.27, which is the amount reflected on page 2 of exhibit 2 (unsworn statement
of Jose J. Mercado).

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Westernbank in compliance with [sic] Court’s order of August 7, 2006 (dkt. #698) is hereby
granted.”

On September 25, 2006, Liberty filed a reservation of rights as to Westernbank’s motion in
compliance with court order (dkt. #704). Liberty states that it expected it would have an opportunity
to oppose Westernbank’s motion (dkt. #698) within the eleven days allowed under Local Bankruptcy
Rule 9013(a); alleges that its arguments as to the calculation of interest on mortgage liens under
Puerto Rico law, as set forth in dkts. #664 and 677, as well as at the hearing held on August 7, 2006,
were not addressed by Westernbank in its motion nor the court in its order; and states that it intends
to file a motion to alter or amend the order (dkt. #701) and for amended findings of fact and
conclusions of law pursuant to rules 7052 and 9023.

On September 27, 2006, the court entered an order stating “[t]he motion filed by Liberty
Mutual Insurance Company (dkt. #704) is hereby granted. Westernbank shall file a reply within
twenty (20) days.”

Liberty’s Motion to Alter or Amend Judgment - The Motion Before the Court

On October 2, 2006, Liberty filed motion to alter or amend the court’s order (dkt. #701)
granting Westernbank’s request to withdraw deposited proceeds of funds (dkt. #708) pursuant to
Rules 7052 and 9023 of the Federal Rules of Bankruptcy Procedure. Liberty argues that,
notwithstanding its numerous oppositions to Westernbank’s motions to withdraw funds, both in
pleadings and at the hearing on August 7, 2006, on September 20, 2006 the court entered an order
(dkt. #701) granting Westernbank’s motion in compliance with the August 7, 2006 order (kt. #698),
which was filed on September 14, 2006, without allowing Liberty or any other creditor time to
respond pursuant to Local Bankruptcy Rule 9013(a).

According to Liberty, through its motion Westernbank is seeking to collect amounts above

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and beyond to what it is entitled pursuant to Puerto Rico law, or amounts that have already been
discharged. Specifically, it argues that Westernbank is trying to collect interest for eleven years while
Puerto Rico law limits the extent and validity of its secured claim for interest to five years prior to
the date of the foreclosure action; and, further, that Westernbank is trying to collect interest on a loan
that was never subject of a proof of claim and, therefore, was discharged through the confirmation
of the chapter 11 plan in this case. Therefore, Liberty asks that the court limit Westernbank’s claim
to $976,481.93 as the stipulated principal for loan #3670, which has already been paid, and
$149,172.94 in interest for loan #3670 as of February 27, 2001, which has already also been paid, and
not allow any payment as to loan #3279.

On October 6, 2006, the court set a hearing on Liberty’s motion to alter or amend (dkt. #708)
for December 5, 2006 (dkt. #710).

After filing three motions requesting an extension of time to respond (dkts. # 715, 719 and
725) which were granted by the court (dkts. #716, 720 and 726), Westernbank filed an opposition to
Liberty’s motion to alter or amend order on November 7, 2006 (dkt. #727). As to loan #3670,
Westernbank argues that it is entitled to the full payment of all interest owed to it by the debtor
pursuant to 11 U.S.C. S 108(c) which, according to Westernbank, directly conflicts with Article 166
of the Puerto Rico Mortgage Law, and provides that the calculation of interest is controlled by federal,
not state law. Further, Westernbank argues that several events in this case have constituted a
recognition of the debt and therefore tolled the statute of limitations under state law. In the
alternative, if the court decides to apply Puerto Rico law, Westernbank argues that the interest on its
claims should be calculated five years back from the date of closing of the sale of the property.

As to loan #3279, Westernbank reiterates that Liberty has waived its right to object to the

payment of the balance owed to it from the sale of the Llanos del Sur property from the proceeds of

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the Barrio Canas property, that the debt was provided for in the plan, and that it has submitted the
evidence requested by the court to establish its security interest in the property at issue regarding this
loan.

Westernbank attaches to its opposition the unsworn statements of Jose Rivera and Jose
Mercado, the latter with exhibits, including spreadsheets re: loan #3670, all of which were previously
submitted as exhibits to dkt. #698; however, this time they also include a spreadsheet as to loan
#3279.

Liberty filed a motion requesting leave to reply to Westernbank’s opposition on November
14, 2006 (dkt. #733), seeking time to respond to the new factual assertions and legal arguments raised
by Westernbank. Westernbank replied to Liberty’s request on November 15, 2006 (dkt. #734), asking
that Liberty’s response be limited to ten pages and the new matter raised; on November 21, 2006, the
court entered an order granting Westernbank’s request (dkt. #735).

Liberty filed their reply to Westernbank’s opposition on November 29, 2006 (dkt. #746).
Liberty argues that Westernbank raised three issues in their opposition for the first time in these
proceedings; namely (1) that the motion to alter or amend does not comply with Fed. R. Civ. P. 59(e);
(2) that, as to loan #3670, section 108(c) of the Code tolls the limitations on the accrual of secured
interest imposed by Article 166 of the Puerto Rico Mortgage Law; and (3) that the plan of
reorganization confirmed in the case included the debtor’s liability as to loan #3279 and the same is
secured by the first mortgage on the real property subject of this controversy.

Liberty asserts that there has been a “manifest error of law” under Fed. R. Civ. P. 59(e)
because, despite it’s numerous oppositions, the court ruled on Westernbank’s motion to withdraw
without giving it, or any other creditor, an opportunity to respond as provided by Local Bankruptcy

Rule 9013(a). Further, Liberty argues that section 108(c) of the Code does not affect, limit, set nor

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toll the accrual of interest on a claim. Finally, according to Liberty, Westernbank has, at most, an
unsecured claim as to loan #3279, and treating it as a secured claim would have required a
modification of the chapter 11 plan of reorganization. Additionally, Liberty objects to the exhibits
attached to Westernbank’s opposition because the declarant, Jose Rivera, has no personal knowledge
of the facts averred and has not been established as an expert; because the legal conclusions expressed
are beyond his knowledge and expertise; because he does not calculate interest accruals on the lien;
and because he does not identify from where comes the November 16, 1999 payment of $372,481.00
in interest and $523,516.07 in principal, leaving open the possibility that the lien was fully
extinguished on or before the payment received on February 24, 2006 upon the closing of the sale of
the property.

On December 4, 2006, Liberty filed a correction to their reply (dkt. #749), noting that while
they stated in their reply that the maximum interest rate that Westernbank could accrue for loan #3670
is 10.5%, it is actually 2 points over the Citibank prime rate.

Conversion to Chapter 7 ( Sequel) and the Motion to Alter or Amend

On October 6, 2006, the court scheduled a hearing to consider Liberty’s motion to alter or
amend order (dkt. # 708) and related matters, including the motion to convert to chapter 7 filed by
INA.

In anticipation of the hearing scheduled for December 5, 2006, Liberty filed a “disclosure of
detail for argument” on December 4, 2006 (dkt. #750), submitting certain electronic worksheets
regarding Westernbank’s claim to be used at the hearing. The same were submitted after the hearing,
on the same date thereof (dkt. #752). These spreadsheets, prepared by Liberty’s counsel, based upon
the information provided by Jose J. Mercado and Jose Rivera of Westernbank, indicate that :

1. As to loan #3279, the total interest accrued through the petition date is
$129,976.66, the total amount paid is $64,181.16, and the unsecured balance due is

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$65,793.50.

2. As to loan #3670, the total amount of interest claimed for the period of 2/1/96 to
2/24/06 is $1,144,899.72; $781,120.90 has been paid, leaving a balance due of
$363,778.82. However, if one calculates interest for the five years prior to
September 19, 2001 (9/19/96 - 9/19/01), the total accrued interest would be
$719,422.24, and interest has been overpaid in the amount of $62,698.46. Further,
if one calculates interest for the five years prior to February 24, 2006 (the sale date)
(2/24/01 - 2/24/06), the total accrued interest would be $286,170.23, and interest has
been overpaid in the amount of $494,950.67.

On December 5, 2006, the court held a hearing on INA’s motion to convert the case to one
under chapter 7 of the Code (see minutes, dkt. #760, and transcript, dkt. #759). Wigberto Lugo
Mender, the trustee in the Empresas Inabon case, testified that the corporation has appoximately $10
to $11 million in assets and $17 to $18 million in liabilities. The debtor, Hernandez Ortiz, testified
that he still owes the debts included in his confirmed amended plan of reorganization in Class V and
Class VII, the latter of which includes Liberty’s claim of approximately $4 million and INA’s claim
of approximately $4 million, as well as $2 million to Robert Hatton and $1.5 million to Citibank.
He further testified that he owns a 15 cuerdas property worth approximately $2 million, a3 cuerdas
property worth approximately $2 million, and three apartments worth approximately $650,000,
$175,000 and $350,000.00. In other words, he has assets of approximately $5 million and liabilities
of approximately $11.5 million. Furthermore, pursuant to debtor Hernandez Ortiz’ confirmed
amended plan, he is responsible for paying the $6 - $8 million shortfall in the Empresas Inabon case.

In finding cause to convert the case, the court concluded that the debtor has insufficient assets
to pay all claims in full, that debtor was unable to substantially consummate the confirmed chapter
11 plan, and that the debtor had incurred in a material default by encumbering his property in breech
of covenants that were made part of the plan.

Secondly, the court addressed the distribution of the proceeds from the sale of debtor’s

property amongst Liberty, Westernbank and the other creditors. The court granted the parties and

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the new chapter 7 trustee twenty days to supplement their legal briefs as to the issue. Liberty and
Westernbank agreed that there are no factual issues to be determined and they are basically in
agreement as to the numerical calculations; they clarified that the legal issues to be determined by
the court are (1) whether Westernbank’s claim as to loan #3279 is secured; that is, how is it affected
by the agreements reached by Westernbank and the debtors in the related cases of Empresas Inabon
and Hernandez Torres, as well as the confirmed chapter 11 plan in this case and the conversion of
this case to chapter 7; and (2) whether Article 166 of the Puerto Rico Mortgage Law applies to the
calculation of interest on Westernbank’s claim(s) and, if so, how should it be calculated.

Wigberto Lugo Mender was appointed as interim trustee (dkt. #751). The notice that the case
was converted to chapter 7 was entered on December 21, 2006 (dkt. #762). Both Liberty (dkt. #780)
and Westernbank (dkt. #782) submitted briefs; neither the trustee nor the debtor, INA, nor any other
creditor so filed.

Liberty filed their post-hearing memorandum on January 25, 2007 (dkt. #780). They argue
that the chapter 11 discharge remains effective even after the conversion of the case to chapter 7 and
that the conversion does not disrupt confirmation or revoke the discharge of pre-confirmation debt;
therefore Westernbank may not claim pre-confirmation debt after conversion because the same was
already discharged. They further argue that if the court decides that Puerto Rico Mortgage Law does
not control the calculation of interest on mortgage loans related to Westernbank’s claims, then the
court may apply the equitable doctrine of marshaling of assets to limit Westernbank’ slien. They ask
that the court grant their motion (dkt. #624) for the withdrawal of $1,000,000.00 corresponding to
paragraph 3-E of the “Urgent Motion Notifying Sale of Real Property and Depositing Funds” (dit.
#618).

Westernbank filed their supplemental brief in support of their motion to withdraw consigned

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funds on February 8, 2007 (dkt. #782). They review the procedural history of the case and reiterate
their previous arguments regarding the effect of the stipulation entered into on February 27, 2001
(dkt. #344) and approved by the court on March 9, 2001 (dkt. #344); and the effect of the stipulation
filed on September 13, 2005 in the Hernandez Torres case (dkt. #265 in case no. 97-14399),
encompassed in an agreement filed on October 27, 2005 (dkt. #279 in case no. 97-14399), and
referenced in an urgent motion seeking authorization to sell property (dkt. #283 in case no. 97-
14399), which was granted by the court on November 29, 2005 (dkt. #284 in case no. 97-14399).
According to Westernbank, Liberty was a party to, and notified of, each of these matters and did not
object, seek reconsideration or appeal; therefore, they have waived their right to do so.

Further, Westernbank argues that Liberty’s motion to alter or amend the order granting its
motion to withdrawal funds (dkt. #708) does not present any new evidence, nor establish a manifest
error of law or fact to induce this court to reconsider its prior decision. According to Westernbank,
the calculation of interest on its claim is controlled by 11 U.S.C. S 108(c) but, ifthe court determines
it is controlled by Puerto Rico law, said law provides that interest should be calculated for five years
back from the date of the closing of the sale of the property.

Westernbank disputes that the chapter 11 confirmation order discharged its claim as to loan
#3279, which it argues is secured; it points out that the September 13, 2005 motion to sell the Llanos
del Sur properties in the Hernandez Torres case was approved after the amended plan in the case
herein (dkts. #284 and 285 in case no. 97-14399). According to Westernbank, this was a post-
confirmation event which altered the relationship between the parties and the treatment of
Westernbank under the plan, was the result of a good faith effort by Westernbank to allow recovery
of funds by the junior lienholders, and was not objected to at the time by Liberty, who has,

consequently, waived their right to object and is estopped from doing so.

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Finally, Westernbank argues that once a case is converted to chapter 7, Fed. R. Bank. P. 1019
provides a new time period for filing claims in the converted case, and the parties must revert to
chapter 7 to distribute any remaining property of the estate. According to Westernbank, Liberty
misunderstands the doctrine of marshaling of assets and the same does not apply herein.
Westernbank argues that the cases of Hernandez Ortiz, Hernandez Torres and Empresas Inabon are
extensive, litigious and have been dealt with in an interrelated manner by the parties, noting that they
and others have made concessions to allow the sale of properties for the benefit of all with the money
being guaranteed from sources other than the specific case being dealt with. Westernbank asks that
the court deny Liberty’s motion to alter or amend and reaffirm its order granting Westernbank’s
request for the withdrawal of the balance owed to it.

Liberty filed an opposition to Westernbank’s supplemental brief on March 7, 2007 (dkt.
#795). According to Liberty, it does not question the validity or enforceability of the February 27,
2001 stipulation, but rather its consequences and whether further payments to Westernbank from the
sale proceeds are contrary to the law. As to the sale of the Llanos del Sur property in the Hernandez
Torres case, Liberty argues that the transaction was neither notified nor approved in the case herein;
that the cases, although related, are neither consolidated nor jointly administered; and, therefore, an
order in the Hernandez Torres case cannot constitute a modification of the confirmed plan in the
Hernandez Ortiz case.

Liberty notes that it did reply and object to the debtor’s November 29, 2005 request to sell
the Barrio Canas property, and timely objected to the distribution of $1,125,654.87 described therein
(dkts. #566 and 572). Further, Liberty argues that it did not acquiesce to the payment of “five years
of interest”. According to Liberty, under Puerto Rico law, Westernbank is not entitled to receive any

further interest payment beyond what it has already received.

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Liberty argues that the court should reconsider, alter or amend its order (dkt. #701) granting
Westernbank’s motion in compliance (dkt. #698) under the “manifest legal error” doctrine because
(1) the payment Westernbank requests is contrary to law; (2) Liberty did not have an opportunity to
oppose the motion before it was granted six calendar days after it was filed; and (3) the court did not
address Liberty’s previous legal arguments. Finally, Liberty reiterates its arguments under the
“marshaling of assets” doctrine.

Westernbank filed an amended claim no. 5 on April 17, 2007, in the secured amount of
$363,502.13, including $0 in principal and $363,502.13 in interest as of April 16, 2007, plus
$150,000.00 in legal fees, as to loan #3670'°. On that same date, Westernbank filed claim no. 34 in
the secured amount of $218,353.44, including $0 in principal and $218,353.44 in interest as of April
16, 2007, plus $40,000.00 in legal fees, as to loan #3279”.

Discussion
Standard for Granting Motion to Alter or Amend
Federal Rule of Civil Procedure 59(e)"* provides that a motion to alter or amend
judgment should be filed within ten days of the entry ofjudgment. “Rule 59(e) motions are granted
only where the movant shows a manifest error of law or newly discovered evidence.” Kansky v.
Coca-Cola Bottling Co. Of New England, F.3d __, 2007 WL 1866752 (1* Cir. 2007), citing

Marie v. Allied Home Mortgage Co., 402 F.3d 1, 7 n. 2 (1* Cir. 2005) (stating that Rule 59(e)

motions are generally unlikely to succeed because the movant must ‘clearly establish a manifest error

'6The claim indicates that it is based on mortgage note no. 3670, executed on September
19, 1995, in the amount of $1,500,000.00 on the Barrio Canas property.

The claim indicates that it is based on mortgage note no. 3279, executed on March 16,
1995, in the amount of $500,000.00 on the Llanos del Sur property.
18Fed. R. Civ. P. 59 applies in cases under the Bankruptcy Code. Fed. R. Bankr. P. 9023.

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of law’ or provide newly discovered evidence).
Rule 59(e) includes motion for reconsideration. 11 Charles Alan Wright et al., Federal

Practice and Procedure S 2810.1 (2007). Any motion seeking the reconsideration of a judgment or

order is considered as a motion to alter or amend a judgment if it seeks to change the order or
judgment issued. Id., citing Villanueva-Mendez v. Nieves Vazaquez, 360 F. Supp. 2d 320 (D.P.R.
2005).

Reconsideration of a judgment after its entry is an extraordinary remedy which should be

used sparingly. Federal Practice and Procedure, id. “Unless the court has misapprehended some

material fact or point of law, such a motion is normally not a promising vehicle for revisiting a
party’s case and rearguing theories previously advanced and: rejected.” Palmer v. Champion
Mortgage, 465 F.3d 24, 30 (1* Cir. 2006).

“There are four basic grounds upon which a Rule 59(e) motion may be granted.

First, the movant may demonstrate that the motion is necessary to correct manifest
errors of law or fact upon which the judgment is based.

Second, the motion may be granted so that the moving party may present newly
discovered or previously unavailable evidence.

Third, the motion will be granted if necessary to prevent manifest injustice.

Fourth, a Rule 59(e) motion may be justified by an intervening change in controlling
law.

Federal Practice and Procedure, id. A motion for reconsideration is property when the court

has patently misunderstood a party, has made a decision outside the adversarial issues presented, or

has made a mistake not of reasoning but of apprehension. Gregg v. American Quasar Petroleum Co.,

840 F. Supp. 1394 (D. C. Colo. 1991).

According to Liberty, the court can grant reconsideration, or alter or amend its order of

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September 20, 2006 (dkt. #701) under the “manifest legal error” doctrine because (1) the payment
which Westernbank wants to collect is contrary to law, (2) Liberty did not have an opportunity to
oppose the motion before it was granted in six calendar days; and (3) Liberty’s previous legal
arguments were not addressed by the court. It argues that if the court’s September 20, 2006 order
(dkt. #701) is left unaltered, it will allow Westernbank to collect amounts to which it is not entitled
under Puerto Rico law and/or amounts which have already been discharged in this case; therefore,
it asks that the court vacate its order and limit Westernbank’s claims to $976,481.93 in principal and
$149,172.94 in interest as of February 27, 2001, as to loan #3670, both of which amounts have
already been paid. Westernbank argues that Liberty’s motion to alter or amend the order granting
its motion to withdrawal funds (dkt. #708) does not present any new evidence, nor establish a
manifest error of law or fact to induce this court to reconsider its prior decision.

Liberty is correct in its argument that the court ruled on the motion without allowing it a
meaningful opportunity to oppose, and premised on the incorrect assumption by the court that
Westernbank, as first lienholder, had to be paid all amounts owed as requested and prayed for.
Particularly, when the amounts to be paid to Westernbank had been placed in question. Although
the motion to alter or amend has not been specifically decided until now, this court’s interim rulings
holding in abeyance the actual distribution of the funds to Westernbank, have in practice had such
effect, that is, setting aside the order allowing the payment of funds to Westernbank as prayed for.
Collateral Estoppel

The principal of collateral estoppel bars relitigation of factual or legal issues that were
actually decided in previous litigation between the same parties as those in the present dispute.

American Express Travel Related Servs. v. Hernandez (In re Hernandez), 195 B.R. 824, 829 (Bankr.

P.R. 1996). “Under collateral estoppel, once an issue is actually and necessarily determined by a

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court of competent jurisdiction, that determination is conclusive in subsequent suits based on a
different cause of action involving a party to the prior litigation.” Montana v. United States, 440
U.S. 147, 153-154 (1979). “To preclude parties from contesting matters that they have hada full and
fair opportunity to litigate protects their adversaries from the expense and vexation attending
multiple lawsuits, conserves judicial resources, and fosters reliance on judicial action by minimizing
the possibility of inconsistent decisions. Id.

For collateral estoppel to apply, the following elements must be present:

1. The issue sought to be precluded must be the same as
that involved in the prior action.

2. The issue must have been actually litigated.

3. It must have been determined by a valid and final
judgment”.

4. The determination must have been essential to the final
judgment.

See In re Bilzerian, 100 F.3d 886 (11% Cir. 1996); Spilman v. Harley, 656 F.2d 224 (6" Cir. 1981);

Matter of Ross, 602 F.2d 604 (3™ Cir. 1979).

Westernbank argues that the elements of the doctrine are present herein because the issue is
the same - that is, where the money to pay Westernbank is going to come from; the issue was
actually litigated in the Hernandez Torres case; the court’s order of November 29, 2005 in the
Hernandez Torres case, approving the sale with reference to the payment provisions, is a valid and
final judgment; and the determination as to how Westernbank was to be paid was essential to the

final judgment. According to Westernbank, the court’s order of November 29, 2005 in the

An issue has been “actually litigated” when a party has been “afforded a reasonable
opportunity to defend himself or herself on the merits but chose not to do so.” In re
Daily, 47 F.3d 365 (9" Cir. 1995).

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Hernandez Torres case (dkt. #284 in case no. 97-14399), which approved the stipulation as to the
sale of the Llanos del Sur properties, was not objected to or appealed from by either Liberty or INA,
both of whom were parties in that case, and, therefore, they are barred from objecting to the
provisions of that stipulation, as it applies to the distribution of the proceeds of the sale of the Barrio
Canas properties in this case.

Liberty argues that the stipulation reached in the Hernandez Torres case on October 27, 2005
(dkt. #279 in case no. 97-14399) does not bar it from objecting to the amounts claimed by
Westernbank in this case, pursuant to the principal of collateral estoppel, because neither it nor
Hernandez Ortiz, debtor herein, were parties to said stipulation, nor was said stipulation filed or
approved in the bankruptcy case at bar. It cites to Inre Stein, 281 B.R. 845 (Bankr. S.D.N.Y. 2002),
which held that collateral estoppel did not prevent a trustee from attacking a stipulation entered into
between the debtor and his landlord in a related state court action because neither the trustee nor the
estate were parties to the stipulation.

The court finds that the debtor herein and Liberty were not parties to the stipulation and,
consequently, the terms of the stipulation cannot bind the estate herein.
Interest Under the Bankruptcy Code

Westernbank argues that the calculation of interest on its claim is governed by 11 U.S.C. S
108(c), and cites to Inre Atkinson, 126 B.R. 713 (N.D. Tex. 1991). According to Westernbank, full
payment of the interest on its claim is required by section 108(c). However, according to Liberty,
section 108(c) concerns the tolling of civil actions against the debtor that would otherwise expire
after the petition date; it does not affect, limit, set nor toll the accrual of interest on a claim. Liberty
argues that none of the cases cited by Westernbank, including the Atkinson case, concern the tolling

of an interest accrual through section 108(c).

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The court agrees with Liberty that section 108 and the Atkinson are inapposite to the issues
herein. Section 108(c) provides that:

Except as provided in section 524 of this title, if applicable nonbankruptcy law, an
order entered in a nonbankruptcy proceeding, or an agreement fixes a period for
commencing or continuing a civil action in a court other than a bankruptcy court on
a claim against the debtor, or against an individual with respect to which such
individual is protected under section 1201 or 1301 of this title, and such period has
not expired before the date of the filing of the petition, then such period does not
expire until the later of— ,

(1) the end of such period, including any suspension of such period occurring on or
after the commencement of the case; or

(2) 30 days after notice of the termination or expiration of the stay under section 362,
922, 1201, or 1301 of this title, as the case may be, with respect to such claim.

11 U.S.C. $ 108(c).

Section 108(c) extends the time period for commencing or continuing civil actions that are
stayed by sections 362, 922, 1201 or 1301 of the Code. “It provides that if an action on a claim
against the debtor in a court other than a bankruptcy court is stayed due to the bankruptcy case, any
time deadline for commencing and continuing the action is extended to 30 days after notice of
termination of the stay, if the deadline would have occurred on an earlier date.” 2 Lawrence P. King,
et al., Collier on Bankruptcy § 108.04 (15 ed. rev’d 2007). “It applies only to civil actions in courts
on claims against the debtor”; “[c]ourts have generally held that it does apply to time periods within
which a creditor must bring an action to enforce a lien before the lien expires.” Id. at 108-14.
This section refers to the time period for commencing or continuing a civil action and does not refer
to the time period for the calculation of interest on a claim.

In Atkinson, the court noted that state law provides a six-year statute of limitations on
prosecution of a promissory note, and that state courts have held that the statute of limitation on a

promissory note payable on demand begins to run from the date of the note’s execution. 126 B.R.

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at 715. Accordingly, the court held that to the extent that the state court order did not toll the statute
of limitations, §108(c) applies to extend the statute of limitations, and concluded that under S
108(c)(2) the statute of limitation on the creditor’s enforcement of the note had not expired. Id. at
716. Neither the Code section nor the case cited support Westernbank’s allegation that the Code
requires the full payment of its claimed interest, nor its assertion that the court should not look to
state law to determine the extent of interest allowed on a secured claim.
Interest on Mortgages under Puerto Rico Law

Liberty argues that the court should look to Article 166 of the Puerto Rico Mortgage Law of
1994 to determine the extent, validity and limits of Westernbank’s secured claim for interest over
debtor’s property. According to Liberty, it is a strong and unanimous principle of bankruptcy law
that the extent, validity and limits of a secured creditor’s lien over property of the estate is

determined by state law. See Butner v. United States, 440 U.S. 48, 55 (1979); Sturges v.

Crowninshield, 17 U.S. 122 (1819); Ogden v. Saunders, 25 U.S. 213 (1827); Stellwagen v. Clum,

245 U.S. 605 (1918). Although Butner was decided under the Bankruptcy Act, it’s rationale has

been held to apply equally under the Bankruptcy Code. See, e.g., Inre Village Properties, Ltd., 723

F.2d 441, 443 (5 Cir. 1984); In re Kurth Ranch, 110 B.R. 501, 505 n. 2 (Bankr. D. Mont.

1990); In re Multi-Group IIL, Ltd. Partnership, 99 B.R. 5, 7 (Bankr. D. Ariz. 1989). The first circuit,
and courts within it, have held that creditor’s security interest over property of the estate is

determined by state law. HSBC Bank USA v. Branch (In re Bank of New England Corp.), 364 F.3d

355 (1* Cir. 2004); Underwriters at Lloyd’s, London v. Chancellor Corp. Inre Adley), 333 B.R. 587

(Bankr. D. Mass. 2005); Levitz v. Arons Arcadia Ins. Agency (In re Levitz Ins. Agency), 152 B.R.

693 (Bankr. D. Mass. 1992); Davis v. Cox (In re Cox), 274 B.R. 13 (Bankr. D. Me. 2002); In re

Hazleton, 137 B.R. 560 (Bankr. D.N.H. 1992).

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Article 166 of the Puerto Rico Mortgage Law of 1994 provides a five-year limitation on the
accrual of interest on mortgage liens, which may only be raised by a junior lienholder, such as
Liberty, against a senior lienholer, such as Westernbank. 30 L.P.R.A. S 2652. The parties agree that
the seminal case on the issue is the Puerto Rico Supreme Court’s decision in Campos Ledesma v.
Fomento, 2001 T.S.P.R. 1, 153 D.P.R. 137 (2001); however, they differ as to its interpretation.
Liberty argues that, pursuant to the Campos case, the key date for calculating mortgage interest is
not the date of public sale but rather the date the action was initiated, in this case, the secured
creditor’s commencement of an action to foreclose on its collateral, and that, therefore, the interest
is counted backwards five years from the date the foreclosure action is initiated. According to
Westernbank, the Court’s decision provides that secured interest is limited to five years”, calculated
from the date of execution of the property (in this case, the closing of the sale) back five years, which
in this case amounts to $357,934.59, of which $207,934.59 is still owed, and any interest in excess

of the five years should be allowed as an unsecured claim.

According to Liberty, in the Matos Matos v. Rodriguez Morales, 2005 P.R. Lexis 3004 (P.R.

*°T iberty argues that, although Westernbank recognized this limitation it errs in its
interest calculation. According to Liberty, Westernbank has assumed contradictory
positions as to the interest on loan #3670; in it’s “Urgent Report on Sale” of the Barrio
Canas property (dkt. #618) it calculated that the interest accrues forward, beginning on
the loan due date of September 19, 1996, until September 19, 2001, while in its “Motion
to Withdraw” (dkt. #636) it calculates that the interest runs backwards from the
February 24, 2006 closing on the sale of the real estate. Liberty argues that since the
interest on loan #3670 has already been calculated, and paid, through the date of the
February 27, 2001 stipulation (dkt. #344), it is only entitled to collect interest from
February 27, 2001 through September 19, 2001 which, according to Liberty, amounts to
$49,556.46. (See Exhibit B to Liberty’s “Response and Opposition to Westernbank’s
Memorandum of Law in Support of Motion to Withdraw Deposited Proceeds of Funds”,

dkt. #664.) Liberty argues that if Westernbank is allowed to collect interest in the
amount of $363,781.83, as requested in its motion in compliance with order (dkt. #698),
it will be receiving interest as a secured claim for the period of September 19, 1995
through February 24, 2006 - that is, eleven years.

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App. Ct. 2005), the Puerto Rico Court of Appeals explained that in commercial transactions, the five
year period under Article 166 is calculated backwards from the date the foreclosure action is
commenced. In this case, Westernbank initiated the foreclosure action on May 9, 1997; therefore,
according to Liberty, it is limited to interest for the five year period from May 9, 1992 through May
9, 1997. Liberty concludes that Westernbank’s claim should be limited to the $976,481.93 in
principal already paid as per the 2001 stipulation and accrued interest of $149,172.94 as of the 2001
stipulation, which has also already been paid. However, according to Liberty, even if one calculates
the mortgage interest going back five years from the date of the public sale, Westernbank would be
entitled to $286,170.23 in interest and has already received $781,120.90. Therefore, Liberty argues,
Westernbank’s mortgage lien as to loan #3670 was fully paid and satisfied”’, and it not entitled to
any further payment from the proceeds of the sale of the Barrio Canas property (13.5 cuerdas,
Remnant I).

Westernbank argues that the Matos case is factually distinguishable from the case herein and

should therefore be disregarded by the court. According to Westernbank, the Matos case is only a
court of appeals case and is therefore only persuasive, but not precedential, while the Campos case
was a decision of the Puerto Rico Supreme Court. It argues that in Campos the court found that
interest is calculated backwards from the culmination, not the commencement, of the eminent
domain proceedings. Further, in the Matos case the loan’s interest rate was fixed and therefore it
was irrelevant how it was calculated; indeed, according to Westernbank, that was not even an issue

in the appeal. In the case herein, however, the interest rate varies at 2% over prime and is therefore

2!The principal of the mortgage upon which loan #3670 is based has already been paid;
Westernbank received $523,518.07 on October 19, 1999, and an additional $976,481.93
on February 24, 2006; therefore, the principal amount of $1,500,000.00 has been fully

paid. See transcript of hearing held 12/5/06, dkt. #759 at pp. 61-62. Westernbank does
not dispute that the principal amount has been paid.

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significantly affected by the manner in which the interest is calculated.

The Puerto Rico Supreme Court decision in Campos Ledesma controls the determination of
the extent of interest that may be paid to the secured creditor with a lien over real property. The
secured creditor may collect the full amount of the principal and up to five years of accumulated
interest prior to the date of the expropriation of the property. The decision in terms of the facts
before us applies to the five years prior to the sale of the property.

The Campos Ledesma decision was criticized by Professor Enid Martinez Moya [now also
a Superior Court Judge] in a learned exposition published in the University of Puerto Rico law
review. Enid Martinez Moya, “Derecho Registral Inmobiliario”, 71 Revista Juridica UPR 607
(2002). As it applies to this case, the main argument espoused by Professor Martinez Moya is that
Article 166 imposes a limitation to the secured creditor on the amount of interest that may be
charged when there are third parties with an interest over the real property. If there are third parties,
the total amount of the principal, and interest for the last two years plus the current year, may be
claimed. According to Professor Martinez Moya, Article 166 further provides that the parties may
agree to increase the two years of interest up to five years. The balance of the interest is still owed
but not secured. Professor Martinez Moya’s position is that if there are no third parties claiming an
interest over the property, the secured creditor can claim the full amount of principal plus all interests
accrued and not prescribed. The intent of Article 166 in limiting the amount of interest when there
are third parties involved is to facilitate the sale of real properties.

Even when this court is constrained to follow the Puerto Rico Supreme Court decision in
Campos Ledesma, the compelling analysis by Professor Martinez Moya is also met in this case. The

real property in question was sold while the debtor was a debtor in possession. The debtor in

possession is a separate entity from the debtor. 7 Lawrence P. King, et al., Collier on Bankruptcy

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§ 1101.01[3]. The debtor in possession as a separate entity is a third party with an interest over the
real property which is property of the estate. Ascribing the separate entity theory to the debtor in
possession does not divest the secured creditor from any right it may have under state law, as set

forth in Campos Ledesma. Moreover, there are junior lienholders with an interest over the real

property in question, and as such, are third parties.
In view of the above, the court finds that the amounts owed to Westernbank are the total
amount of principal and five years of interest up to the date of the sale on loan #3670.

Claims in Chapter 11 and Chapter 7, the Effect of a Chapter 11 Plan Confirmation Order, and
the Effect of Post-Confirmation Conversion to Chapter 7 on Claims

Section 1141(d)(1)(A) of the Bankruptcy Code provides that the confirmation of a plan
“discharges the debtor from any debt that arose before the date of such confirmation.” Pursuant to
this section, “all preconfirmation debts owed by the [debtors] to their creditors, including the
[movant creditor] were discharged upon confirmation of the Chapter 11 plan cee ‘Once the
reorganization plan is approved by the bankruptcy court, each claimant gets a “new” claim, based

upon whatever treatment is accorded to it in the plan itself.”” Murdock v. Holquin, 323 B.R. 275,

282 (N.D. Cal. 2005), quoting In re Benjamin Coal Co., 978 F.2d 823, 827 (3d Cir. 1992); see also,
Nat’| City Bank v. Troutman (In re Troutman), 253 B.R. 8, 11 (6" Cir. BAP 2000) (“Confirmation,

then, had the dual effect of discharging the Petitioning Creditor’s preconfirmation debt and replacing
it with their Plan Claims.”). The court in Murdock noted that:

A case converted from a Chapter 11 reorganization to a Chapter 7 liquidation after
confirmation of a plan is fundamentally different from a straightforward Chapter 7
liquidation. ... [C]onfirmation of a Chapter 11 plan vests all of the property of the
estatein the debtor, except as otherwise provided for in the Plan or as may be
otherwise excepted as a matter of law. Similarly, since all pre-confirmation debts are
discharged, only the claims provided for under the Plan or arising as part of its
administration may be asserted in the converted proceeding. Thus, a Chapter 7 estate
which comes into existence upon conversion of a confirmed Chapter 11 consists of
only those assets ‘provided for’ in the plan or includable as a matter of law in order

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to effectuate the plan.
323 B.R. at 283.
The conversion ofa case to chapter 7 does not disrupt the chapter 11 confirmation or “revoke

the discharge of pre-confirmation debts.” See Troutman Enterprises, 253 B.R. at 11; Bank of

Lousiana v. Pavlovich (In re Pavlovich), 952 F.2d 114 (5" Cir. 1992); Inre Chattanooga Wholesale
Antiques, Inc., 930 F.2d 458 (6" Cir. 1991). Conversion under the Bankruptcy Code is not designed

to change what has already happened, but rather to leave matters as they existed on the date of

conversion. See Confederated Tribes v. White (In re White), 139 F.3d 1268, 1272 (9" Cir. 1988);

In re Ramirez, 188 B.R. 413, 415 (9" Cir. BAP 1995).

When a debtor defaults on his confirmed chapter 11 plan, a creditor will be unable to revoke
or claim debt that was discharged by the confirmed plan. See In re Depew, 115 B.R. 965 (Bankr.
N.D. Ind. 1990); see also, In re Rodwell, 280 B.R. 100 (Bankr. N.J. 2002); Inre Cronk, 124 B.R. 759
(Bankr. N.D. Ill. 1990).

Liberty argues that since Westernbank’s claim as to loan #3279 was provided for as an
unsecured claim in its amended chapter 11 plan of reorganization it cannot now be treated as a
secured claim based upon agreements that Westernbank reached in the related bankruptcy cases of
Empresas Inabon and Hernandez Torres. Further, Liberty argues that any claim Westernbank may
have as to loan #3279 in the Hernandez Ortiz case was discharged while the case was under chapter
11 and cannot be revived by filing a claim once the case is converted to chapter 7.

Westernbank argues that Liberty is estopped from arguing the matter, and, further, that the
issue becomes moot upon the conversion of the case to chapter 7, because Fed. R. Bankr. P. 1019(2)
provides anew time period for filing claims in the converted case, and it filed a timely secured claim

as to loan #3279. It argues that once a chapter 11 plan is aborted and a case converted, the parties

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must revert to chapter 7 to distribute any remaining property of the estate, In re Reef Petroleum

Corp., 99 B.R. 355, 360 (Bankr. Mich. 1989), and the arrangements and obligations of the confirmed

plan likewise become meaningless, In re MFI, Inc., 1989 Bankr. LEXIS 1600).

Westernbank notes that it submitted documental proof of its security interest in the Barrio
Canas property related to loan #3279 on September 14, 2006 (dkt. #698). Further, it argues that the
September 13, 2006 motion to sell the Llanos del Sur properties in the Hernandez Torres case
occurred after the confirmation of the amended plan herein and, therefore, served to alter the
relationship between the parties as well as the treatment of Westernbank under the plan. According
to Westernbank, if Liberty objected to the treatment ofits claim as provided in the Hernandez Torres
stipulation, it should have objected at the time, and it is now barred by the doctrine of collateral
estoppel from opposing the agreement.

Liberty counters that an order in the case of Hernandez Torres cannot constitute a
modification of the confirmed plan in the Hernandez Ortiz case, nor a revocation of the discharge
under the confirmed plan. However, Westernbank argues that the cases of Hernandez Ortiz,
Hernandez Torres and Empresas Inabon are interrelated and have been extensive and subject to much
litigation, and all three, although they had confirmed plans of reorganization, have been converted
to chapter 7. Concessions have been made by parties, including Westernbank, in order for sales to
go through, and payments have been guaranteed from sources other than the specific case being dealt
with. Westernbank argues that Liberty has been an active participant in all cases and cannot claim
ignorance of these events or agreements.

The court finds that the amounts owed to Westernbank on loan #3279 are unsecured as that
was the treatment given in the confirmed plan. The parties cannot by stipulation grant secured status

where none was existent pre-petition. The confirmed plan contemplated payment in full of all

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claims. However, the plan could not be consummated as there were no sufficient assets to be
liquidated to pay all creditors in full. This insufficiency led to the post confirmation conversion of
the case to chapter 7.
Attorney’s Fees

Section 506(b) of the Bankruptcy Code provides that “[t]o the extent that an allowed secured
claim is secured by property the value of which ... is greater than the amount of such claim, there
shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs,
or charges provided for under the agreement under which such claim arose.” When fees are provided
for in the underlying agreement, allowance of the attorney’s fees is mandatory. In re Auto

Specialties Mfg. Co., 18 F.3d 358, 362 (6" Cir. 1994); In re K.H. Stephenson Supply Co., 768 F.2d

580 (4° Cir. 1985); Inre Williams, 174 B.R. 307 (Bankr. D. Kan. 1994); Lawrence P. King, et
al., Collier on Bankruptcy P 506.04[3] (15 ed. rev’d 2007). In determining whether fees are
reasonable under section 506(b), courts “generally require the party seeking allowance of
attorney’s fees to carry the burden of demonstrating reasonableness by providing a detailed
description of services rendered, supporting documentation, or other evidence prior to making a
determination on an application for payment.” 4 Lawrence P. King, et al., Collier on Bankruptcy P
506.04[3] [a] [iii] (15" ed. rev’d 2005).

According to Westernbank, attorney’s fees were contractually agreed to in the promissory
notes and, therefore, are part of the amounts to which Westernbank is entitled. Westernbank argues
that its requested fees are “more than reasonable” but, in the alternative, it will submit a fee
application for the court’s scrutiny.

According to Liberty, the February 21, 2001 stipulation did not provide for any attorney’s

fees and, further, any said fees cannot be allowed until evidence is provided and they are examined

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by the court and found to be reasonable.

The court finds that since Westernbank as first lienholder is an over secured creditor and the
contract provides for attorney’s fees it may be allowed reasonable fees. However, the court has not
been placed in a position to determine the reasonableness of the fees. This court follows the lodestar

method in determining the reasonableness of attorney’s fees. In re Boston and Maine Corporation,

778 F.2d 890 (1* Cir. 1985); In re C.P. del Caribe, Inc., et als, 143 B.R. 11 (Bankr. D. P.R. 1992).

The fees set forth in the contract are not necessarily reasonable. The movant has the burden of
demonstrating that they are.
Conclusion

In view of the foregoing the court rules as follows:

1. The motion to alter or amend is hereby granted.

2, The amount of interest owed on loan #3670 is limited to five years prior to the date of the
sale. Balance of interest owed is unsecured. Any corrections to conform to this ruling will be filed
within twenty (20) days.

3. Amounts owed in loan #3279 are unsecured as to this case, thus, Westernbank may not
be paid from the proceeds of the sale of the Barrio Canas property until all secured interests are
satisfied.

4. The request for attorney’s fees is hereby denied without prejudice to filing an application
following the lodestar method in order to place the court in a position to pass upon their
reasonableness.

SO ORDERED.

Dated this 23 day of August, 2007, in San Juan, Puerto Rico.

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