REDONDO CONSTRUCTION CORPORATION v. SUMMERTIME DEVELOPERS CORPORATION et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
In re: 	:
:
REDONDO CONSTRUCTION CORP., 	: 	Case No. 02-02887 (GAC)
:
Debtor 	: 	Chapter 11
___________________________________:
:
REDONDO CONSTRUCTION CORP., 	:
:
Plaintiff 	:
:
v. 	: 	Adv. No. 04-00017
:
SUMMERTIME DEVELOPMENT CORP., 	:
RAMON MARTINEZ PEREZ and 	:
JUAN MARTINEZ PEREZ, 	:
:
Defendants 	:
___________________________________:
DECISION AND ORDER
Pending before this Court are two Motions to Dismiss (Docket
#28 and Docket #43). The debtor filed this adversary proceeding on
February 9, 2004, to determine whether Summertime Development Corp.
(“Summertime”) 	and 	Mr. 	Ramon 	Martinez 	Perez, 	President 	of
Summertime 	(“Mr. 	Ramon 	Martinez”) 	have 	unlawfully 	withheld
$390,597.00, 	which 	the 	debtor 	alleges 	is 	due 	under 	the 	Amended
Construction Contract between the debtor and Summertime. The debtor
contends 	that 	the 	act 	of 	withholding 	the 	funds 	violates 	the
automatic stay of 11 U.S.C. § 362(a)(3) and § 542(a). 	The debtor
also contends that the act constitutes contempt, sanctionable under
11 	U.S.C. 	§ 	105(a). 	Summertime 	and 	Mr. 	Ramon 	Martinez
counterclaimed (Docket #5). Afterward, the debtor filed an Amended
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Complaint 	to 	include 	Mr. 	Juan 	Martinez 	Perez, 	Vice-President 	of
Summertime (“Mr. Juan Martinez”) seeking to hold him liable in his
personal 	capacity 	for 	the 	amount 	due 	to 	the 	debtor 	under 	the
Amended Contract and for damages resulting from his involvement in
the withholding of the monies as Vice-President and 50% shareholder
of Summertime (Docket #17).
A. Motion to Dismiss filed by Mr. Ramon Martinez
On 	May 	9, 	2005, 	a 	Motion 	to 	Dismiss 	was 	filed 	by 	Mr. 	Ramon
Martinez (Docket #28), alleging that taking all the allegations of
the Complaint as true, it fails to state a claim upon which relief
could be granted. He contends that he should not be held personally
liable 	for 	the 	damages 	claimed 	because 	he 	was 	not 	a 	party 	in 	the
Amended Contract entered between the plaintiff and Summertime. He
contends 	that 	although 	he 	appeared 	in 	the 	Amended 	Contract 	as
Summertime’s representative, his action was within his capacity as
President 	of 	Summertime. 	He 	therefore 	maintains 	that 	because
contracts are valid only between the parties, the Complaint, as to
him, should be dismissed.
On 	June 	8, 	2005, 	debtor 	filed 	an 	Opposition 	(Docket 	#34),
alleging 	that 	Mr. 	Ramon 	Martinez 	is 	personally 	liable 	for 	the
amount 	due 	to 	debtor 	under 	the 	Amended 	Contract, 	for 	damages
resulting 	from 	their 	actions 	and 	the 	refusal 	to 	turn 	over 	the
amounts 	due 	in 	violation 	of 	§ 	362(a)(3) 	and 	§ 	542(a), 	and
sanctionable 	under 	§ 	105(a). 	Debtor 	maintains 	that 	Mr. 	Ramon
Martinez willfully, maliciously and with dolus improperly retained
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and 	refused 	to 	pay 	debtor. 	Debtor 	contends 	that 	the 	personal
liability 	of 	Mr. 	Ramon 	Martinez, 	Summertime’s 	President 	and 	the
signatory 	to 	the 	Amended 	Contract, 	is 	for 	his 	failure 	to 	satisfy
the obligations of Summertime under Puerto Rico Law and supported
by the common law tort theory of liability. The debtor asserts that
under Puerto Rico law, an officer or director of a corporation may
be held liable for a tort in which he actively participates. Thus,
the Motion to Dismiss should be denied.
B. Motion to Dismiss filed by Mr. Ramon Martinez
On August 3, 2005, a Motion to Dismiss was filed by Mr. Juan
Martinez, contending that he cannot be held liable in his personal
capacity 	(Docket 	#43). 	In 	the 	Complaint, 	the 	debtor 	recognizes
that 	Mr. 	Ramon 	Martinez, 	as 	President 	of 	Summertime, 	signed 	the
Amended 	Contract 	on 	Summertime’s 	behalf 	(Docket 	#1). 	Mr. 	Juan
Martinez did not appear as a party nor representative of Summertime
in the contract. 	Mr. Juan Martinez asserts that as Vice-President
of Summertime, he had a duty to protect the assets of the Company
and any acts taken in his capacity as Vice-President are on behalf
of 	the 	Company. 	Mr. 	Juan 	Martinez 	also 	maintains 	that 	he 	is
separate and independent from Summertime, and thus cannot be held
liable for the corporation’s alleged debts and omissions.
The debtor filed an Answer to the Motion to Dismiss contending
that 	the 	cause 	of 	action 	against 	Mr. 	Juan 	Martinez 	is 	not 	for
breach 	of 	contract 	but 	as 	a 	result 	of 	his 	illegal 	withholding 	of
funds, 	which 	are 	property 	of 	the 	debtor’s 	estate 	under 	the
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Bankruptcy 	Code 	(Docket 	#46). 	The 	debtor 	states 	that 	the 	Amended
Complaint 	alleges 	several 	claims 	against 	Mr. 	Juan 	Martinez. 	The
debtor argues that it fulfilled its obligations under the contract
with 	Summertime 	and 	that 	there 	is 	no 	valid 	reason 	for 	the
withholding 	of 	payments 	due 	under 	the 	contract. 	The 	Amended
Complaint also alleges that Mr. Juan Martinez’s acts in withholding
the 	payment 	due 	to 	the 	debtor 	under 	the 	Amended 	Contract 	are
willful, done with knowledge of the filing of debtor’s Chapter 11
petition, and contumacious. 	Likewise, the debtor argues that Mr.
Juan 	Martinez 	has 	committed 	contempt 	of 	court 	and 	should 	be
sanctioned under 11 U.S.C. § 105(a). 	The debtor also states that
Mr. 	Juan 	Martinez 	is 	obligated 	to 	turn 	the 	funds 	over 	under 	11
U.S.C. 	§ 	542(a). 	Finally, 	the 	debtor 	contends 	that 	Mr. 	Juan
Martinez is liable under Puerto Rico law, stating that an officer
or 	director 	of 	a 	corporation 	may 	be 	held 	liable 	for 	a 	corporate
tort in which he actively participates and that he is liable under
theories of breach of contract and tort for his wrongdoing.
DISCUSSION
In ruling on a motion to dismiss, a court must accept as true
all 	the 	factual 	allegations 	in 	the 	complaint 	and 	construe 	all
reasonable inferences in favor of the plaintiffs. See Alternative
Energy, 	Inc. 	v. 	St. 	Paul 	Fire 	and 	Marine 	Insurance 	Company, 	267
F.3d 30, 33 (1st Cir. 2001). Dismissal under Federal Rule of Civil
Procedure 12(b)(6) is appropriate only if the facts alleged by the
plaintiff, 	taken 	as 	true, 	do 	not 	justify 	recovery. 	See 	Aulson 	v.
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Banchard, 	83 	F.3d 	1, 	3 	(1st 	Cir. 	1996). 	Therefore, 	in 	order 	to
survive 	a 	motion 	to 	dismiss, 	plaintiff 	must 	set 	forth 	"factual
allegations, either direct or inferential, regarding each material
element necessary to sustain recovery." Gooley v. Mobil Oil Corp.,
851 F.2d 513 (1st Cir. 1988).
In 	the 	present 	case, 	both 	defendants 	meet 	the 	standard 	to
obtain a 12(b)(6) dismissal. The facts alleged by the debtor in the
Amended Complaint taken as true, do not justify recovery from Mr.
Ramon Martinez or Mr. Juan Martinez.
In 	the 	instant 	case, 	the 	debtor’s 	claim 	against 	Mr. 	Ramon
Martinez 	relates 	to 	whether 	the 	latter 	can 	be 	held 	personally
liable 	for 	his 	actions 	as 	President 	and 	50% 	shareholder 	of
Summertime 	in 	withholding 	payment 	due 	pursuant 	to 	the 	Amended
Contract 	entered 	between 	Summertime, 	represented 	by 	him 	as
President, 	and 	the 	debtor. 	Mr. 	Ramon 	Martinez 	contends 	that 	the
claim should be dismissed in view of the fact that he acted in his
official capacity on behalf of the company, that he was not a party
in 	the 	Amended 	Contract 	and 	that 	he 	is 	separate 	and 	independent
from 	Summertime; 	thus 	he 	cannot 	be 	held 	liable 	for 	the
corporation’s alleged debts and omissions.
On 	the 	other 	hand, 	the 	debtor’s 	claim 	against 	Mr. 	Juan
Martinez 	relates 	to 	whether 	the 	latter 	can 	be 	held 	personally
liable 	for 	his 	actions 	as 	Vice-President 	and 	50% 	shareholder 	of
Summertime 	in 	withholding 	payment 	due 	pursuant 	to 	the 	Amended
Contract entered between Summertime, represented by its President,
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Mr. 	Ramon 	Martinez, 	and 	the 	debtor. 	Mr. 	Juan 	Martinez 	contends
that 	the 	claim 	should 	be 	dismissed 	in 	view 	of 	the 	fact 	that 	he
acted in his official capacity on behalf of the company and that he
is separate and independent from Summertime; thus he cannot be held
liable for the corporation’s alleged debts and omissions.
“It 	is 	a 	well-known 	fact 	that 	a 	corporation 	has 	its 	own
personality and assets, which is separate and distinct from those
of 	its 	stockholders, 	whether 	these 	are 	natural 	or 	artificial
persons. 	14 	L.P.R.A. 	§ 	1106.” 	D.A.C.O. 	v. 	Alturas 	de 	Florida
Development 	Corp., 	132 	P.R. 	Dec. 	905, 	924 	(1993). 	Consequently,
the liability of the stockholders for the debts and obligations of
the corporation is generally limited to whatever assets they have
brought 	to 	the 	corporate 	capital. 	D.A.C.O. 	v. 	Alturas 	de 	Florida
Development Corp., 132 P.R. Dec. 905, 925 (1993) (citing Fleming v.
Toa Alta Develop. Corp., 96 P.R. Dec. 240, 244 (1968)).
The 	Supreme 	Court 	of 	the 	United 	States 	has 	also 	made 	the
distinction 	between 	a 	shareholder 	and 	the 	corporation 	itself.
Although 	this 	case 	is 	one 	in 	which 	a 	shareholder 	filed 	an 	action
under 42 U.S.C. § 1981 claiming discrimination, the Supreme Court
held that a shareholder could not claim discrimination because he
was not a party in the contract. His corporation was only entitled
to breach of contract damages, which were settled in the bankruptcy
proceeding. Domino’s Pizza v. Macdonald, 126 S.Ct. 1246 (2006). The
Court specifically held:
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McDonald's 	complaint 	does 	identify 	a
contractual 	relationship, 	the 	one 	between
Domino's 	and 	JWM. 	But 	it 	is 	fundamental
corporation and agency law--indeed, it can be
said 	to 	be 	the 	whole 	purpose 	of 	corporation
and 	agency 	law--that 	the 	shareholder 	and
contracting 	officer 	of 	a 	corporation 	has 	no
rights 	and 	is 	exposed 	to 	no 	liability 	under
the corporation's contracts.
Domino's 	filed 	a 	proof 	of 	claim 	against 	JWM
during 	its 	corporate 	bankruptcy; 	it 	did 	not
proceed 	against 	McDonald 	personally. 	The
corporate 	form 	and 	the 	rules 	of 	agency
protected his personal assets, even though he
"negotiated, signed, performed, and sought to
enforce" contracts for JWM.
Domino’s Pizza v. Macdonald, 126 S.Ct. 1246 (2006).
On 	the 	other 	hand, 	this 	Court 	recognizes 	that 	an 	individual
can 	be 	held 	liable 	for 	torts 	that 	the 	individual 	committed 	while
acting in their official capacity as an officer of a corporation.
See 	3A 	William 	Fletcher, 	Fletcher 	Cyclopedia 	of 	Law 	of 	Private
Corporations 	§ 	1135 	(2005). 	Similarly, 	under 	Puerto 	Rico 	law, 	an
officer 	or 	director 	may 	be 	held 	liable 	for 	a 	corporate 	tort 	in
which he actively participates. Escude Cruz v. Ortho Pharmaceutical
Corp., 619 F.2d 902, 907 (1st Cir. 1980).
The debtor argues that the defendants committed torts, but the
allegations 	of 	the 	complaint 	only 	amount 	to 	breach 	of 	contract.
Different interests are protected by actions for breach of contract
and tort actions. Actions for breach of contract protect interests
in having promises performed and tort actions protect interests in
freedom 	from 	harms 	incident 	to 	intrusions 	upon 	legally 	protected
interests. 	W. Prosser, Torts 613, § 92. 	Repudiation of a contract
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is 	not 	a 	tort. 	Redgrave 	v. 	Boston 	Symphony 	Orchestra, 	Inc., 	557
F.Supp. 	230, 	237 	(D. 	Mass. 	1983). 	As 	stated 	by 	the 	court 	in
Redgrave:
a 	breach 	of 	contract 	is 	not, 	standing 	alone, 	a 	tort 	as
well. 	And it cannot be converted into a tort merely by
attaching to the contract, or to the breach, new labels
that 	sound 	in 	tort. 	Calling 	a 	“breach 	of 	contract” 	a
“tortious repudiation of contract” is no more helpful in
identifying a ground of tort liability than would be an
argument that every breach of contract–or perhaps every
willful breach-is a tort.
Id. 	at 	238. 	“Absent 	some 	identifiable 	tort 	theory, 	no 	reason
appears 	for 	enlarging 	remedies 	for 	the 	breach 	of 	contract 	. 	. 	.
beyond those, supported by precedents, protecting the interest in
having promises performed.” Id.
The 	debtors 	also 	argue 	that 	the 	defendants 	violated 	the
automatic 	stay. 	With 	respect 	to 	violations 	of 	stay, 	the 	First
Circuit has stated that:
[a] 	willful 	violation 	does 	not 	require 	a
specific intent to violate the automatic stay.
The 	standard 	for 	a 	willful 	violation 	of 	the
automatic stay under 11 U.S.C. § 362(h) is met
if 	there 	is 	knowledge 	of 	the 	stay 	and 	the
defendant 	intended 	the 	actions 	which
constituted the violation.
Fleet 	Mortgage 	Group, 	Inc. 	v. 	Kaneb, 	196 	F.3d 	265, 	269 	(1st
Cir. 1999). Likewise, the First Circuit has held that a creditor’s
violation of the automatic stay is not a strict liability tort and
that a debtor’s recovery under a tort theory, requires proof that
the creditor violated the automatic stay under circumstances that
satisfy 	the 	elements 	of 	the 	tort 	theory 	in 	question. 	Vahlsing 	v.
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Commercial Union Insurance Co., Inc., 928 F.2d 486 (1st Cir. 1991).
Thus, a willful violation of stay does not equate with a commission
of a tort.
Moreover, in Spookyworld, the First Circuit Court of Appeals
held 	that 	corporations 	cannot 	sue 	under 	11 	U.S.C. 	§ 	362(h) 	to
collect damages for violations of the automatic stay. 	Spookyworld,
Inc. 	v. 	Town 	of 	Berlin, 	346 	F.3d 	1, 	8 	(1st 	Cir. 	2003).
Nonetheless, 	corporations 	may 	seek 	damages 	for 	automatic 	stay
violations 	under 	11 	U.S.C. 	§ 	105(a). 	Id. 	The 	First 	Circuit
recognized 	that 	damages 	awarded 	pursuant 	to 	this 	section 	are
contempt orders. Id. “[C]ivil contempt is somewhat analogous to a
tort judgment for damages.” 	Morales Feliciano v. Rosello Gonzalez,
124 F.Supp.2d 774, 785 (D.P.R. 2000). 	But, the similarity does not
equate a contempt proceeding with being a tort action.
The debtor’s claim against Summertime, Mr. Ramon Martinez and
Mr. Juan Martinez is for breach of contract and the debtor seeks to
have 	Summertime 	held 	in 	contempt 	for 	violation 	of 	the 	automatic
stay 	and 	for 	failure 	to 	turnover 	funds 	that 	are 	property 	of 	the
estate. 	The debtor does not include any cause of action for which
Mr. Ramon Martinez or Mr. Juan Martinez could be held individually
liable.
First, Mr. Ramon Martinez as President of Summertime was the
one suited to appear for Summertime in the Amended Contract. This
is 	not 	to 	be 	understood 	that 	he 	was 	the 	one 	who 	entered 	the
contract with debtor. The Amended Contract was between the debtor
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and Summertime as a corporation. Although debtor asserts that Mr.
Ramon 	Martinez 	willfully, 	maliciously 	and 	with 	dolus 	improperly
retained 	and 	refused 	to 	pay 	debtor, 	under 	the 	specific 	facts 	of
this case, this is not enough to hold him personally liable for the
allegations of the Amended Complaint.
Secondly, the debtor recognizes that Mr. Juan Martinez is only
a 50% shareholders of the company; that he acted as Vice-President;
and 	that 	he 	was 	not 	the 	one 	who 	appeared 	as 	the 	legal
representative 	of 	Summertime 	in 	the 	Amended 	Contract. 	The 	debtor
merely characterizes Mr. Juan Martinez as the person in charge of
Summertime and contends that he unlawfully orchestrated the scheme
to deprive the debtor of the funds to which it was entitled.
The Court concludes that the debtor has failed to allege that
Mr. Ramon Martinez or Mr. Juan Martinez violated the automatic stay
under 	circumstances 	satisfying 	the 	elements 	of 	any 	tort 	theory.
Likewise, 	a 	mere 	contention 	that 	an 	alleged 	violation 	of 	stay
constitutes contempt, does not appear to satisfy the elements of a
tort theory. Accordingly, the complaint will be dismissed as to Mr.
Ramon Martinez and Mr. Juan Martinez.
ORDER
WHEREFORE 	IT 	IS 	ORDERED 	that 	the 	motion 	to 	dismiss 	filed 	by
Mr. 	Ramon 	Martinez 	(Docket 	#28), 	shall 	be, 	and 	it 	hereby 	is,
GRANTED.
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IT IS FURTHER ORDERED that the motion to dismiss, filed by Mr.
Juan Martinez (Docket #43), shall be, and it hereby is, GRANTED.
SO ORDERED.
San Juan, Puerto Rico, this 22nd day of May, 2006.
s/ Gerardo A. Carlo-Altieri
_____________________________
GERARDO A. CARLO-ALTIERI
Chief, U.S. Bankruptcy Judge
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