INMOBILIARIA MENDOZA DEL NORTE INC

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
In re: 	:
:
FRANCISCO MENDOZA, INC., 	: 	Case No. 07-01474 (GAC)
:
Debtor 	: 	Chapter 11
___________________________________:
:
COMMERCIAL MENDOZA, INC., 	: 	Case No. 07-01476 (GAC)
:
Debtor 	: 	Chapter 11
___________________________________:
:
INVERSIONES MENDOZA, INC., 	: 	Case No. 07-01477 (GAC)
:
Debtor 	: 	Chapter 11
___________________________________:
:
INMOBILIARIA MENDOZA DEL 	: 	Case No. 07-01478 (GAC)
NORTE, INC., 	:
:
Debtor 	: 	Chapter 11
___________________________________:
DECISION AND ORDER
Before the Court are Westernbank’s amended motions for relief
from 	the 	automatic 	stay 	to 	foreclose 	collateral, 	the 	debtors’
opposition 	and 	motions 	to 	dismiss 	the 	requests 	for 	relief 	from
stay. 	For the reasons set forth below, the debtors’ requests for
dismissal will be denied and the motions for relief from stay will
be granted.
Background
The 	debtors 	(collectively 	“the 	Mendoza 	Corporations”) 	filed
voluntary 	petitions 	under 	Chapter 	11 	on 	March 	21, 	2007. 	At 	the
time 	of 	the 	filing, 	the 	debtors 	were 	engaged 	in 	the 	sale 	of
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household furniture and appliances throughout Puerto Rico. 	On June
15, 2007, the debtors ceased operations at all of their stores.
Westernbank 	has 	filed 	a 	secured 	proof 	of 	claim 	in 	all 	four
cases 	for 	$41,831,672.00, 	claiming, 	among 	other 	things, 	accounts
receivable, 	inventory, 	cash 	collateral, 	as 	well 	as 	the 	debtors’
real property, as security. 	More than six years ago, the debtors
gave 	separate, 	individual 	and 	unlimited 	corporate 	guarantees 	to
Westernbank, 	pursuant 	to 	which 	the 	debtors 	agreed 	to 	be
unconditionally, 	jointly 	and 	severally 	liable 	for 	the 	full
indebtedness 	to 	Westernbank. 	The 	guarantees 	were 	signed 	by 	the
then 	Treasurer 	of 	the 	debtor 	corporations 	and 	notarized. 	The
debtors also executed Loan and Security Agreements with Westernbank
on 	September 	28, 	2001, 	pursuant 	to 	which 	Westernbank 	agreed 	to
disburse 	credits 	and 	revolving 	loans 	to 	finance 	the 	commercial
operations 	of 	the 	Mendoza 	Corporations 	for 	the 	total 	amount 	of
$43M. 	The 	Loan 	and 	Security 	Agreements 	were 	signed 	by 	the 	then
president 	of 	the 	debtors’ 	board 	of 	directors 	and 	notarized.
Westernbank 	presently 	holds 	at 	least 	thirty-four 	mortgages 	over
twenty-eight 	real 	properties 	in 	Puerto 	Rico 	belonging 	to 	the
debtors.
Westernbank 	disbursed 	the 	sum 	of 	$41,831,672.00 	to 	the
debtors. 	The 	disbursed 	sums 	accrued 	interest 	in 	an 	amount
exceeding 	$250,000.00 	monthly. 	Although 	the 	debtors 	paid
Westernbank 	approximately 	$14M 	in 	the 	year 	prior 	to 	filing
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bankruptcy, 	the 	debtors 	have 	made 	no 	post-petition 	payments 	to
Westernbank and the collateral for Westernbank’s loans is valued at
less than $35M. 	The debtors have admitted that Westernbank is an
undersecured 	creditor. 	The 	Court 	concludes 	that 	Westernbank’s
security interests are undercollateralized.
Westernbank seeks relief from the automatic stay to foreclose
its security interests over the collateral. 	The parties engaged in
significant discovery and the debtors repeatedly sought dismissal
of Westernbank’s motions for relief from stay for failure to comply
with 	discovery 	requests. 	Westernbank 	waived 	the 	thirty 	day
determination period and after various hearings, the Court took the
matter under advisement.
While 	the 	Court 	was 	considering 	the 	motions, 	a 	third 	party,
Grupo 	Hima 	San 	Pablo, 	filed 	an 	informative 	motion 	indicating 	its
interest 	in 	purchasing 	various 	real 	properties 	of 	the 	estate 	for
the sum of $21,800,000.00 (dkt. #294). 	Based on the motion and the
fact 	that 	the 	purported 	offer 	was 	for 	more 	than 	the 	previous
appraisals 	of 	the 	properties, 	the 	Court 	ordered 	the 	debtor,
Inversiones 	Mendoza, 	Inc., 	and 	Westernbank 	to 	respond 	to 	the
motion(dkt. #297). 	The debtor informed that it is not interested
in 	selling 	the 	property 	(dkt. 	#307). 	Rather, 	as 	contemplated 	in
the 	debtors’ 	plan 	of 	reorganization, 	the 	debtors 	desire 	to 	lease
these properties, hoping to obtain between $1.39M and $1.626M from
the 	lease 	within 	the 	first 	five 	years 	of 	the 	plan. 	Westernbank
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filed a motion contending that the offer is a windfall (dkt. #312).
Westernbank argues that it would allow the debtors to halve their
debt to Westernbank and could be accomplished while saving nearly
$875,000.00 in real estate commissions. 	Westernbank also indicated
that it would finance the purchase of the properties by Grupo HIMA.
Thus, 	it 	appearing 	that 	Hospital 	Hima’s 	purported 	offer 	for
the 	purchase 	of 	the 	property 	has 	no 	bearing 	on 	this 	matter,
especially 	given 	the 	rejection 	of 	the 	offer 	by 	the 	debtors, 	the
Court 	will 	proceed 	to 	the 	merits 	of 	the 	motions 	for 	relief 	from
stay.
Validity of Security Interests in Inventory and Account Receivables
The 	debtors 	allege 	that 	the 	claims 	over 	the 	inventory 	and
accounts receivable of Francisco Mendoza and Comercial Mendoza were
not 	properly 	signed 	and 	dated 	as 	required 	by 	the 	Puerto 	Rico
Uniform Commercial Code (“UCC”) and are thus invalid. 	Of relevance
here, the Laws of Puerto Rico provide that financing statements are
sufficient 	if 	signed 	by 	the 	debtor 	and 	if 	they 	include 	a
description of the collateral. 	19 L.P.R.A. § 2152(1). 	The Laws of
Puerto Rico do not require that a financing statement be dated.
The 	Court 	concludes 	that 	the 	existence 	of 	a 	date 	in 	a 	UCC
filing 	is 	not 	essential 	to 	a 	determination 	of 	the 	nature 	of 	the
obligation. 	Thus, 	the 	Court 	concludes 	that 	perfection 	is 	not
dependent upon the inclusion of a date in the financing statement.
In the present case, although the financing statements themselves
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are not dated, they are date stamped with the date of registration
with 	the 	Puerto 	Rico 	Department 	of 	State. 	Moreover, 	the 	riders
attached 	to 	the 	financing 	statements 	are 	dated. 	The 	Court
concludes 	that 	Westernbank’s 	secured 	claims 	are 	not 	invalidated
based 	on 	any 	alleged 	inadequacies 	in 	the 	dating 	of 	the 	financing
statements.
With 	respect 	to 	signatures, 	the 	Laws 	of 	Puerto 	Rico 	require
the debtor’s signature on a financing statement, but do not require
that 	the 	signature 	be 	notarized. 	The 	Laws 	of 	Puerto 	Rico
specifically indicate that the parties have the option, but not the
obligation to have their signatures notarized. 	19 L.P.R.A. § 2152.
In 	the 	present 	case, 	the 	financing 	statements 	covering 	the
inventory and accounts receivable are signed by the then treasurer
of 	the 	Mendoza 	Corporations. 	Because 	authentication 	is 	not 	a
mandatory 	requirement, 	the 	Court 	concludes 	that 	the 	signature 	of
the debtors’ treasurer is sufficient.
The 	signed 	financing 	statements, 	as 	well 	as 	the 	Loan 	and
Security 	Agreements, 	grant 	Westernbank 	a 	security 	interest. 	In
referring 	to 	what 	is 	covered 	by 	the 	financing 	statements, 	the
statements include the words “see schedule attached.” 	In turn, the
riders attached to the financing statements, include lists of the
collateral 	covered 	by 	the 	financing 	statements. 	The 	financing
statements 	were 	filed 	with 	the 	Puerto 	Rico 	Department 	of 	State.
Thus, 	from 	the 	documents 	submitted, 	the 	Court 	concludes 	that 	the
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debtors 	intended 	to 	transfer 	their 	interests 	in 	property 	as
security 	to 	Westernbank 	and 	the 	liens 	against 	the 	debtors’
inventory 	and 	accounts 	receivable 	were 	properly 	recorded 	and
perfected.
Validity of Security Interests in Cash Collateral
The 	debtors 	also 	allege 	that 	the 	cash 	collateral 	over 	the
proceeds of the leases and other income of Inversiones Mendoza and
Immobiliaria 	Mendoza 	are 	insufficiently 	described 	in 	the 	UCC
filings and are likewise invalid. 	As to the identification of the
object of the secured transaction, the Laws of Puerto Rico provide
that 	“any 	description 	of 	personal 	property 	. 	. 	. 	is 	sufficient
whether or not it is specific if it reasonably identifies what is
described 	. 	. 	.” 	19 	L.P.R.A. 	§ 	2010. 	In 	the 	present 	case, 	the
signed UCC forms include all income, interest, profits, rents and
proceeds 	from 	the 	mortgaged 	properties 	and 	refer 	to 	an 	attached
Schedule A, which includes a listing of the mortgage amounts, the
location of the property and the deed numbers. 	The Court concludes
that 	the 	UCC 	filings 	reasonably 	identify 	the 	property 	in 	which
Westernbank 	took 	a 	security 	interest. 	Thus, 	the 	Court 	concludes
that the UCC filings over the rents and other income are perfected
and valid.
Validity of Security Interests in Real Property
The debtors allege that some of Westernbank’s liens over real
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property 	are 	not 	duly 	perfected 	because 	they 	have 	not 	yet 	been
recorded. 	The 	Court 	concludes 	that 	prepetition, 	Westernbank
presented 	the 	deeds 	over 	the 	debtors’ 	real 	properties 	for
registration in the Registry of Property. 	The Laws of Puerto Rico
require that deeds be recorded by the Registry of Property within
sixty 	days, 	“except 	for 	just 	cause 	that 	is 	duly 	justified 	and
admitted by the Director.” 	30 L.P.R.A. § 2255. 	The fact that the
liens are not yet recorded is due to an ongoing backlog and delay
by the Registrar of Property, which does not affect the validity of
the 	liens. 	Once 	recorded, 	the 	deeds 	are 	effective 	against 	third
parties from the initial date of presentation. 	30 L.P.R.A. § 2256.
Thus, Westernbank’s security interest in the real properties will
be considered perfected as of the date of presentation. 	The Court
concludes that Westernbank’s claims against the real property are
secured.
Merits of Stay Relief
Westernbank primarily moves for relief from stay pursuant to
11 U.S.C. § 362(d)(2). 	This section provides for relief from the
automatic 	stay 	in 	the 	situation 	where 	the 	debtor 	does 	not 	have
equity in the property and where the “property is not necessary to
an effective reorganization.” 	11 U.S.C. § 362(d)(2). 	Westernbank
has the burden of proof as to the debtors’ equity in the property.
See 	11 	U.S.C. 	§ 	362(g)(1). 	After 	the 	movant 	has 	met 	its 	burden,
pursuant 	to 	11 	U.S.C. 	§362(g), 	the 	debtors 	bear 	the 	burden 	of
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demonstrating 	that 	the 	property 	is 	“necessary 	to 	an 	effective
reorganization” under § 362(d)(2).
The debtors must prove by a preponderance of the evidence that
there is “‘a reasonable possibility of a successful reorganization
within 	a 	reasonable 	time.’” 	United 	Savings 	Assoc. 	of 	Texas 	v.
Timbers 	of 	Inwood 	Forest 	Assoc. 	Ltd., 	484 	U.S. 	365, 	376
(1988)(citations omitted)(quoting In re Timbers, 808 F.2d 363, 370
(5th 	Cir. 	1987)(en 	banc)). 	“What 	this 	requires 	is 	not 	merely 	a
showing 	that 	if 	there 	is 	conceivably 	to 	be 	an 	effective
reorganization, this property will be needed for it; but that the
property 	is 	essential 	for 	an 	effective 	reorganization 	that 	is 	in
prospect.” 	In 	re 	Gunnison 	Center 	Apartments, 	LP, 	320 	B.R. 	391
(Bankr. D.Colo. 2005)(emphasis in original).
In 	the 	present 	case, 	as 	the 	Court 	previously 	concluded, 	the
debtors have no equity in the real property, inventory nor accounts
receivable. 	The 	property 	is 	fully 	encumbered. 	The 	debtors 	have
filed a joint plan of reorganization, which is premised on the sale
of real properties, rents obtained from the leasing of commercial
properties and funds obtained from litigation. 	While the debtors
seek 	to 	lease 	various 	properties, 	and 	have 	sought 	to 	employ
professionals 	with 	expertise 	in 	the 	leasing 	of 	commercial
properties, 	the 	debtors 	themselves 	have 	no 	expertise 	in 	the
development 	of 	real 	estate. 	The 	evidence 	presented 	shows 	that
achieving 	full 	value 	of 	the 	properties 	requires 	knowledge 	of 	the
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market, capital to cover carrying costs and time.
The 	debtors 	have 	no 	income, 	except 	for 	the 	collection 	of
account 	receivables, 	which 	are 	encumbered 	by 	Westernbank’s 	lien.
The 	Court 	notes 	that 	there 	are 	millions 	of 	dollars 	in 	priority
claims, including, among others, claims for income taxes, property
taxes, unemployment insurance, worker’s compensation and unfunded
pension 	liabilities. 	There 	are 	also 	administrative 	claims
accruing. 	Moreover, during the bankruptcy case, Westernbank paid
$150,000.00 	to 	insure 	the 	real 	properties. 	The 	Court 	concludes
that the debtors have insufficient unencumbered funds to maintain,
market, make tax payments and insure the real properties.
The debtors seek to surcharge the collateral for the expenses
of maintenance. 	To effect their plan, the debtors also seek to use
the 	proceeds 	of 	Westernbank’s 	collateral 	to 	pay 	administrative
expenses 	and 	to 	litigate 	various 	causes 	of 	action 	against
Westernbank. 	The Bankruptcy Code provides that “[t]he trustee may
recover 	from 	property 	securing 	an 	allowed 	secured 	claim 	the
reasonable, 	necessary 	costs 	and 	expenses 	of 	preserving, 	or
disposing 	of, 	such 	property 	to 	the 	extent 	of 	any 	benefit 	to 	the
holder of such claim.” 	11 U.S.C. § 506(c).
“It 	is 	the 	general 	rule 	that 	the 	unsecured 	creditors 	must
assume 	the 	costs 	of 	administering 	the 	estate.” 	In 	re 	Parque
Forestal, Inc., 949 F.2d 504, 511 (1st Cir. 1991). 	See also In re
Visual 	Industries, 	Inc., 	57 	F.3d 	321, 	324 	(3d 	Cir. 	1995); 	In 	re
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Flagstaff Food Service Corp., 739 F.2d 73, 76 (2d Cir. 1984). 	As
stated by the Fifth Circuit Court of Appeals:
In order to charge a secured creditor with administrative
expenses 	under 	§ 	506(c), 	three 	elements 	must 	be 	shown:
(1) 	the 	expenditure 	was 	necessary, 	(2) 	the 	amounts
expended were reasonable, and (3) the creditor benefitted
from 	the 	expenses. 	In 	re 	Trim-X, 	Inc., 	695 	F.2d 	[296]
299 [(7th Cir. 1982)]. 	The burden of demonstrating these
elements 	is 	on 	the 	party 	seeking 	recovery. 	See 	In 	re
Flagstaff 	Foodservice 	Corp., 	739 	F.2d 	73, 	77 	(2d 	Cir.
1984)(“Flagstaff I”); Brookfield Production Credit Ass’n
v. Borron, 738 F.2d 951, 952 (8th Cir. 1984).
. 	. 	. 	Courts 	have 	construed 	the 	benefit 	element 	as
requiring that the claimant incur the expenses primarily
for 	the 	benefit 	of 	the 	secured 	creditor 	and 	that 	the
expenses resulted in a quantifiable direct benefit to the
secured 	creditor. 	In 	re 	Cascade 	Hydraulics 	& 	Utility
Service, 	Inc., 	815 	F.2d 	546, 	548 	(9th 	Cir. 	1987);
Brookfield 	Production, 	738 	F.2d 	at 	952; 	In 	re 	Beker
Industries 	Corp., 	89 	B.R. 	336, 	342 	(S.D.N.Y. 	1988).
Indirect or speculative benefits are insufficient. 	In re
Flagstaff 	Foodservice 	Corp., 	762 	F.2d 	10, 	12 	(2d 	Cir.
1985)(“Flagstaff II”). 	At the same time, expenses which
benefit 	the 	debtor 	or 	other 	creditors 	rather 	than 	the
secured 	creditor 	himself 	are 	immaterial. 	Flagstaff 	I,
739 F.2d at 76.
In 	the 	Matter 	of 	Delta 	Towers, 	Ltd., 	924 	F.2d 	74, 	76-77 	(5th 	Cir
1991).
In the present case, surcharging Westernbank’s collateral is
not permissible under 11 U.S.C. § 506(c) because the expenditure of
funds will not create a benefit for Westernbank. 	The expenditure
of funds will not improve Westernbank’s position. 	To the contrary,
allowing the debtors to surcharge the collateral for maintenance,
marketing, 	tax 	payments, 	insurance 	and 	other 	administrative
expenses, will deteriorate the value of Westernbank’s liens.
The Court concludes that the debtors’ proposed reorganization,
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in 	an 	entirely 	different 	line 	of 	business 	than 	that 	which 	the
debtors 	operated 	at 	the 	time 	of 	the 	filing 	of 	the 	bankruptcy
petitions, 	is 	highly 	speculative. 	Likewise, 	the 	Court 	concludes
that 	the 	debtors 	have 	failed 	to 	prove 	that 	there 	is 	a 	reasonable
possibility 	of 	a 	successful 	reorganization 	within 	a 	reasonable
time. 	The debtors have failed to demonstrate that the encumbered
property 	is 	necessary 	for 	an 	effective 	reorganization. 	Thus,
grounds 	exist 	for 	granting 	Westernbank 	relief 	from 	the 	automatic
stay pursuant to 11 U.S.C. § 362(d)(2).
Debtors’ Defenses
The debtors filed various motions to dismiss the motions for
relief 	from 	stay 	based 	on 	allegations 	that 	Westernbank 	failed 	to
comply 	with 	the 	debtors’ 	discover 	requests. 	The 	Court 	concludes
that 	Westernbank 	sufficiently 	complied, 	delivering 	far 	more
documentation than would generally be required in a hearing of this
nature. 	Accordingly, the debtors’ requests for dismissal on this
basis will be denied.
The debtors also claim alternatively, that there are grounds
for 	equitable 	subordination 	or 	avoidance 	of 	Westernbank’s 	liens,
under 	theories of deepening insolvency, insider behavior or other
grounds. 	To the extent that the debtors may have causes of action
against Westernbank in tort for deepening insolvency or a claim for
lender 	liability, 	granting 	Westernbank 	relief 	from 	stay 	will 	not
prevent 	the 	debtors 	from 	pursuing 	these 	claims. 	The 	Court 	also
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concludes 	that 	money 	damages 	are 	an 	adequate 	remedy 	should
Westernbank be held liable under any of the debtors’ theories.
ORDER
WHEREFORE IT IS ORDERED that the debtors’ motions to dismiss
Westernbank’s 	requests 	for 	relief 	from 	the 	automatic 	stay 	are
DENIED.
IT IS FURTHER ORDERED that Westernbank’s amended motions for
relief from the automatic stay are GRANTED pursuant to 11 U.S.C. §
362(d)(2), to foreclose against its collateral.
SO ORDERED.
San Juan, Puerto Rico, this 7th day of November, 2007.
BY THE COURT:
s/Gerardo A. Carlo
GERARDO A. CARLO
U.S. Bankruptcy Judge
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