ABISLAIMAN E HIJOS CORP v. FLORES GALARZA et al

OCR transcription for search; preserved printed pages are authoritative

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO

In re:

ABISLAIMAN E HIJOS, CORP., : Case No. 03-13726 (GAC)
d/b/a Joyeria Rivera, :

: Chapter 11
iueED & ENTERED
ABISLAIMAN & HIJOS, CORP. ;

Debtor

d/b/a Joyeria Rivera, JUL 0 5 2005
Plaintiff U,3, BANKRUPTCY COURT
SAN JUAN, PUERTO RICO

Vv. : Adv.- No. 03-00191°
DEPARTMENT OF THE TREASURY FOR
THR COMMONWEALTH OF PUERTO RICO,
et al,

Defendants

DECISION AND ORDER

The debtor/plaintiff, Abislaiman e Hijos, Corp. d/b/a Joyeria
Riviera (“Abislaiman”) operates two fine jewelry and watch stores,
one located in Old San Juan and one in the El Conquistador Hotel in
Fajardo. On December 18, 2003, at approximately 11:00 a.m., the
Puerto Rico Department of the Treasury for the Commonwealth of
Puerto Rico (“Hacienda”) served notices of attachment against
jewelry and watches in both of Abislaiman’s stores for failure to
pay excise taxes. On the same date, at 3:41 p.m., Abislaiman filed
a voluntary petition under Chapter 11 of the United States

Bankruptcy Code. Abislaiman filed this adversary proceeding on

AUTHENTICATED

U.S. GOVERNMENT
INFORMATION

GPO

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December 19, 2003, alleging that the defendants, Hacienda and
various individuals employed by Hacienda, violated the automatic
stay of 11 U.S.C. § 362(a). Abislaiman seeks damages pursuant to
11 U.S.C. § 105(a) and turnover of property of the estate pursuant
to 11U.S.C. 8§ 542(a), 543(a), 547(b) or 549 and 42 U.S.C. § 1983.

Abislaiman‘s complaint alleges that Hacienda closed
Abislaiman’s jewelry stores after the filing of the bankruptcy
petition and attempted to attach its jewelry and watches inventory
post-petition. Abislaiman contends that the attachment was not
completed prior to the filing of the bankruptcy petition, but
argues that if it were, it would be subject to avoidance and
turnover, Abislaiman also argues that Hacienda violated its
constitutional right to due process by attaching its property
without a hearing. Moreover, Abislaiman complains that the notices
of attachment were addressed to the d/b/a, Joyeria Riviera, rather
than to the corporate entity.

The Court held a telephone conference at 5:00 p.m. on
Thursday, December 18, 2003. At the hearing, the court allowed
Hacienda to continue the inventory at Abislaiman’s stores and
ordered that all items remain in the sealed vault inside the
jewelry stores. The Court held a second hearing on Friday,
December 19, 2003. The Court entered an order allowing Abislaiman
to operate, but requiring it to provide adequate assurance to

Hacienda in the form of $500,000.00 cost value in jewelry pieces.

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The Court held two further hearings on Saturday, December 20, 2003
and on December 24, 2003, and reaffirmed the determination as to
adequate assurance.

Hacienda filed a motion to dismiss the complaint and/or motion
for summary judgment, alleging that the attachment was executed
prepetition, at 11:10 a.m. on the petition date, and therefore the
attachment did not violate the automatic stay (dkt. #49). Hacienda
also contends that the attachment was not a preference since
Abislaiman was not insolvent when the attachment was perfected.
Finally, Hacienda argues that it is entitled to sovereign immunity
and that the individual employees are entitled to qualified
immunity.

Abislaiman opposed the motion to dismiss (dkt. #56).
Abislaiman reiterates the allegations of its complaint, emphasizing
that Hacienda’s attempted attachment came just fourteen days after
its final notice of tax deficiency, which granted Abislaiman thirty
days to challenge the determination in court, subject to the
posting of a bond. Abislaiman does not deny that it did not post
a bond. Abislaiman argues that the attachment was not perfected at
the time of filing, because Hacienda was still in the process of
Cataloging the jewelry. Moreover, Abislaiman claims that the
jewelry stores were not closed with consent. Abislaiman also
contends that Hacienda waived its sovereign immunity when it filed

a proof of claim in this: case and that the individual defendants

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are not entitled to qualified immunity.
Background of Tax Assessment and Attachment

On February 19, 2003, Hacienda sent a request for information,
addressed to Joyeria Rivera, Abislaiman E Hijos Corp. and Julio
Abislaiman, as president. The request referred to Joyeria Riviera
as the taxpayer and listed the account number as 660-23-8588. ‘The
request referred to years 2000, 2001 and 2002 and required
production of monthly excise tax returns, evidence of payments of
excise taxes and evidence of jewelry license. The request was
signed as received by “Julio Abislaiman” on February 25, 2003.

On October 21, 2003, Hacienda sent deficiency notices,
referred to by the parties as “Jeopardy Assessments,” addressed to
Joyeria Rivera Inc. with account number 660-23-8588. The notices
were for excise taxes for the years 2000, 2001 and 2002. The
notices granted thirty days to request reconsideration. On the
same date, notices were sent indicating that the collection of the
assessed amounts could be postponed by posting a bond, within ten
days from the date of notice, for the amount of the assessed
deficiencies.

On December 4, 2003, Hacienda issued a notice of final
decision on deficiency, addressed to Joyeria Riviera, Inc., account
number 660-23-8588, in the total amount of $1,438,738.71. The
notice granted thirty days to file a complaint in the court of

first instance of Puerto Rico, subject to the posting of a bond in

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the amount of $1,582,600.00. This notice was sent by certified
mail and received on December 8, 2003.

On December 18, 2003, Hacienda prepared various notices of
attachment for personal property held at the Old San Juan store,
which include certificates of service, signed by a collector for
Hacienda and “Julio Abislaiman,” as president-owner of Joyeria
Rivera e Hijos, with account number 660-23-8588. Other notices of
attachment were served at the El Conquistador store, addressed to
Joyeria Riviera e Hijos, and signed by a collector for Hacienda and
Mario Gonzalez Chamorro, as Manager. By noon on December 18, 2003,
both of the jewelry stores were closed and representatives of
Hacienda were present in the stores, photographing and making an
inventory of the jewelry and watches.

After the filing of the bankruptcy petition, Abislaiman
produced the notice of filing and demanded that Hacienda
discontinue the attachment. Hacienda’s employees continued the
physical inventory. At the hearing held before this Court on the
date of the bankruptcy filing, the Court allowed Hacienda to
complete the physical inventory and thereafter allowed Hacienda to
take physical possession of $500,000.00 in cost value of jewelry
pieces as adequate protection.

Standard for Dismissal
When considering a motion to dismiss under Fed. R. Civ. P.

12(b) (6), made applicable by Fed. R. Bankr. P. 7012(b), the Court

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“must accept the allegations of the complaint as true, and if,
under any theory, the allegations are sufficient to state a cause
of action in accordance with the law, [it] must deny the motion to

dismiss.” Vartanian v. Monsanto Co., 14 F.3d 697, 700 (1% Cir.

1994). A Rule 12(b) (6) motion to dismiss admits the well-pleaded
material allegations of the complaint, but denies their legal
sufficiency. The motion cannot be granted unless it appears
certain that the plaintiff would not be entitled to relief under
any facts the plaintiff could prove in support of its claim, taking
all of the allegations of the complaint as true, viewing them in
their most favorable Light, and giving the plaintiff the benefit of
all inferences which fairly may be drawn therefrom. In re
'Voltolini, 48 B.R. 199, 200-01 (D. Ma. 1985).

If, on a motion for judgment on the pleadings,
Matters outside the pleadings are presented to and not
excluded by the court, the motion shall be treated as one
for summary judgment and disposed of as provided in Rule
56, and all parties shall be given reasonable opportunity
to present all material made pertinent to such a motion
by Rule 56.

Fed. R. Civ. Pro. 12(c).
As the First Circuit Court of Appeals has stated,:

conversion of a motion for judgment on the pleadings into
one for summary judgment should only occur after the
parties have been offered a reasonable opportunity to
present pertinent summary judgment materials. Fed. R.
Civ. P. 12(c). Whether the parties had an opportunity to
respond necessarily turns on the way in which the
particular case under consideration has unfolded. See
Whiting v. Maiolini, 921 F.2d 5, 6 (1st Cir. 1990).
Thus, we have disfavored conversion when (1) the motion
comes quickly after the complaint was filed, (2)

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discovery is in its infancy and the nonmovant is limited
in obtaining and submitting evidence to counter the
motion, or (3) the nonmovant dees not have reasonable
notice that a conversion might occur.

Rubert-Torres v. Hospital San Pablo, Inc., 205 F.3d 472, 475 (1%

Cir. 2000).

In this case, these considerations are not present. Hacienda
had answered the complaint and subsequently filed the motion to
dismiss almost five months after the complaint was filed. There
has been some discovery and Abislaiman was on explicit notice that
Hacienda was seeking dismissal or summary judgment. Moreover, both
parties have submitted exhibits to their pleadings, and neither
party has objected to their inclusion. Thus, the Court will treat
Hacienda’s motion as a motion for summary judgment.

Standard for Summary Judqment

Hacienda is entitled to summary judgment if "the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled
to a judgment as a matter of law." See Fed. R. Civ. P. 56(c); Fed.

R. Bankr. P. 7056. See also Celotex Corp. v. Catrett, 477 U.S.

317, 322, (1986). Summary judgment cannot be granted if there are
issues of material fact. A material issue is one that affects the
outcome of the litigation. Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 248 (1986). The Court should also draw all reasonable

inferences from the facts in the manner most favorable to the

LL Ee Se

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nommovant. Desmond v. Varrasso {In re Varrasso), 37 F.3d 760, 763

(lst Cir. 1994); Piccicuto v. Dwyer, 39 F.3d 37, 40 (1st Cir.

1994).
Sovereign Immunity

The Eleventh Amendment to the U.S. Constitution provides that
“[t]lhe Judicial power of the United States shall not be construed
to extend to any suit in law or equity, commenced or prosecuted
against one of the United States by Citizens of another State, or
by Citizens or Subjects of any Foreign State.” This Amendment has
also been interpreted to bar a suit in federal court against a
State, by a citizen of the State. See Hans v. Louisiana, 134 U.S.
1 (1890). Historically, pursuant to the prohibition against suit
found in the Eleventh Amendment, a state could only be sued in

federal court with its consent. Ford Motor Co. v. Devartment of

treasury of Indiana, 323 U.S. 459 (1945).

Notwithstanding the Eleventh Amendment’s prohibition, the
Bankruptcy Code provides that “[a] governmental unit that has filed
a proof of claim in the case is deemed to have waived sovereign
immunity with respect to a claim against such governmental unit
that is property of the estate and that arose out of the same
transaction or occurrence out of which the claim of such
governmental unit arose.” 11 U.S.C. § 106(b). This subsection
conditionally abrogates a State’s Eleventh Amendment right to

sovereign immunity when the State has filed a proof of claim in the

RE _ —__ ee ee

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bankruptcy case and the claim against the State involves the same
transaction or occurrence that is the subject of the proof of claim
by the State. The First Circuit Court of Appeals has concluded
that this section is constitutional and that the Commonwealth
waives its Eleventh Amendment immunity by filing a proof of claim
availing itself of the jurisdiction of the federal court. Arecibo

Cmty. Health Care, Inc. v. Commonwealth of Puerto Rico, 270 F.3d 17

(1% Cir. 2001).

Hacienda claims that it is entitled to Eleventh Amendment
sovereign immunity. Hacienda’s argument, however, which it
advanced in its motion to dismiss, was predicated on the fact that
it had not filed a proof of claim prior to the filing of the motion
to dismiss. Thereafter, on June 15, 2004, Hacienda filed a proof
of claim in the amount of $6,518,382.73, claim #9, which it
subsequently amended twice. Hacienda presently claims the amount
of $6,717,426.76.

The Court concludes that Abislaiman’s claim against Hacienda
involves the same transaction or occurrence that is the subject of
the Hacienda’s proof of claim. Both Abislaiman’s claims against
Hacienda and Hacienda’s proof of claim relate to Hacienda’s tax
assessment and attachment. Therefore, the Court concludes that
sovereign immunity is not a defense available to Hacienda.

Hacienda’s Use of D/B/A

The Court concludes that Hacienda’s use of Abislaiman’s d/b/a

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in the notices does not defeat the attachment. The Court notes
that Abislaiman itself identifies itself using the d/b/a in its
balance sheets, which it attached to demonstrate insolvency.
Moreover, the first notice sent by Hacienda included the names of
the corporation, the d/b/a and the principal and used the
corporation’s tax identification number of 66-023-8588. While the
subsequent notices were addressed to the d/b/a, they clearly
included the same identification number. Abislaiman can claim no
confusion as to the entity being addressed by Hacienda. Moreover,
any potential claim by Abislaiman would require it to demonstrate
wrongfulness i.e. that Hacienda had no cause of action against
Abislaiman. See 36 Am. Jur. 2d Proof of Facts § 4. Abislaiman
itself scheduled Hacienda as a creditor in an unknown amount for
excise and sales taxes for the years 2000, 2001 and 2002. Thus,
Abislaiman can not claim that Hacienda did not have a cause of
action against it.
Jeopardy Assessment

The Laws of Puerto Rico provide that “[i]£= the Secretary [of
Hacienda] believes that the assessment or collection of a
deficiency will be jeopardized by delay he shall immediately assess
such deficiency . . .” 13 L.P.R.A. § 8023(a).

Hacienda claims that it made the Jeopardy Assessments because
Abislaiman failed to file tax returns, pay excise taxes, as well as

produce the licenses and bond required as a withholding agent.

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Abislaiman argues that the Jeopardy Assessments were issued in an
unreasonable, arbitrary and capricious manner.

Abislaiman cites to federal standards regarding the issuance
of jeopardy assessments. In reviewing the reasonableness of the
assessment, the government bears the burden of proving the

reasonableness of the assessment. Varjabedian v. U.S., 339

F.Supp.2d 140, 143 (D.Mass. 2004). Courts have held that a
jeopardy assessment is reasonable “so long as the decision to
impose it falls between ‘something more than “not arbitrary and
capricious” and something less than “supported by substantial

evidence.”“’" Olbres v. I.R.S., 837 F.Supp. 20, 21 (D.N.H. 1993).

See also Varjabedian v. U.S., 339 F.Supp.2d at 144. The court in

Olbres stated that:
A jeopardy assessment is appropriate if:

1} the taxpayer is or appears to be designing quickly to
depart from the United States to conceal himself;

2) the taxpayer is or appears to be designing quickly to
place his property beyond the reach of the government by
removing it from the United States, or by concealing it,
or by transferring it to another person, or by
dissipating it; or

3) the taxpayer’s financial solvency appears to be
imperiled.

Olbres v. E.R.S., 837 F.Supp. at 21.

Hacienda has not alleged that the principal of Abislaiman was
designing to depart Puerto Rico nor that he was designing to place
the business property beyond the reach of Hacienda. As to the

final criteria, Hacienda has argued the contrary with respect to

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the preference issue. Hacienda contends that Abislaiman is
solvent. Thus, the Court can not determine from the pleadings
whether the attachment was unlawful or whether it violated
Abislaiman’s constitutional rights because there is very little
information to make a determination as to the reasonableness of the
Jeopardy Assessments.

Qualified Immunity

Qualified immunity is an affirmative defense and Hacienda
bears the burden of proving that it applies. Dimarco-Zappa_v.
Cabanillas, 238 F.3d 25, 35 (18* Cir. 2001). The First Circuit
Court of Appeals employs a three-part test to determine whether a
public official is entitled to qualified immunity: “(1) whether
plaintiff's allegations, if true, establish a constitutional
violation; (2) whether that right was clearly established at the
time of the alleged violation; and (3) whether a similarly situated
reasonable official would have understood that the challenged

action violated the constitutional right at issue.” Mihos v. Swift

358 F.3d 91, 102 (1% Cir. 2004).

Abislaiman argues that its right to due process was violated
because it claims that Hacienda issued the Jeopardy Assessments
without a hearing and in an unreasonable, arbitrary and capricious
manner. After the issuance of the Jeopardy Assessments, Hacienda
served the notices of attachment and closed Abislaiman’s stores,

If Abislaiman’s allegations are true, they may prove the

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violation of a constitutional right that was clearly established at
the time of the alleged violation. The Court concludes that the
defense of qualified immunity may only be available to the
individual defendants if there was a reasonable basis for the
Jeopardy Assessments or if they can show that similarly situated
reasonable officials would not have understood that the challenged
action violated the constitutional right at issue. Thus, qualified
immunity can not be determined because as the Court previously
concluded, based on the information provided, the Court can not
determine the reasonableness of the Jeopardy Assessments.

Attachment and Automatic stay

The Laws of Puerto Rico provide for attachment and sale of
property for failure or refusal to pay taxes. See 13 L.P.R.A. 8
8150. With respect to the procedure for attachment of real and
personal property, the Laws provide that an “attachment shall be
enforceable as soon as notice shall have been served by leaving a
copy thereof with the debtor or any member of his family in charge
of said property.” 13 L.P.R.A. § 8151. The Laws further provide
that “[a]s soon as the attachment is served as above, the collector
or agent is authorized to seize the attached property, or close the
business or property, if he believes it is necessary.” Id.

Hacienda served the notices of attachment shortly after 11:00
a.m., at which time both jewelry stores were closed. Thus , if the

Jeopardy Assessments were properly issued, the attachment was

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perfected because Hacienda had constructive possession of the
personal property in the Old San Juan and the El Conquistador
stores prior to the filing of the bankruptcy petition.
Nonetheless, Abislaiman retained an interest in the attached
property, which interest became property of the estate when the

bankruptcy petition was filed. See U.S. v. Whiting Pools, Inc.,

462 U.S. 198, 204 (1983). See also A&J Auto Sales, Inc. v. U.S.,

223 B.R. 839, 842 (D.N.H, 1998).

The automatic stay prohibits acts to obtain possession of
property of the estate or to exercise control over it. 11 U.S.C.
§ 362{a) (3). The Court concludes, however, that Hacienda’s
cataloging and inventory of the attached property, which continued
for one hour and nineteen minutes postpetition, prior to the
Court’s hearing, did not violate the automatic stay because it did
not change the nature of Hacienda’s possession from constructive to
physical. Hacienda’s actual physical possession of $500,000.00 in
cost value of jewelry pieces was authorized by the Court and
accordingly did not violate the automatic stay.

Preference

The Bankruptcy Code provides for recovery of preferential
transfers in §547(b):

(b) Except as provided in subsection (c) of this section,

the trustee may avoid any transfer of an interest of the

debtor in property-

{1) to or for the benefit of a creditor;

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(2) for or on account of an antecedent debt owed by the
debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made-
(A) on or within 90 days before the date of the
filing of the petition; or
{B) between ninety days and one year before the
date of the filing of the petition, if such
creditor at the time of such transfer was an
insider; and

(5) that enables such creditor to receive more than such
creditor would receive if-

(A) the case were a case under chapter 7 of this
title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to
the extent provided by the provisions of this
title.
11 U.S.C. § 547(b).
At issue in this case, is Abislaiman’s solvency. The
Bankruptcy Code defines “insolvent” as “with reference to an entity
., financial condition such that the sum of such entity’s debts
is greater than all of such entity’s property, at a fair valuation
-“ 11 U.S.C. § 101(32}. The Court concludes that there is a
genuine issue of material fact as to whether Abislaiman is
insolvent. .
Hacienda contends that Abislaiman admitted solvency at the
§ 341 meeting of creditors, by stating that the companies are up to

date with their payments to creditors. As Abislaiman argues,

however, this did not take into account any debt owed to Hacienda.

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Abislaiman disclosed in its schedules that it owed an unknown
amount to Hacienda for 2000, 2001 and 2002 excise and sales taxes.
Abislaiman’s financial statement of December 18, 2003, shows a net
worth of $350,409.55. Hacienda claimed a deficiency amount of
$1,438,738.71. If the financial statement and the deficiency
amount is correct, then Abislaiman would appear to be insolvent.
Moreover, if the entire amount of Hacienda’s present claim,
$6,717,426.76, ig allowed and deducted from Abislaiman’s net worth,
the results would be more drastic. Thus, the solvency issue is
directly dependent upon the final allowed amount of Hacienda’‘s
claim. Determination of the solvency issue will determine whether
Hacienda’s attachment constitutes a preference.

Conclusion

The Court concludes that Hacienda is not entitled to sovereign
immunity. Hacienda’s use of Abislaiman’s d/b/a in addressing its
various notices did not serve to defeat its attachments. From the
evidence presented, the Court is unable to determine the
reasonableness of Hacienda’s Jeopardy Assessments. Likewise, the
Court can not determine whether the individual defendants are
entitled to qualified immunity. If the Jeopardy Assessments were
properly issued, the Court concludes that the attachments were
perfected prepetition and that they did not violate the automatic
stay. There is a genuine issue of material fact as to Abislaiman’s

solvency and thus the Court is unable to determine whether the

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attachments constituted a preference. For these reasons,
Hacienda’s motion to dismiss and/or for summary judgment will be
denied.
ORDER

WHEREFORE IT IS ORDERED that the motion to dismiss filed by
the Department of Treasury for the Commonwealth of Puerto Rico and
the individual defendants (dkt. #49), shall be, and it hereby is,
DENIED.

SO ORDERED.

San Juan, Puerto Rico, this 30 day of June, 2005.

Ziel tw

GERARDO A. CARLO
Chief, U.S. Bankruptcy Judge

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