Defendants’ Reply in Support of Motion to Dismiss FRBSF’s Complaint (D.E. 180) — OTO Analytics v. Benworth

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U.S. District Court for the District of Puerto Rico · No. 3:23-cv-01034-GMM · Doc. 180 · 2024-11-12 · Docket on CourtListener

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The defendants' reply in support of a motion to dismiss the Federal Reserve Bank of San Francisco's complaint and complaint in intervention in Oto Analytics, LLC v. Benworth Capital Partners PR, LLC, Civil No. 23-01034 (GMM), consolidated with Civil No. 24-01313 (GMM), in the U.S. District Court for the District of Puerto Rico, filed November 12, 2024 as Document 180. It supports the motion to dismiss at D.E. 169, joined by the other defendants at D.E. 170. The reply argues the complaints fail to state a breach of contract claim on the two asserted Events of Default, that the Operating Circular has eight definitions of Insolvency and the complaints do not say which applies, and that an unconfirmed arbitration award is not a finalized debt. It also argues the conversion claim sounds in contract, not tort, and that the complaints improperly group the defendants. The reply runs 10 pages.

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IN THE UNITED STATES DISTRICT COURT 
FOR THE DISTRICT OF PUERTO RICO 
 
OTO ANALYTICS, LLC,  
Plaintiff, 
v. 
BENWORTH CAPITAL PARTNERS PR, 
LLC; BENWORTH CAPITAL 
PARTNERS, LLC; BERNARDO 
NAVARRO and CLAUDIA NAVARRO, 
Defendants. 
 
 
 
 
 
Civil No. 23-01034 (GMM) cons.  
Civil No. 24-01313 (GMM) 
 
FEDERAL RESERVE BANK OF SAN 
FRANCISCO,  
Plaintiff-Intervenor 
v. 
OTO ANALYTICS, LLC; BENWORTH 
CAPITAL PARTNERS PR, LLC; 
BENWORTH CAPITAL PARTNERS, 
LLC; BERNARDO NAVARRO and 
CLAUDIA NAVARRO, 
Defendants in Intervention. 
 
 
 
 
 
 
FEDERAL RESERVE BANK OF SAN 
FRANCISCO,  
Consolidated Plaintiff, 
v. 
BENWORTH CAPITAL PARTNERS PR, 
LLC; BENWORTH CAPITAL 
PARTNERS, LLC; BERNARDO 
NAVARRO and CLAUDIA NAVARRO, 
Consolidated Defendants. 
 
 
DEFENDANTS’ REPLY IN SUPPORT OF MOTION TO DISMISS THE FEDERAL  
RESERVE’S COMPLAINT AND COMPLAINT IN INTERVENTION 
 
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COME NOW Defendants Benworth Capital Partners, LLC (“Benworth FL”), Benworth 
Capital Partners PR, LLC (“Benworth PR”), and Bernardo and Claudia Navarro (the “Navarros” 
and, jointly with Benworth PR and Benworth FL, the “Defendants”) through the undersigned 
counsel, and respectfully submit this reply in support of Benworth FL’s Motion to Dismiss [D.E. 
169] (the “Motion”) the Federal Reserve Bank of San Francisco’s (“Federal Reserve”) Complaint 
[Case No. 24-cv-01313, D.E. 1] (“Complaint” or “Compl.”) and Complaint in Intervention [Case 
No. 23-cv-01034, D.E. 146] (“Complaint in Intervention” or “Compl. Int.”) (collectively, the 
“Complaints”)1, as joined by Benworth PR and the Navarros [D.E. 170], and as grounds therefore 
STATE and PRAY as follows: 
ARGUMENT 
I. 
The Complaints Fail to State a Claim for Breach of Contract. 
 
A. Breaches #1 and #2: The Federal Reserve “deem[s] itself insecure with 
respect to the financial condition of Benworth FL and Benworth FL’s ability 
to perform its obligations,” and Benworth FL is insolvent. 
 
The Opposition confirms that the Complaints are based on only two possible Events of 
Default: (1) the Federal Reserve deemed itself insecure with respect to the financial condition of 
Benworth FL or Benworth FL’s ability to perform its Obligations under the Agreements and 
(2) Benworth FL’s Insolvency. (Opp. §§ I.A, B.) According to the Federal Reserve, the sole 
basis for these purported Events of Default is “Benworth FL’s inability to pay the Final Award 
and financial statements, reports, and other information” Benworth FL disclosed to the Federal 
Reserve. Compl. ¶ 32. This allegation is insufficient to state a claim that an Event of Default has 
occurred based on the financial condition of Benworth FL. 
As to Insolvency, the Motion pointed out that the Operating Circular contains eight 
 
1 This Court granted the Federal Reserve’s request to consolidate Case Numbers 24-cv-01313 
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definitions for Insolvency, but the Federal Reserve failed to allege which definitions apply to 
Benworth FL. (Motion at 11.) For example, subsection (vi) of the Operating Circular defines 
Insolvency to include when “the Borrower ceases or refuses to make payments in the ordinary 
course of business, or admits in a record its inability to pay its debt as they become due[.]” In its 
Opposition, the Federal Reserve concedes that are no allegations in the Complaints that this 
subsection applies to Benworth FL. (Opp. at 9.) Put differently, the Federal Reserve has 
disclaimed that Benworth FL failed to pay its debts to the Federal Reserve in the ordinary course 
of business or that Benworth FL admitted to the Federal Reserve that it is unable to pay its debts 
as they become due. Thus, the Complaints must contain allegations that allege Benworth FL’s 
Insolvency is based on the condition of insolvency or that other circumstances exist that evince 
Benworth FL is unable to pay its debts when due. They do not. 
Pointing to paragraph 30 of the Complaint, the Federal Reserve contends that its 
allegation that Benworth FL admitted it could not pay the unconfirmed arbitration award is 
sufficient to establish Insolvency. (Opp. at 10.) However, Benworth FL never concretely 
admitted that it could not pay the unconfirmed arbitration award. As Exhibit D to the Complaint 
reflects, Benworth FL only told the Federal Reserve that, as of December 2023, it “may not have 
access to sufficient funds” to pay the award. This statement in Exhibit D controls over the 
conflicting allegation in paragraph 30 of the Complaint that states Benworth FL represented “it 
did not have access to sufficient funds . . . .” Clorox Co. v. Procter & Gamble Commercial Co., 
228 F.3d 24, 32 (1st Cir. 2000) (“It is a well-settled rule that when a written instrument 
contradicts allegations in the complaint to which it is attached, the exhibit trumps the 
allegations”). 
 
and 23-cv-01034. [Case No. 23-cv-01034, D.E. 155]. 
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Notwithstanding, Benworth FL argued that an unconfirmed arbitration award does not 
constitute a finalized debt that would render Benworth FL insolvent because it lacks the finality 
required to be considered a current liability for purposes of insolvency. (Motion at 12.) The 
Federal Reserve does not dispute this point. Instead, the Federal Reserve argues that the 
definition of Insolvency under subsection (viii) does not require a debt to be currently due. (Opp. 
at 10.) But the Federal Reserve is ignoring that the arbitration award may be vacated and never 
become due. So, the Federal Reserve is asking the Court to stack the speculative inference that 
Benworth FL may not have funds to pay an arbitration award on top of the speculative inference 
that the award may become a finalized debt. Such stacking of inferences “stops short of the line 
between possibility and plausibility of ‘entitlement to relief.’” Bell Atlantic Corp. v. Twombly, 
550 U.S. 544, 557 (2005). 
The Federal Reserve also argues that Benworth FL provided it with financial statements, 
which are attached as Exhibit A to the Opposition, “that call into question its ability to pay its 
liabilities and indicate that Benworth FL has negative equity.” (Opp. at 7.) As a threshold matter, 
the Court should not consider the financial records attached to the Opposition. The financial 
records were not attached to the Complaint, the allegations in the Complaint do not sufficiently 
identify them, and they are not central to the Federal Reserve’s claims. Indeed, as reflected in the 
Default Notice, the Federal Reserve only noted that the financial statements “support” Benworth 
FL’s disclosure that it may not have sufficient funds to pay the award. See, Compl., Ex. D at 1 
(“Benworth acknowledged to the Reserve Bank that it may not have access to sufficient funds to 
pay the amount of the interim award or any larger amount that may be finally awarded, which 
assertion is supported by Benworth’s financial statements provided to the Reserve Bank.”). In its 
Opposition, however, the Federal Reserve characterizes the financial statements as “call[ing] into 
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question [Benworth FL’s] ability to pay its liabilities and indicate that Benworth FL has negative 
equity.” (Opp. at 7.) No such allegations are present in the Complaints. The Complaints and their 
exhibits are entirely devoid of any mention of “negative equity” or any liability other than the 
unconfirmed arbitration award. This Court should reject the Federal Reserve’s attempt to amend 
its Complaints through the Opposition. See Diaz-Zayas v. Municipality of Guaynabo, 600 F. 
Supp. 3d 184, 195 (D.P.R. 2022) (“As an initial matter, it is axiomatic that the complaint may 
not be amended by the briefs in opposition to a motion to dismiss.”) (internal quotation omitted). 
For the same reasons, the Complaints fail to allege sufficient facts to support the Federal 
Reserve’s conclusory allegation that it deemed itself insecure. According to the Federal Reserve, 
the Complaint alleges that it deemed “itself insecure as to Benworth FL’s ability to perform its 
Obligations[.]” (Opp. at 6 (citing Compl. ¶ 32) (emphasis added).) Notably, “Obligations” is a 
contractually defined term under the Operating Circular: 
(i) 
Advance Repayment Amounts; 
 
(ii) 
Indebtedness; 
 
(iii) 
any other liabilities of the Borrower to the Bank or any other Reserve 
Bank, including without limitation, any services fees, whether due or to 
become due; and 
 
(iv) 
any expense the Bank or its designee(s) may incur to: 
 
a. obtain, preserve and/or enforce the Lending Agreement or the Bank’s 
security interest in Collateral and the Borrower’s Obligations under the 
Lending Agreement, 
 
b. collect any or all of the foregoing, or 
 
c. assemble, transport, maintain or preserve Collateral (including, 
without limitation, taxes, assessments, insurance premiums, repairs, 
reasonable attorneys’ fees, rent, transportation, storage costs, and 
expenses of sale. 
 
Compl., Ex. B at § 2.1. “Advance Repayment Amounts” and “Indebtedness” both refer to 
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liabilities owed to the Federal Reserve, see id., not to a third-party with whom the borrower had a 
business relationship. But, as the Federal Reserve admits, its insecurity is based solely on the 
speculative inability of Benworth FL to pay the unconfirmed arbitration award. The Complaints 
thus should be dismissed for failure to allege any “Obligations” under the Agreements that the 
Federal Reserve feels insecure about Benworth FL performing.  
B. The Complaint Fails to Sufficiently Allege Benworth FL Breached 
Representations, Warranties or Covenants it Made under the Agreements. 
 
The Federal Reserve next argues it stated a breach of contract claim because the 
Complaints allege that Benworth FL breached three representations, warranties, or covenants 
under the Agreements: two misrepresentations as to Events of Default and one misrepresentation 
as to PPP compliance. (See Opp. at § I.C.) Because the Complaints fail to sufficiently allege the 
Events of Default, see supra § I.A, they fail to allege breaches of any representation as to Events 
of Default for the same reasons. And Benworth FL’s purported misrepresentation as to PPP 
compliance fares no better. 
The Federal Reserve asserts that the SBA’s denial of guarantee purchase applications on 
3,600 PPP loans (out of more the more than 300,000 PPP loans Benworth FL funded) “is 
sufficient to plausibly allege a breach of the representation that the pledged loans comply with 
the requirements of PPP and have been duly approved for guaranty by the SBA.” (Opp. at 14.) 
But as the Federal Reserve knows and stated in the Default Notice, denial of guarantee purchase 
applications is only something that “could result in these PPP Loans not being fully guaranteed 
by the SBA.” Compl., Ex. D at 1 (emphasis added). In fact, since the Complaints were filed, the 
SBA has reversed its denial of many guarantee purchase applications and the outstanding amount 
of Advances has been significantly reduced. Thus, denying the application is not a determination 
that Benworth FL failed to comply with PPP requirements or that the PPP loans will not be duly 
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approved for guaranty by the SBA. Simply put, there is no factual basis in the Complaints or 
legal authority to support the inference that Benworth FL has misrepresented its compliance with 
PPP requirements. The Federal Reserve has accordingly failed to state a breach of contract claim.  
II. 
If the Court Dismisses the Breach of Contract Claim, then the Federal Reserve’s 
Fraudulent Transfer Claims and Declaratory Judgment Are Not Ripe and Fail 
to State a Claim. 
 
In the Motion, Benworth FL argued that if the Court agrees that the Federal Reserve has 
failed to state a claim for breach of contract, then its fraudulent transfer and declaratory judgment 
claims are not ripe and subject to dismissal. (Motion at § II.) The Federal Reserve does not 
dispute that its fraudulent transfer and declaratory judgment claims hinge on a properly alleged 
breach of contract claim. Thus, the fraudulent transfer and declaratory judgment claims must fall 
with the breach of contract claims. 
III. 
The Federal Reserve Fails to State a Claim for Conversion. 
 
The Motion established that the conversion claim is subject to dismissal because the 
Complaints fail to allege that Defendants maliciously and wrongfully acquired the Federal 
Reserve’s property and the claim sounds in contract, not tort. (Motion at § III.) The Federal 
Reserve counters that the simple transfer of the PPP Collateral is enough to state a conversion 
claim that is independent of the Agreements. The Federal Reserve is wrong. 
The Opposition does not meaningfully respond to Benworth FL’s argument that the 
Federal Reserve must allege malicious and wrongful acquisition of its property to state a claim 
for conversion under Puerto Rico law. Rather, the Federal Reserve cites to United States v. GZ 
Construction St, Inc., 1555 F. Supp. 3d 147 (D.P.R. 2015) for the proposition that all Defendants 
are liable for conversion because Benworth FL transferred funds to the other Defendants while it 
was servicing the PPP loans. But in that case, the court found that the allegations surrounding the 
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timing of the transfer of property at issue were sufficient to infer the defendant’s “intent, 
maliciousness, and desire to defraud.” Id. at 152. The Federal Reserve has not identified any 
allegations in its Complaints that reflect Benworth PR or the Navarros had a malicious or 
wrongful intent to deprive the Federal Reserve of its property. Nor could it; none exist. Indeed, 
the Complaint attributes wrongful intent only to Benworth FL. See Compl. ¶ 109. The 
conversion claim must be dismissed against Benworth PR and the Navarros for this reason alone. 
As to Benworth FL, even if the Court infers malicious and wrongful intent (it should not), 
the conversion claim still must be dismissed because it is not independent of the claim for breach 
of the Agreements. See Montalvo v. LT’s Benjamin Records, 56 F. Supp. 3d 121, 139 (D.P.R. 
2014) (dismissing conversion claim because the “Plaintiffs’ allegations sound in contract, rather 
than tort”). Benworth FL’s duty to maintain the PPP Collateral arises solely out of the 
Agreements. Absent the Agreements, Benworth FL would have no obligation to maintain the 
PPP Collateral for the Federal Reserve. The Federal Reserve admits as much by incorporating its 
breach of contract claim into the conversion claim. See Compl. ¶ 106 (incorporating by reference 
all proceeding paragraphs). Thus, like in Montalvo, the Federal Reserve’s conversion claim 
sounds in contract, rather than tort, and must be dismissed.   
IV. 
The Court Should Dismiss the Complaints Because It Is a Shotgun Pleading that 
Improperly Groups Defendants. 
 
The Federal Reserve argues its Complaints should not be dismissed for violating the rules 
against shotgun pleadings because Defendants have not argued any prejudice and the Complaints 
plausibly allege that all four Defendants are liable for all the claims. (Opp. at § IV.) Here, too, 
the Federal Reserve is wrong. For one, the Federal Reserve has not identified any authority 
requiring Benworth FL or the other Defendants to show prejudice before a complaint is 
dismissed for violating the rules against shotgun pleadings.  
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Moreover, the Federal Reserve’s incorporation by reference of all counts into subsequent 
counts while grouping the Defendants together renders the Complaint confusing. For example, 
the conversion claim lumps all Defendants together, but the Prayer for Relief seeks a finding that 
only Benworth FL and Benworth PR converted the PPP Collateral. See Compl. At 32. Yet, in the 
Opposition, the Federal Reserve argues that the conversion claim also applies to the Navarros. 
(Opp. at §§ III, IV.) This alone demonstrates that the Complaints should be dismissed for 
violating the rules against shotgun pleadings. 
CERTIFICATE OF SERVICE: We hereby certify that on this same date the foregoing 
motion was filed with the Clerk of the Court using the CM/ECF system, which will send 
notification of such filing to all attorneys and participants of record. 
RESPECTFULLY SUBMITTED. 
In San Juan, Puerto Rico, on November 12, 2024. 
 
PO Box 195168 
San Juan, PR 00919-5168 
Tel.: 787.766.7000 
Fax: 787.766.7001 
 
s/ Roberto A. Cámara-Fuertes 
Roberto A. Cámara-Fuertes 
USDC-PR 219002 
rcamara@ferraiuoli.com 
 
s/ Jaime A. Torrens-Dávila 
Jaime A. Torrens-Dávila 
USDC-PR 223810 
jtorrens@ferraiuoli.com 
 
s/ Mónica Ramos Benítez 
Mónica Ramos-Benítez 
USDC-PR 308405 
mramos@ferraiuoli.com 
 
Counsel for Benworth Capital Partners, LLC and Bernardo Navarro 
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CASELLAS ALCOVER & BURGOS PSC 
PO Box 364924 
San Juan, PR 00936-4924 
Tel. (787) 756-1400 
Fax. (787) 756-1401 
/s/ Ricardo F. Casellas 
USDC-PR Bar No. 203114 
rcasellas@cabprlaw.com 
 
/s/ Carla S. Loubriel Carrión 
USDC-PR Bar No. 227509 
cloubriel@cabprlaw.com 
 
Counsel for Benworth Capital Partners PR, LLC and Claudia Navarro  
 
 
 
Case 3:23-cv-01034-GMM     Document 180     Filed 11/12/24     Page 10 of 10

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