- Case Type:
- Case Status:
- Reversed and Remanded
- BAP NOS. PR 16-053, PR 16-056. Bank. Case No. 13-02800-MCF (1st Circuit, Jun 16,2017) Published
- The bankruptcy court made erroneous factual findings and committed a legal error with respect to the threshold issue of whether there was a valid, binding, and enforceable settlement agreement between the parties and, as a result, the bankruptcy court erred in confirming a second amended plan containing terms materially different from the terms of the Settlement Agreement. As a result, the BAP vacated the confirmation order and remanded to the bankruptcy court for further proceedings consistent with the opinion.
- Procedural context:
- PRLP 2011 Holdings LLP (“PRLP”) appeals from the bankruptcy court’s order confirming the Second Amended Joint Plan of Reorganization filed by the individual debtors and their wholly owned corporation, Manuel Mediavilla, Inc. ( jointly administered cases) PRLP also appeals from several prior orders relating to plan confirmation and relating to a settlement agreement between the parties. The Debtors have filed cross-appeals with respect to a prior order relating to their request to designate and disqualify PRLP’s votes rejecting the plan pursuant to Bankruptcy Code § 1126.
- The Corporate Debtor and the Individual Debtors are engaged in the leasing and management of commercial real estate, and they separately own several commercial real properties. The Debtors rent the commercial properties to various tenants, and their main source of income is rents received from these tenants. In 2006, the Corporate Debtor obtained a $2,700,000 loan from Banco Popular de Puerto Rico (“BPPR”), as evidenced by a promissory note, which was secured by, among other things, mortgages on most of the Debtors’ real properties (including the Individual Debtors’ residence), and assignments of rental proceeds from all of the commercial real estate. The Individual Debtors also gave personal guarantees of the Note. In 2011, BPPR transferred the loan to PRLP, and, when the Note matured in January 2012, the Debtors and PRLP were unable to renegotiate new terms and PRLP called the loan. Unable to collect, PRLP commenced an action against both the Corporate Debtor and the Individual Debtors in the Puerto Rico Court of First Instance, Humacao Section (“Local Court”), and, in March 2013, that court issued orders for the attachment of the Debtors’ personal property, including all rental proceeds, and the appointment of a receiver. In April 2013, the Individual Debtors and the Corporate Debtor filed separate chapter 11 petitions, thereby staying the case in the Local Court. PRLP moved the court for an order to prohibit Debtors' use of cash collateral. The parties executed a Stipulation for Use of Cash Collateral, pursuant to which the Debtors agreed to make monthly adequate protection payments to PRLP. The court approved the stipulation and the Debtors made adequate protection payments to PRLP throughout the course of the bankruptcy cases. On the filing of the joint disclosure statements PRLP objected to the Joint Disclosure Statement, arguing, among other things, that: (1) it did not provide “adequate information” because it failed to independently classify and treat PRLP’s secured and unsecured claims in each case; (2) it did not provide a sufficient basis to assess the feasibility of the Original Plan; and (3) the Original Plan was unconfirmable on its face for numerous reasons. After a hearing, the bankruptcy court directed the Debtors to supplement their Joint Disclosure Statement to “independently classify and treat all secured and unsecured claims for the corporate and individual cases.” Thereafter, the bankruptcy court approved the Joint Disclosure Statement, as amended by the supplement. PRLP moved for reconsideration of the order approving the Joint Disclosure Statement, arguing among other things, that the Debtors did not provide all of the information ordered by the court, specifically information relating to the classification of claims and the calculation of the proposed 4.25% cramdown interest rate for PRLP’s claims. Afterward, filed motions to convert the Debtors’ cases to chapter 7 arguing that § 1112(b) “mandated” conversion and that conversion was in the best interest of creditors and the estates. Also objected to the confirmation of the plan on several grounds. The Debtors filed a first amended plan. The bankruptcy court held a combined hearing on confirmation of the First Amended Plan, PRLP’s Motions to Convert, and PRLP’s motion for reconsideration of the order approving the Joint Disclosure Statement. The court ruled that, due to certain unresolved issues arising from multiple filings the day before, it could not hold the hearing on plan confirmation or PRLP’s Motions to Convert. However, it granted the motion for reconsideration in part, directing the Debtors to file an amended supplement to the Joint Disclosure Statement to provide “a brief explanation of how they calculated the interest rate of 5.15% at which Debtors [we]re proposing to restructure PRLP[’]s claim.” The court also directed the parties to submit additional briefing regarding the classification of CRIM’s tax claims and ordered the Debtors to supplement and recirculate the Joint Disclosure Statement and First Amended Plan and re-solicit votes. debtors submitted a second supplement to the disclosure statement to which PRLP objected, challenging the formula used to calculate the interest rate. Debtors filed a motion submitting ballots - including CRIM's accepting vote- and contended that the first amended plan met all the requirements for confirmation. PRLP paid CRIM's unsecured claim and requested the elimination of CRIM's accepting vote. Debtors requested the court to deisgnate PRLP's votes rejecting the plan as having been made in bad fiath under section 1126(e). After an evidentiary hearing the court granted debtors' designation motion. PRLP moved for reconsideration which was granted by the court. Debtors requested additional findings of facts, which were granted by the court but did not alter the reinstatement order. After a five day hearing on confirmation the court denied confirmation and denied PRLP's motion to convert. The court concluded that, as the cases were not substantively consolidated, the Debtors could not consolidate treatment of PRLP's claims wihout consolidating all creditors'claims in both cases; and order the debtors to amend the plan and provide separate classification and treatment of PRLP's claims. The Debtors requested NUNc Pro Tunc consolidation. There were still pending the reconsideration of the impairment of CRIMS claims, the treatment of PRLP's claims as a single secured claim, the objection to the cramdown interest. the court entered an order solving all the issues on December 30, 2015. on December 31, 2105 the parties filed a motion to inform settlement that provided for the transfer of one of the corporate debtor's commercial properties to PRLP in full satisfaction of PRLP's claim for $1,600,000 and the release of its liens against all other properties owned by the Debtors.( the settlement included the execution of docuemtns to grant PRLPa perpetual easement to provide an access road for a parking lot) in addition to several other detailed stipulations. But on January 4, 2016 Debtors filed an urgent motion in opposition to PRLP's motionto inform and requesting to strike the motion contending that the assertions were incorrect and unathorized, and that there was no binding agreement. PRLP filed both a response to the Debtors’ Urgent Motion and an “Urgent Motion to Vacate and Set Aside the Opinion and Order Entered December 30, 2015 or for Enlargement of Time to Appeal”. The Debtors opposed. Thecort denied the motion to vacate. Debtors filed a second amended plan which provided for the payment of post-petition interest at 5% on PRLP’s claim, and eliminated CRIM’s unsecured claim. On February 15, 2016, PRLP objected to the Second Amended Plan, reaffirming its previous objections and asserting new objections based on the post-petition interest rate, the preservation of its liens, and feasibility concerns. PRLP also argued that the Second Amended Plan failed to incorporate the terms of the Settlement Agreement. In response, the Debtors argued, among other things, that PRLP’s attempts to force them to comply with the Settlement Agreement were contrary to the December 30, 2015 Decision, which was the law of the case. PRLP filed a “Motion for Entry of Order Finding that the Settlement Agreement is Binding and Enforceable” . the BAP make reference to the audio file of the status conference that reveals that the court rejected PRLP’s arguments that the Settlement Agreement was binding due to a “meeting of the minds,” and that the parties had agreed to all the essential terms of the settlement, including how those terms would be implemented. It viewed the matter as “straight forward,” finding that there was “no agreement.” The court noted that the attorneys for the parties did not execute the agreement, as well as the absence of a corporate resolution. It also expressed concern that there was no motion for authority to compromise, no notice, and no court approval, stating that the “meat” of the agreement was a sale of the Corporate Debtor’s property which required notice and bankruptcy court approval. The “Minutes of Proceeding” of the status conference did not mention the Motion to Enforce Settlement or the court’s ruling on it. On September 23, 2016, the bankruptcy court issued an Opinion and Order addressing the remaining issues for confirmation relating to post-petition interest for PRLP’s aggregate claim, the retention of PRLP’s lien on rents from the new lease agreement with CRIM, and feasibility concerns relating to the Debtors’ ability to pay PRLP’s secured claim, particularly the substantial balloon payment to pay the balance of the claim in full. on that same date entered an order confirming the second amended plan to which PRLP filed notices of appeal..
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