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In re Carol Engen

Summarizing by Bradley Pearce

United Surety & Indemnity Co. v. Lopez-Munoz

United Surety & Indemnity Co. v. Pedro Lopez-Munoz (In Re Pedro Lopez-Munoz), 1st Cir. BAP No. PR16-011, Bankr. Case No. 13-08171-EAG (July 28, 2016)
Despite the debtor's initial failure to disclose certain prepetition transfers and schedule certain assets, the court denied a creditor's motion to appoint a chapter 11 trustee when the debtor explained, and corrected his failures in a manner sufficient to satisfy the bankruptcy court. The BAP upheld the bankruptcy court's finding that the moving creditor had failed to meet its burden under Section 1104 that the benefit of appointing a trustee outweighed the costs to the estate under the present facts.
Procedural context:
Appeal of an order of the United States Bankruptcy Court for the District of Puerto Rico to the United States Bankruptcy Appellate Panel for the First Circuit.
Prior to the petition date, the Debtor owned and operated certain gas stations in Puerto Rico individually (the "Debtor Station") and through a corporation (the "Corporate Station") he established. After suffering certain financial setbacks, the Debtor entered into leases of the two stations with a third party, Puma Energy Caribe, LLC ("Puma") which required certain monthly payment from Puma to the Debtor and his corporation respectively. On April 11, 2013, the Debtor sold his interest in the Debtor Station to the corporation and transferred his interest in the corporation to a trust for which he was the settlor and principal beneficiary. On October 13, 2013, the Debtor filed for chapter 11 relief. In his schedules, he did not list any financial interest in the gas stations and, while disclosing the transfers of the Debtor Station and corporate interests, indicated that the transfers took place in March, rather than April. He did not disclose his lease agreements with Puma. Further, at his 341 meeting, the Debtor indicated that the beneficiaries of the trust were his children rather than himself. One of the Debtor's creditors seized on these failures of disclosure and misstatements to file a motion to seek appointment of a chapter 11 trustee pursuant to Section 1104. The creditor noted that the transfers were to related parties and, coupled with the Debtor's failures to disclose the transfers completely and accurately indicated an intent to defraud creditors. The United States Trustee supported, but did not join, the motion to appoint a chapter 11 trustee. The Debtor responded in part by rescinding the sale of the Debtor Station and transferring the shares of the corporation back to himself from the trust. The Debtor then moved to amend his schedules to correct these changes. The Debtor further argued the intent of the transfers was to benefit all creditors by shielding the assets from the reach of one particularly aggressive creditor. After two days of evidentiary hearings, the bankruptcy court ruled that the moving creditor had failed to meet its burden of proof and denied the motion to appoint a trustee. The BAP noted that appointment of a trustee is an extraordinary act and the burden falls on the moving party to justify the appointment. The BAP noted that the First Circuit has not determined the appropriate burden of proof under Section 1104, noting a split of the courts on this issue. However, the bankruptcy court had held that, though it agreed with a majority of the courts that the appropriate standard requires "clear and convincing evidence", the standard of proof was not critical because the facts did not warrant appointment under either standard. The BAP found that the bankruptcy court had not abused its discretion in determining the moving creditor had failed to meet its burden under either standard. The BAP then found that the bankruptcy court had correctly determined that the Debtor had credibly explained the transfers and alleged misrepresentation, sufficiently to overcome a presumption of fraud under the applicable Puerto Rican statute. While the BAP was troubled by the bankruptcy court's focus only on the standard under the Puerto Rican statute and the possible impact on a Section 1104 analysis, the BAP nevertheless found that the bankruptcy court had correctly examined the facts and applied the law in denying the 1104 motion. Finally, the BAP sustained the bankruptcy court's finding that the creditor had failed to demonstrate that the costs of appointing a trustee were outweighed by the benefit of such appointment to the estate and its creditors.
Judges Francis Bailey, Diane Finkle and Michael Fagone

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