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In re Manuel Mediavilla, Inc.

United States Bankruptcy Appellate Panel of the First Circuit

June 16, 2017

MANUEL MEDIAVILLA, INC., Debtor.
v.
MANUEL MEDIAVILLA, INC., Appellee / Cross-Appellant. PRLP 2011 HOLDINGS LLC, Appellant / Cross-Appellee, MANUEL MEDIAVILLA and MAYDIN G. MELÉNDEZ, Debtors. PRLP 2011 HOLDINGS LLC, Appellant / Cross-Appellee,
v.
MANUEL MEDIAVILLA and MAYDIN G. MELÉNDEZ, Appellees / Cross-Appellants. Bankruptcy Case Nos. 13-02800-MCF, 13-02802-MCF

         Appeals from the United States Bankruptcy Court for the District of Puerto Rico (Hon. Mildred Cabán, U.S. Bankruptcy Judge)

          Ubaldo M. Fernández, Esq., and David P. Freedman, Esq., on brief for Appellant /Cross-Appellee.

          Carmen D. Conde Torres, Esq., and Luisa S. Valle Castro, Esq., on brief for Appellees / Cross-Appellants.

          Before Feeney, Finkle, and Fagone, United States Bankruptcy Appellate Panel Judges.

          Per Curiam.

         PRLP 2011 Holdings LLP ("PRLP") appeals from the bankruptcy court's order confirming the Second Amended Joint Plan of Reorganization (the "Second Amended Plan") filed by the individual debtors, Manuel Mediavilla and Maydin G. Melendez (the "Individual Debtors"), and Manuel Mediavilla's wholly owned corporation, Manuel Mediavilla, Inc. (the "Corporate Debtor" and, together with the Individual Debtors, the "Debtors"), in their 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.[1]

         Although the parties raise a plethora of issues relating to voting and plan confirmation, we conclude that the bankruptcy court erred in confirming the Second Amended Plan because it summarily determined that a certain settlement agreement (the "Settlement Agreement") resolving pending confirmation issues did not exist. The bankruptcy court made erroneous factual findings and committed 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 plan containing terms materially different from the terms of the Settlement Agreement. As a result, we VACATE the confirmation order and REMAND to the bankruptcy court for further proceedings consistent with this opinion.

         BACKGROUND

         I. Pre-Bankruptcy Events

         We recite the lengthy background of these bankruptcy cases to provide a complete and accurate understanding of the disputes between the parties, the events that led to settlement negotiations, the confirmation of a plan, and the filing of these appeals.

         Both 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 in Humacao and Guaynabo, Puerto Rico. 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 in that amount ("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.

         II. The Bankruptcy Case

         A. Case Commencement

         In April 2013, the Individual Debtors and the Corporate Debtor filed separate chapter 11 petitions, thereby staying the case in the Local Court. Thereafter, the bankruptcy court authorized joint administration of the bankruptcy cases. The disputes between the Debtors and PRLP which engendered the action in the Local Court persisted and pervaded the bankruptcy cases from their commencement through these appeals.

         In its schedules, the Corporate Debtor listed PRLP as a secured creditor with a disputed and contingent claim in the amount of $2, 469, 874.01, secured by liens on three commercial properties valued at $2, 241, 000.00, with an unsecured portion of $228, 874.01. It also listed Centro de Recaudación de Ingresos Municipales ("CRIM") as a secured creditor with an unliquidated and disputed tax claim in the amount of $14, 654.72. It did not list any creditors holding priority or nonpriority unsecured claims.

         The Individual Debtors listed three secured creditors on their Amended Schedule D: (1) PRLP with a disputed and unliquidated claim in the amount of $500, 000.00, secured by a lien on real property valued at $400, 000.00, with an unsecured portion of $100, 000.00; (2) CRIM with an unliquidated and disputed property tax claim in the amount of $1, 486.96; and (3) Doral Bank with a claim in the amount of $342, 689.30, secured by a lien on the Individual Debtors' Guaynabo residence valued at $650, 000.00. The Individual Debtors did not list any creditors holding priority unsecured claims, but they did list unsecured nonpriority claims totaling $3, 104, 841.00.

         At the outset of these bankruptcy cases, PRLP moved the court to prohibit the Debtors' use of cash collateral (namely, the rental income from their commercial properties). After extensive litigation relating to the Debtors' use of cash collateral, including a disputed Emergency Motion to Use Cash Collateral filed by the Debtors, and an Opinion and Order of the bankruptcy court, the parties executed a Stipulation for Use of Cash Collateral, pursuant to which the Debtors agreed to make monthly adequate protection payments to PRLP. In early January 2014, the court approved the stipulation and the Debtors made adequate protection payments to PRLP throughout the course of the bankruptcy cases. Nevertheless, the adversarial relationship between the parties with respect to other issues continued, dominating the entire record of the proceedings in the bankruptcy court.

         B. Proofs of Claim by PRLP and CRIM

         PRLP filed separate proofs of claim asserting in each case a secured claim in the amount of $2, 635, 138.28. It later amended its proofs of claim to include $66, 672.78 for pre-petition legal expenses, increasing the total claimed amount to $2, 701, 810.06 in both cases.[2] It also separated the claimed amount in each case into secured and unsecured portions as follows: (1) in the Corporate Debtor's case, $2, 110, 000.00 secured and $591, 812.06 unsecured claims;[3] and (2) in the Individual Debtors' case, $400, 000.00 secured and $2, 301, 811.06 unsecured.[4] The Debtors objected to PRLP's amended claims.[5]

         CRIM filed a proof of claim in the Corporate Debtor's case for unpaid property taxes in the amount of $14, 185.65, with a secured portion of $13, 539.97 and an unsecured portion of $645.68. In the Individual Debtors' case, CRIM filed a proof of claim asserting a secured claim for unpaid property taxes in the amount of $745.52. PRLP objected to CRIM's claims, alleging, among other things, that the unsecured portion was untimely filed after the bar date for governmental claims.

         C. Original Joint Disclosure Statement and Joint Plan of Reorganization

         In November 2013, the Debtors filed in both cases a Joint Disclosure Statement and a Joint Plan of Reorganization ("Original Plan").[6] The Original Plan divided the creditors into the following seven classes:

(1) Class 1-Allowed administrative expenses payable in full on the effective date of the plan or as agreed by the Debtors and the claimants;
(2) Class 2-Allowed secured claim of Doral Bank (in the Individual Debtors' case) payable pursuant to the terms and conditions of the loan;
(3) Class 3-Allowed secured claim of CRIM, payable in full in 36 monthly installments together with interest at the rate of 4.25%;
(4) Class 4-Allowed secured claim of PRLP, payable in full in 60 monthly installments of $12, 348.00, with a lump sum at the end of the 60-month term, calculated by amortizing the loan amount over 30 years at 4.25% interest;
(5) Class 5-Allowed unsecured claims of governmental units in Corporate Debtor's case (consisting of Puerto Rico Treasury Department and CRIM), to be paid a dividend of 5% in equal monthly installments over 60 months;
(6) Class 6-Allowed general unsecured claims (consisting of PRLP's deficiency claims), to be paid a 5% dividend in 60 monthly installments; and
(7) Class 7-Equity security holders and/or other interest holders, to receive no payments.

         The Debtors identified Classes 3, 4, 5 and 6 in the Original Plan as impaired classes of claims.

         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 on January 29, 2014, 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, directed the Debtors to solicit votes pursuant to § 1125, and scheduled a confirmation hearing for April 22, 2014. 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. The parties then filed a series of responses and replies.

         On March 19, 2014, PRLP filed motions to convert the Debtors' cases to chapter 7 ("PRLP's Motions to Convert"), arguing that § 1112(b) "mandated" conversion and that conversion was in the best interest of creditors and the estates. The Debtors opposed conversion.

         On April 8, 2014, PRLP filed an objection to confirmation of the Original Plan asserting numerous grounds, including the following: (1) CRIM's claims were unimpaired and not entitled to vote; (2) classification of two unsecured classes was improper "gerrymandering" designed to obtain the acceptance of an impaired class; (3) the Original Plan failed to separately classify and treat PRLP's secured and unsecured claims for each of the cases, instead treating the claims as if the two cases were substantively consolidated; (4) the Original Plan did not comply with § 1129(b)(2)(A) as it failed to provide an adequate cramdown interest rate for PRLP's claims; (5) the Original Plan violated the absolute priority rule; (6) the Individual Debtors had not shown they were pledging all disposable income to pay unsecured creditors as required by § 1129(a)(15); and (7) the Debtors failed to demonstrate the feasibility of the Original Plan, in particular, the ability to make payments to PRLP.

         D. First Amended Plan

         In April 2014, the Debtors filed an Amended Joint Plan of Reorganization ("First Amended Plan"). The Debtors again classified claims in seven classes, but divided CRIM's Class 3 claims, PRLP's Class 4 claims, and the General Unsecured Creditors' Class 6 claims into sub-classes in order to segregate the Corporate Debtor's and the Individual Debtors' creditors into separate voting sub-classes (Class 3A, 4A, and 6A for the Corporate Debtor's case and Class 3B, 4B, and 6B for the Individual Debtors' case). The Debtors also increased the amount and the rate of interest to be paid to PRLP, indicating that payments would be made from net proceeds of their rental income plus a substantial lump sum payment at the end of the plan term, and provided that priority and general unsecured creditors would be paid from the sale proceeds of one of the Corporate Debtor's real properties. PRLP renewed its objections to confirmation.

         On April 22, 2014, 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. The hearing was continued to June 2, 2014.

         On May 1, 2014, the Debtors filed a second supplement to the Joint Disclosure Statement, in which they explained their application of the so-called "formula approach" set forth in Till v. SCS Credit Corp., 541 U.S. 465, 479-85 (2004), to calculate the 5.15% interest rate for PRLP's claims in the First Amended Plan. PRLP objected, challenging the Debtors' application of the Till formula approach to determine the appropriate interest rate and arguing that the Debtors had failed to consider relevant risk factors which required a substantial increase of the interest rate.

         On May 19, 2014, the Debtors filed a Motion Submitting Ballots, in which they submitted all newly solicited ballots, including CRIM's accepting ballots under Classes 3A, 3B, and 5, and PRLP's rejecting ballots under Classes 4A, 4B, 6A, and 6B. They also filed a motion referencing the requirements for confirmation under § 1129 in which they contended that the First Amended Plan met all requirements for confirmation.

         E. Motion to Designate and Disqualify PRLP's Votes Pursuant to § 1126(c) and (e)

         On May 19, 2014, PRLP filed a motion informing the court that PRLP's counsel had paid CRIM's unsecured claim, allegedly eliminating CRIM's accepting vote. As a result of this action, the Debtors filed a motion asking the bankruptcy court to designate PRLP's votes rejecting the plan as having been made in bad faith under § 1126(e) and to disqualify PRLP's rejecting votes under § 1126(c) ("Designation Motion"). According to the Debtors, PRLP made the payment to CRIM on the eve of the confirmation hearing solely to eliminate CRIM's accepting vote under Class 5 and impede confirmation. PRLP opposed the Designation Motion, arguing that the Debtors had mischaracterized its motives in paying off CRIM's unsecured claim and that it was lawfully exercising its rights under the loan agreement and as a creditor in the bankruptcy cases.

         After an evidentiary hearing in July 2014, the bankruptcy court entered an order granting the Designation Motion ("Designation Order"), thereby invalidating PRLP's votes. PRLP moved for reconsideration pursuant to Bankruptcy Rule 9023, and the Debtors objected. On September 23, 2014, the bankruptcy court entered an order granting reconsideration and reinstating PRLP's votes in both cases (the "Reinstatement Order"). The Debtors moved the court to make additional findings of fact under Bankruptcy Rule 7052(b), and PRLP opposed that request. Although the bankruptcy court entered an order granting the Debtors' request for additional findings of fact and clarifications under Bankruptcy Rule 7052(b), it held that the amended findings did not alter its ultimate conclusion that PRLP's votes should not be designated. Thus, the court held that the Reinstatement Order "will stand as our final order, as amended by the additional findings of fact which we incorporate therein."[7]

         F. Confirmation Hearing

         Commencing on February 24, 2015, the bankruptcy court held a five-day combined hearing on confirmation of the First Amended Plan and PRLP's Motions to Convert. On the first day of the hearing, the bankruptcy court sustained in part and overruled in part PRLP's objection to CRIM's claims, effectively disallowing the unsecured portion of CRIM's claim in the Corporate Debtor's case (which was included in Class 5) as untimely filed, but allowing the secured portion of the claims ...


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