Opinion
CASE NO. 09-05585 EAG
11-21-2011
In re: HERMANOS TORRES PEREZ INC Debtor(s)
OPINION AND ORDER
I. PROCEDURAL HISTORY
Hermanos Torres Pérez, Inc. ("HTP" or "debtor") filed a petition for relief under chapter 11 of the Bankruptcy Code on July 7, 2009. (Docket No. 1.) HTP is a family-owned corporation organized under the laws of the Commonwealth of Puerto Rico. (Docket No. 134 at pp. 4-5.) Before ceasing distribution operations in July 2011, HTP purchased and sold petroleum and petroleum products. Id. Debtor also owns several real properties, which it leases together with the gas stations located on them. Id.
After initially seeking to reorganize, debtor filed a plan of liquidation on August 18, 2011 (the "liquidation plan"). (Docket Nos. 80; 107; 136; 351.) Pending before the court is the confirmation of the liquidation plan and an objection to confirmation filed by a single creditor, Peerless Oil & Chemicals, Inc. ("Peerless"). (Docket Nos. 351; 357.) Peerless, HTP's former petroleum supplier, is an unsecured creditor with a claim for $3,943,273.15 against debtor. (Docket No. 136 at pp. 5-6, 14.) Also pending is Peerless' motion to convert the case from chapter 11 to chapter 7, as well as debtor's opposition. (Docket Nos. 277; 290.)
The amount of this claim is disputed. Debtor also filed an adversary proceeding against Peerless asserting claims, inter alia, for violations of the Sherman Act. See Adversary No. 10-00038.
A hearing was held on October 6 and October 14, 2011 to address both matters. (Docket Nos. 378; 379.) The court heard testimony from HTP's president, María de los Ángeles Torres Pérez. Debtor's court-appointed accountant, CPA Wigberto Lugo Ménder, also testified at the hearing. In addition, the report of CPA Francisco J. Méndez González, the examiner appointed under section 1104 of the Code, was entered into evidence as direct testimony in substitution of his live testimony. (Docket Nos. 222-1; 378; 379.) Counsel for creditors Banco Popular de Puerto Rico ("BPPR") and MAPFRE Praico Insurance Company ("MAPFRE") also appeared at the hearing and opposed conversion. The matter was then taken under advisement.
The examiner was present in court, and parties in interest were given the opportunity to sit him as a witness and cross-examine him, although no party did so.
The court has jurisdiction over the case pursuant to 28 U.S.C. §§ 157(a) and 1134, as well as the general order of the district court dated July 19, 1984, referring title 11 proceedings to the bankruptcy court (Torruella, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).
II. LEGAL ANALYSIS
Peerless' motion to convert and objection to confirmation involve many of the same issues, in essence requiring a determination of whether the estate should be liquidated by the debtor under chapter 11 or by a trustee under chapter 7. This opinion and order addresses first the motion to convert and then the matter of confirmation.
A. Peerless' Motion to Convert Case to Chapter 7
The movant bears the initial burden of establishing by a preponderance of the evidence that cause exists to convert a case from chapter 11 to chapter 7 under section 1112(b) of the Bankruptcy Code. In re Landmark Atl. Hess Farm, LLC, 448 B.R. 707, 711 (Bankr. D. Md. 2011). Under section 1112(b), except as provided in paragraph (2) and subsection (c), if the movant establishes cause, the court has four options: either convert or dismiss a case or appoint a trustee or examiner, "whichever is in the best interests of creditors and the estate." Paragraph (2) provides that the court "may not" convert or dismiss a case if it finds and specifically identifies "unusual circumstances" demonstrating that dismissal or conversion is not in the best interests of creditors or the estate. However, the "unusual circumstances" defense requires the debtor or other party opposing the section 1112(b) motion to make two showings. First, that there is a reasonable likelihood that a plan will be confirmed within the time frames set out in section 1112(b)(2)(A). Second, that the grounds for conversion include an act or omission-other than "substantial or continuing loss to or diminution of the estate"-for which there is a reasonable justification for the act or omission, and such act or omission will be cured within a reasonable period of time fixed by the court. 11 U.S.C. § 1112(b)(2)(B). Subsection (c) of section 1112 is not applicable here.
Section 1112 was recently clarified by "technical amendments" effective December 22, 2010. See Bankruptcy Technical Corrections Act of 2010, Pub. L. 111-327, 124 Stat. 3557 (Dec. 22, 2010). Courts have held that these amendments apply both to pending cases and to cases filed thereafter. See In re Landmark Atl. Hess Farm, LLC, 448 B.R. at 712 n.14.
Although not explicitly defined in the statute, section 1112(b)(4) provides a non-exhaustive list of acts or omissions that constitute cause. Peerless' motion to convert is premised on three of these:
(A) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation;11 U.S.C. § 1112(b)(4)(A), (B) & (D). Substantial or Continuing Loss to or Diminution of the Estate
(B) gross mismanagement of the estate; [and]
(D) unauthorized use of cash collateral substantially harmful to 1 or more creditors.
Section 1112(b)(4)(A) requires the court to find both that there has been a "substantial or continuing loss to or diminution of the estate" and that there is an "absence of a reasonable likelihood of rehabilitation." See StellarOne Bank v. Lakewatch LLC (In re Park), 436 B.R. 811, 816 (Bankr. W.D. Va. 2010). The first requirement is "often met by showing that the debtor continues to incur losses or maintains a negative cash-flow position after the entry of the order for relief." In re Fall, 405 B.R. 863, 867-68 (Bankr. N.D. Ohio 2009). Where the plan under consideration provides for the liquidation of the estate, as in this case, the second requirement is always met. See In re Park, 436 B.R. at 817 (stating that "rehabilitation" requires-at a minimum-the prospect of re-establishing a business).
At the hearing, Peerless submitted the examiner's report as evidence the estate lost substantial value since debtor filed for bankruptcy. It focused on the report's finding that in March 2010 debtor's accounts receivable balance was discounted from $4,664,807 to $1,483,703: a 68.2% reduction. (Docket Nos. 221-1 at p. 8; 240.) These figures are somewhat deceptive. While schedule B, filed at the outset of bankruptcy, lists $4,664,806.79 in accounts receivable, debtor projected in the schedule that it would only be able to collect 40% of them, or $1,865,922.60. (Docket No. 14-1 at p. 6.)
However, Peerless has not established that the reduction in accounts receivable mentioned in the examiner's reports reflects that the asset has, in fact, lost value postpetition. In its second amended disclosure statement, debtor states that the accounts receivable balance was adjusted due to a determination that some of the accounts receivable were uncollectible, as well as to other accounting adjustments to the accounts receivable of insiders. (Docket No. 134 at p. 10.) This is supported by the findings of the examiner's report, which indicates that the reduction in accounts receivable was, at least in large part, attributable to two accounting adjustments made after the bankruptcy filing.
The first concerns an approximate $1.8 million reduction in accounts receivable due to the elimination of interest charges previously added to the accounts receivable of non-insiders. (Docket No. 221-1 at pp. 10-11.) Peerless did not place the court in a position, with admissible evidence, to second guess this business determination that the interest charges in question were uncollectible. And the court will not establish a per se rule that the write-down postpetition of uncollectible, pre-petition accounts receivable is equivalent to a "substantial or continuing loss to or diminution of the estate" as this could require an otherwise prudent debtor to throw good estate money after bad accounts receivable.
In the second amended disclosure statement, debtor states that it "adjusted and eliminated from the account receivables included in the Schedules, several account receivables that have been deemed uncollectible by management due to various reasons, including but not limited to bankruptcy filing of clients, closing of client's facilities, collection actions that have not prospered vs. costs of litigation, etc." (Docket No. 134 at pp. 11-12.)
The second relates to an approximate $1.3 million write-down postpetition in the pre-petition accounts receivable of two insiders that is related to an exchange transaction, referred to in the report as the "permuta." (Docket No. 221-1 at pp. 11-12, 14.) In this transaction, HTP's founder, Victor Torres Oliveras ("Torres-Oliveras"), and his wife, Hilda Pérez Sauchet ("Pérez-Sauchet"), transferred in January 2004 two gas stations and four other parcels of land to HTP in exchange for 80% of the shares of the company. (Docket Nos. 221-1 at p. 14; 383.) At the time of the exchange, there existed approximately $1.3 million in accounts receivable from Torres-Oliveras and Pérez-Sauchet which were not mentioned in the exchange deed. Those $1.3 million were used by Torres-Oliveras and Pérez-Sauchet to "purchase, build and/or make improvements to" the gas stations subsequently transferred to HTP. Id. According to the testimony of debtor's accountant, this amount was carried on HTP's financial statements until 2009, at which time it was deducted from the accounts receivable of these two insiders.
Peerless argues that this transaction was improperly accounted for in HTP's books, and, as a consequence, the exchange should be avoided. But, debtor's accountant testified-and the court agrees-that such a determination could not be made without examining HTP's financial statements for 2004, which were not entered into evidence at the hearing. Debtor's accountant did admit that the write-down may have been insufficiently documented. But, this is can be explained by the fact that the debtor is a family-owned business. Without evidence showing otherwise, the court cannot conclude that it was improper of the debtor to write-off this insider accounts receivable. In reaching this conclusion, the court takes into consideration the fact that this accounts receivable was used by the two insiders to purchase and improve real properties they later transferred to HTP.
Based on the above, the court finds that Peerless has failed to show that the accounting adjustments made postpetition by debtor to the pre-petition accounts receivable constitute a "substantial or continuing loss to or diminution of the estate" under section 1112(b)(4)(A) of the Bankruptcy Code.
In its motion, Peerless also argues that the diminution of the estate can be demonstrated by comparing the debtor's cash balance as of the bankruptcy filing date with its current cash balance. (Docket No. 277 at p. 7.) However, Peerless neither addressed this argument at the hearing nor submitted sufficient documentary or testimonial evidence to provide the court with a clear picture as to debtor's financial condition on this point, which would be necessary to make such a finding. See In re Motel Props., Inc., 314 B.R. 889, 894 (Bankr. S.D. Ga. 2004) ("To determine if there is a continuing loss to or diminution of the estate, the [c]ourt must look beyond financial statements and fully evaluate the present condition of the [d]ebtor's estate."). In light of the fact that debtor has not ceased all operations and is currently receiving significant income from rental properties, the court cannot simply assume that expenses related to administering the estate have resulted in a negative cash flow. Cf. Loop Corp. v. United States Tr., 379 F.3d 511, 516 (8th Cir. 2004) (court found debtor's administrative expenses sufficient to qualify as a "substantial or continuing loss" where debtor had ceased all business operations and liquidated "virtually all of its assets"). Gross Mismanagement of the Estate
Peerless further contends that HTP's officers have grossly mismanaged the estate by writing-off or not collecting accounts receivable owed by the insiders and by allowing the insiders to purchase petroleum and petroleum products on credit, contrary to industry practice. (Docket No. 277 at pp. 6-8); see 11 U.S.C. § 1112(B)(4)(B). The court concludes otherwise. It reaches that conclusion considering only the postpetition conduct of the debtor. See 7 Alan N. Resnik et al., Collier on Bankruptcy ¶1112.04[6][b] (16th ed. 2011) ("The inquiry cannot include mismanagement by the debtor prior to the bankruptcy filing.").
In previously addressing the allegation of "substantial or continuing loss to or diminution of the estate," the court concluded that Peerless had not established that the $1.3 million write-down in the accounts receivable of Torres-Oliveras and Pérez-Sauchet reflects an actual loss to or diminution of the estate as opposed to a valid accounting adjustment. The same facts and underlying reasons that led to that conclusion leads the court to conclude that the writing-down of the accounts receivable of these two insiders does not constitute "gross mismanagement of the estate."
Although Peerless alleges that the debtor is not collecting the accounts receivable of the other insiders, it failed to show that at the hearing. Indeed, at the hearing the debtor demonstrated that since the bankruptcy filing it has been able to collect accounts receivable owed by these insiders and plans to continue with those efforts.
While these insiders have not paid their debts in full, debtor provided evidence at the hearing that at least some of them began a payment plan. For instance, HTP's president provided testimony-which the court finds credible-that she and her brother, Víctor Torres-Pérez, who together account for nearly $900,000 of the approximately $1 million in insider accounts receivable, have been making monthly payments to the estate of approximately $4,000 combined, which is the most they can afford at this time. Additionally, HTP's president testified that her brother Victor is selling one or two of his gas stations to pay his debt in full.
The examiner's report states that the contemplated sale would violate a state court order prohibiting the alienation of Victor Torres-Pérez's property. (Docket No. 221-1 at p. 13.) However, neither party has provided the court with a certified translation of that order. See González-De Blasini v. Family Dep't, 377 F.3d 81, 89 (1st Cir. 2004) (the court "should not have considered any documents before it that were in the Spanish language."). Likewise, no evidence was provided as to the recording of the state court order in the registry of property. Thus, the court cannot pass judgment on the alleged illegality of such a sale.
Peerless points to the fact that the debtor has not filed collection actions against its insiders as evidence of gross mismanagement of the estate. It then argues that only a chapter 7 trustee can be counted on to sue HTP's insiders on their accounts receivable. At the start of the hearing, counsel for BPPR noted that there could be many reasons why a creditor may decide that suing may not be the best means of collecting a debt. He then stated that BPPR had not sued HTP's insiders on their guarantees, but offered no evidence of that at the hearing; opposed conversion to chapter 7; and had voted in favor of the liquidation plan. Likewise, counsel for MAPFRE stated that his client had not sued HTP's insiders on their guarantees, but offered no evidence of that, and had voted in favor of liquidation under chapter 11 as opposed to chapter 7. Peerless, on the other hand, according to its counsel sued HTP's insiders on their guarantees in state court, and the examiner's report makes reference to that lawsuit. (Docket No. 221-1.) The court agrees with the observation of BPPR that litigation is not always the best way to collect a debt. A prudent decision by debtor to sue its insiders would require the consideration of many factors, including their financial condition and other collection actions already filed against them. Peerless did not provide at the hearing evidence to place the court in a position to second guess debtor's decision (and apparently also the decision of BPPR and MAPFRE) not to sue the insiders.
Peerless' assertion that the debtor committed gross mismanagement by allowing insiders to make purchases on credit must also be evaluated only with postpetition conduct. See 7 Collier on Bankruptcy at ¶1112.04[6][b]. At the hearing, there was uncontested testimony from HTP's president that-following the filing of the petition-debtor required insiders to make purchases with cash on the date of sale or upon delivery.
Finally, the examiner, who was appointed by the court at Peerless' request to scrutinize debtor's records and operations, made no finding of gross mismanagement in his report. (Docket Nos. 151; 173; 221-1.) In light of the above, Peerless has failed to establish cause on this basis.
Unauthorized Use of Cash Collateral
Peerless also premises its motion to convert on its assertion that debtor used MAPFRE's cash collateral without authorization. (Docket No. 277 at pp. 7-8); see 11 U.S.C. § 1112(b)(4)(D). Prior to the bankruptcy filing, MAPFRE provided a payment bond in the amount of $500,000 securing HTP's debt to Peerless, indemnified by debtor and its insiders. (Docket Nos. 351 at pp. 7-8; 213 at pp. 20-21.) The indemnity agreement covers the payment of any claims under the bond as well as any related costs and expenses incurred by MAPFRE, and gives MAPFRE a lien over debtor's cash, vehicles, accounts receivables, and other assets. (Docket No. 213 at pp. 12-23.)
After debtor filed for bankruptcy, debtor and MAPFRE entered into a stipulation requiring that debtor provide MAPFRE adequate protection for its interest in the cash collateral and other assets of debtor. (Docket Nos. 213; 229.) Debtor did not comply with all required payments under the stipulation, and MAPFRE subsequently filed a motion to prohibit debtor's use of its cash collateral. (Docket No. 274). It is this motion that Peerless cites as the basis for establishing cause due to the unauthorized use of cash collateral. (Docket No. 277 at pp. 7-8.) However, in its response to MAPFRE's motion, debtor indicated that it had paid all attorney's fees incurred by MAPFRE to date, but other payments required under the stipulation were no longer necessary because of the dismissal of Peerless' state court action against MAPFRE seeking payment under the bond for amounts owed by debtor. (Docket No. 276 at p. 2.) The court construes the fact that MAPFRE now opposes the motion to convert-and has, in fact, voted in favor of the liquidation plan-as evidence that MAPFRE's dispute with debtor regarding this issue has since been resolved. Therefore, Peerless' reliance on this factor to establish cause is unavailing.
In view of the above, the court finds that Peerless has failed to establish cause to convert the case to chapter 7. Even, arguendo, if Peerless were to establish cause for gross mismanagement of the estate or improper use of MAPFRE's cash collateral, the court finds that debtor's adversary proceeding against Peerless, seeking $15 million for alleged antitrust violations, among other things, qualifies as an "unusual circumstance" that defeats conversion. See 11 U.S.C. § 1112(b)(2). Accordingly, Peerless' motion to convert the case from chapter 11 to chapter 7 is hereby DENIED. (Docket No. 277.)
The court finds that the timeliness requirements under § 1112(b)(2)(A) are satisfied since debtor's liquidation plan is confirmed herein. Also, the court finds that debtor met its burden under § 1112(b)(2)(B) since the cash collateral issue was settled (as stated above) and debtor's role in the administration of the estate since the filing of the liquidation plan on August 18, 2011 is limited mainly to the collection of accounts receivable and rent on several properties, the liquidation of vehicles and tanks, and the prosecution of the adversary proceeding against Peerless.
The denial of Peerless' motion to convert is by no means a free pass to debtor. The "inability to effectuate substantial consummation of a confirmed plan" and the "material default by the debtor with respect to a confirmed plan" are two expressly listed grounds for dismissal or conversion under section 1112(b)(4)(M) and (N), respectively. And, P.R. LBR 2015-2(b) requires debtor to file detailed post-confirmation reports so that creditors and the court can continue to closely monitor debtor's progress under the liquidation plan.
B. Confirmation of Debtor's Liquidation Plan
Having denied Peerless' motion to convert, the court now addresses the confirmation of the liquidation plan. (Docket No. 351.) Peerless is the only creditor objecting to confirmation. It argues that the plan is not in the best interests of all creditors, is unfeasible, was not proposed in good faith, and is not "fair and equitable" to impaired classes. (Docket No. 357.)
Section 1129 of the Bankruptcy Code sets out the substantive requirements for the confirmation of a chapter 11 plan. 11 U.S.C. § 1129(a)(1)-(16). The proponent of the plan bears the burden of establishing by a preponderance of the evidence that each requirement of section 1129(a) has been met. See In re Multiut Corp., 449 B.R. 323, 332 (Bankr. N.D. Ill. 2011). Where a plan does not receive the unanimous consent of all impaired classes of creditors, thus failing to satisfy section 1129(a)(8), the plan may nevertheless be confirmed through "cram down" if "the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan." 11 U.S.C. § 1129(b)(1).
In this case, the liquidation plan divides debtor's creditors into nine classes, six of which are impaired. (Docket Nos. 351; 366.) Of those, Class 2 (BPPR), Class 3 (MAPFRE), and Class 6 (general unsecured creditors) voted to accept the liquidation plan, while only Class 8 (Peerless) voted against it. (Docket Nos. 367; 369.) Thus, the liquidation plan may be confirmed only if it satisfies the "cram down" requirements. In making its determination, the court will focus its attention on the confirmation requirements that are in dispute. All other requirements under section 1129(a) and (b) have either been met or are inapplicable to the facts in this case, and thus do not warrant further discussion.
Debtor claimed that Peerless' vote to reject a prior plan was made in bad faith and should thus be disqualified. (Docket No. 329.) But debtor has not raised this argument with regard to Peerless' vote to reject the liquidation plan.
Best Interests of Creditors
Peerless argues that the liquidation plan is not in the best interests of creditors because it would entrust the liquidation process to the "exclusive control of the same officers that drained the working capital of the corporation and forced [HTP] to bankruptcy." (Docket No. 357 at p. 2.) Peerless asserts that creditors would be better served if the liquidation were handled through a chapter 7 trustee. See 11 U.S.C. § 1129(a)(7) (requiring that each holder of an impaired claim or interest must either accept the proposed plan or receive no less under the plan than what it would receive in a chapter 7 liquidation). Just as in its motion to convert, Peerless' primary focus is the recovery of accounts receivable from HTP insiders.
According to the liquidation analysis included in the second amended disclosure statement, a hypothetical chapter 7 liquidation would yield an estimated 7% dividend on unsecured claims. (Docket No. 134 at p. 74.) Under the liquidation plan, the debtor expects to distribute at least 9.998% to the general unsecured creditors-including any amount ultimately owed to Peerless-on or before 24 months. (Docket Nos. 351 at p. 14; 366). In addition, the plan states that in the event debtor prevails in its adversary claim against Peerless, any and all proceeds from that litigation would be distributed to the general unsecured creditors, after payment in full to senior classes. Id. Therefore, the liquidation plan, as proposed, would satisfy the requirements section 1129(a)(7) of the Bankruptcy Code.
In an amendment to the liquidation plan, debtor clarified that all net proceeds obtained from the adversary against Peerless, as well as the proceeds from other assets, will be distributed to all creditors "up and until their claims are paid in full." (Docket No. 376.)
Peerless, however, questions debtor's ability to effectuate the liquidation plan, and argues that a chapter 7 trustee would be more successful at recovering accounts receivable owed by the insiders, leading to a greater distribution to all unsecured creditors. Peerless cites the significant amount of accounts receivable attributable to insiders that have yet to be collected as evidence of the debtor's conflict of interest. Peerless also argues that a chapter 7 trustee would pursue an avoidance action regarding the "permuta" or exchange. Once again, the same facts and underlying reasons that led the court to reject these arguments with respect to the motion to convert leads the court to reject them here.
Based on the foregoing, the court finds that Peerless has failed to establish-by a preponderance of the evidence-that the liquidation plan is not in the best interests of creditors. Simply put, Peerless has not demonstrated that it, or any other impaired class, would receive less under the plan than in a hypothetical chapter 7 liquidation. In making its determination, the court also takes into consideration that both BPPR and MAPFRE, two sophisticated creditors, voted in favor of the liquidation plan. (Docket No. 367.)
Feasibility
In order for a plan to be feasible under section 1129(a)(11), it must "'offer[] a reasonable assurance of success,' but it need not 'guarantee[]' success." Dish Network Corp. v. DBSD N. Am., Inc. (In re DBSD N. Am., Inc.), 634 F.3d 79, 106 (2d Cir. 2010) (quoting Kane v. Johns-Manville Corp., 843 F.2d 636, 649 (2d Cir. 1988)). Based on the evidence presented at the hearing and the testimony of debtor's accountant, the court finds debtor's liquidation plan to be feasible.
The plan will be funded by the collection of HTP's accounts receivable, the sale of the debtor's vehicles and tanks, and rental income, in addition to funds HTP currently has on hand and monies it has previously deposited with the court. (Docket Nos. 351 at pp. 33-34; 134 at p. 74; 376 at p. 1.) The projected recovery from the collection or sale of these assets-which the debtor's accountant deemed reasonable-will generate sufficient funds to pay 100% of HTP's administrative expenses and priority claims and at least 9.9% on unsecured claims, with a safety cushion in excess of $700,000 in the event that debtor's projections fall short. In fact, debtor's accountant testified that the priorities should be paid in full just from the liquidation of HTP's vehicles and tanks.
At the hearing, Peerless argued-for the first time-that the liquidation plan is not feasible since it does not account for liability debtor could potentially incur if BPPR chose to terminate the leases of the rental properties debtor will surrender to the bank under the liquidation plan. (Docket No. 351 at pp. 11-12.) However, Peerless has not provided the court with any legal argumentation to support such an imposition of liability on debtor. Furthermore, Peerless has not submitted certified translations of the leases, which were drafted in the Spanish language, in particular any provisions contained therein concerning the termination of leases. See González-De Blasini, 377 F.3d at 89. Consequently, the court finds Peerless' last-minute charge to be too speculative to take into consideration in determining the plan's feasibility, as Peerless has not put the court in a position to evaluate the merit of this new assertion. In any event, the court notes that debtor's plan has a built-in safety cushion of over $700,000, which could offset, at least partially, any liability imposed on debtor if BPPR chose to terminate any or all of the lease agreements.
Of note, HTP's president testified that the gas stations located on the properties would be more valuable to BPPR with a tenant in place rather than closed.
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Good Faith
Peerless argues that debtor's liquidation plan was proposed in bad faith based on the fact that the plan assigns Peerless to its own class-Class 8-rather than including it with the general unsecured creditors in Class 6. (Docket Nos. 357 at p. 1; 271 at p. 6); see 11 U.S.C. § 1129(a)(3) (requiring chapter 11 plan be proposed "in good faith and not by any means forbidden by law."). Peerless also asserts that the plan does not provide for any payment of its claim. Id. Additionally, at the hearing Peerless argued that the fact that none of the accounts receivable assigned to MAPFRE for collection under the plan are attributable to insiders also demonstrates bad faith.
At the outset, while Peerless asserts that its claim will not be paid under the plan, the plan explicitly provides for such payment, stating that "[a]ny final allowed amounts owed to Peerless will be paid under Class 6, once the claim is liquidated." (Docket No. 351 at p. 15.) As to Peerless' argument that it should be classified with the other general unsecured creditor in Class 6, the court first emphasizes that the placement of Peerless in Class 8 does not impact the amount it will be paid under the liquidation plan. Id. Moreover, debtors are afforded broad discretion in classifying claims, as courts focus on whether a debtor has "good business reasons" for the placement of a creditor in a particular class. See Multiut Corp., 449 B.R. at 335. In this case, debtor justifies its classification of Peerless based on the fact that debtor initiated an adversary proceeding against Peerless seeking damages in excess of any amounts claimed by Peerless, and that any allowed amounts owed to Peerless are guaranteed in part with payment bonds by Tower Bonding Co. and MAPFRE, as well as a guarantee from BPPR that was executed pre-petition. (Docket No. 134 at p. 22.) In the In re Multiut Corp. case, the court found the fact that debtor was engaged in litigation with several claimants to be a "good business reason for their separate classification ... [as] [s]uccess against those parties could, in effect, eliminate payment on their claims." Multiut Corp. , 449 B.R. at 335. Based on this reasoning, the court finds that debtor had a good business reason for separating Peerless from the other unsecured creditors, and thus that Peerless' classification was not made in bad faith.
Finally, the court also finds Peerless' argument regarding the assignment of non-insider accounts receivable to MAPFRE to be unavailing. Peerless suggests that debtor specifically retained the right to collect on insiders' accounts receivable as a means of protecting the insiders (claiming that debtor has no intention of collecting those accounts). However, this argument fails to account for the fact that the insiders are indemnitors on MAPFRE's bond, which gives MAPFRE a means of collecting directly from them in case of default. (Claim No. 35-1.) This makes the assignment of insider-related accounts receivable to MAPFRE unnecessary. In light of this, the court finds that Peerless has failed to show that debtor's assignment of only non-insider accounts receivable to MAPFRE evidences bad faith.
Having addressed the specific objections raised by Peerless pertaining to section 1129(a) of the Code, the court finds that debtor has satisfied the substantive requirements for the confirmation of a chapter 11 plan, other than section 1129(a)(8). Therefore, the court now turns to the requirements for cram down.
Cram Down Requirements
Where a plan does not receive the unanimous consent of all impaired creditors, the court may nevertheless confirm the plan via cram down as long as it does not "discriminate unfairly" and is "fair and equitable" to the rejecting, impaired class. 11 U.S.C. § 1129(b)(1). While Peerless does not explicitly argue that the plan discriminates unfairly, to the extent that Peerless' argument that it should be classified with the general unsecured creditors should be construed as such, this objection has already been addressed-and denied-above in the context of good faith. See In re Idearc, Inc., 423 B.R. 138, 171 (Bankr. N.D. Tex. 2009) ("the unfair discrimination standard prevents creditors and equity interest holders with similar legal rights from receiving materially different treatment under a proposed plan without compelling justifications for doing so."). Thus, the court finds that debtor's plan does not discriminate unfairly. Regarding the requirement that a plan be "fair and equitable," the Code states that a plan is "fair and equitable" as to a dissenting class of unsecured creditors-like Peerless-under section 1129 where
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or11 U.S.C. § 1129(b)(2)(B).
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property . . . .
In this case, the liquidation plan satisfies section 1129(b)(2)(B)(ii), which is typically referred to as the "absolute priority rule." Peerless argues that the plan violates the absolute priority rule because it does not explicitly indicate whether funds collected in excess of the payment terms set out in the plan will be distributed to creditors or retained by the debtor. This argument was mooted by by debtor when it supplemented the liquidation plan. (Docket No. 376.) Peerless also argues that since debtor will not collect on accounts receivable from the insiders, that this-in effect-would allow the insiders, as junior claimholders, to retain assets at the expense of an objecting class, Peerless. However, as discussed more fully above, Peerless has failed to provide sufficient evidence establishing that debtor will not collect the insider accounts receivable. Thus, Peerless' objection on this basis is denied.
Accordingly, the court finds that the liquidation plan "does not discriminate unfairly" and is "fair and equitable" as to Peerless. In addition, the court makes the same findings as to the other non-accepting, impaired classes.
As the court finds that all applicable requirements under section 1129 have been met, the liquidation plan is hereby CONFIRMED over Peerless' objection. (Docket Nos. 351; 376.)
III. CONCLUSION
In view of the foregoing, having been determined after a hearing on notice,
IT IS ORDERED THAT:
The motion to convert the case to chapter 7 filed by Peerless (Docket No. 277) is hereby DENIED.
The plan filed by debtor on August 18, 2011 (Docket No. 351), as supplemented on October 10, 2011 (Docket No. 376), is hereby CONFIRMED.
Debtor is ORDERED to timely comply with the post-confirmation reporting requirements of P.R. LBR 2015-2(b) until such time as it files the application for final decree.
Debtor is ORDERED to timely comply with the requirements of P.R. LBR 3022-1 in order to obtain the final decree, except that the 120-day term to file the application shall not apply; rather, the debtor shall file the application for final decree once the estate is fully administered. See Fed. R. Bankr. P. 3022 advisory committee's note on 1991 amendment.
The debtor shall give notice of this opinion and order with a copy of the confirmed plan and its supplement to all parties in interest.
SO ORDERED.
San Juan, Puerto Rico, this 21 day of November, 2011.
Edward A. Godoy
U.S. Bankruptcy Judge