In re: Alco Corporation

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2

3 IN RE: 4 CASE NO. 12-00139 MCF 5 ALCO CORPORATION Chapter 11 6

8 XXX-XX4986 9

10 FILED & ENTERED ON 03/11/2013 11 Debtor 12

13 14 OPINION AND ORDER 15 Before this Court is the confirmation of Alco Corporation's 16 17 (hereafter referred to as "Debtor") Amended Chapter 11 Plan of 18 Reorganization and Objection to Confirmation and Request for 19 Conversion filed by Betteroads Asphalt Corporation, Petroleum and 20 Emulsion Manufacturing Corporation and Betterecycling Corporation 21 (hereafter jointly referred to as "Betteroads Group") (Docket No. 22 23 160, 247 and 248). For the reasons set forth herein, this Court 24 confirms Debtor's Amended Chapter 11 Plan of Reorganization, 25 overrules Betteroads Group’s objection, and denies Betteroads Group's request for conversion to Chapter 7. 1 1 I- Procedural History 2 Debtor is a corporation organized under the laws of the 3 Commonwealth of Puerto Rico, whose primary business is the 4 production and sale of asphalt (Docket No. 44). Debtor filed a 5 6 voluntary petition for relief under Chapter 11 of the Bankruptcy 7 Code on January 12, 2012, in order to protect its assets from the 8 effects of ongoing litigation with secured creditors and suppliers 9 (Docket No. 1 & 44). Betteroads Group are Debtor's creditors and 10 11 competitors in the sale of asphalt in Puerto Rico. 12 Debtor filed an Amended Disclosure Statement and Amended 13 Chapter 11 Plan of Reorganization (the "Amended Plan") (Dockets No. 14 159 & 160). The Betteroads Group filed a Limited Objection to the 15 Amended Plan (Docket No. 247) and an Amended Objection to 16 17 Confirmation of the Amended Plan and Request for Conversion to 18 Chapter 7 liquidation (Docket No. 248).1 The Betteroads Group 19 voted to reject the Amended Plan.2 20 During the course of a three day evidentiary hearing, the 21 Court heard testimony from Debtor's President, Alfonso Rodriguez 22 23 ("Rodriguez"), Debtor's Certified Public Accountant, Certified 24 Evaluation Analyst and Certified Financial Government Manager, Jose 25

1 At the hearing held on December 18, 2012, the Court determined that Betteroads Group's Amended Objections were timely filed (Docket No. 284). 2 The Betteroads Group is included in the Amended Plan under Class 12 as Other General Unsecured Claims. The total amount of claims in Class 12 is $5,812,066. The Betteroads Group’s total claims comprises 51% of the total value of the claims in Class 12; hence, they control Class 12. 2 1 J. Jimenez Vazquez ("Jimenez"), Betteroads Group's expert witness,a 2 certified public accountant, Luis R. Carrasquillo Ruiz 3 ("Carrasquillo"), and Antonio J. Diaz ("Diaz"), an engineer and 4 Vice President of Sales and Engineering for Betteroads. 5 6 II - Jurisdiction 7 The Court has jurisdiction to hear this case, pursuant to 28 8 U.S.C. § 157(a)3 and the general order of the United States 9 District Court dated July 19, 1984, which refers title 11 10 11 proceedings to the Bankruptcy Court (Torruellas, C.J.). This is a 12 core proceeding, pursuant to 28 U.S.C. § 157(b). 13 III - Legal Analysis 14 The statutory requirements for the confirmation of a Chapter 15 11 plan can be found in § 1129 of the Bankruptcy Code. The plan 16 17 proponent bears the burden of demonstrating by preponderance of the 18 evidence that each element of § 1129 has been met.4 Upon agreement 19 of the parties, the only contested issue is whether the Amended 20 Plan meets the feasibility requirements pursuant to § 1129(a)(11).5 21 22 A Chapter 11 plan cannot be confirmed if such confirmation 23 will likely be followed by the liquidation or the need for further 24 financial reorganization of the debtor, unless such liquidation is 25

3 Unless otherwise indicated, all statutory references are to title 11 of the United States Code, 11 U.S.C. §§ 101, et seq., as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8 (the "Bankruptcy Code"). 4 Beal Bank, S.S.B. v. Waters Edge Ltd. Partnership, 248 B.R. 668, 690 (D. Mass. 2000). 3 1 part of the plan, pursuant to § 1129(a)(11). This is commonly 2 referred to as the "feasibility test." "In determining whether [a 3 plan of reorganization] is feasible, the bankruptcy court has an 4 obligation to scrutinize the plan carefully to determine whether it 5 6 offers a reasonable prospect of success and is workable."6 The 7 purpose of § 1129(a)(11) is manifold: 8 1) 'to prevent confirmation of visionary 9 schemes which promise creditors and equity security holders more under a 10 proposed plan that the debtor can possibly attain after confirmation,' In 11 re Pikes Peak Water Company, 779 F.2d 12 1456, 1460 (10th Cir. 1985), quoting In re Pizza of Hawaii, Inc., 761 F.2d 1374, 13 1382 (9th Cir. 1985) and L. King, 5 14 Collier on Bankruptcy para. 1129.02 [11] (15th ed. 1984); 2) to prevent an abuse 15 of the reorganization process by the confirmation of a plan of a debtor likely 16 to return to bankruptcy, In re Prudential 17 Energy Co., 58 B.R. at 862; and 3) to promote the willingness of those who deal 18 with post-confirmation debtors to extend the credit that such companies frequently 19 need. 7 20 The Betteroads Group asserts that the financial information 21 submitted with the Amended Plan lacks credible assumptions and the 22 Plan is not feasible. The Betteroads Group’ objections can be 23 24 grouped into three categories: (a) Debtor’s pre-petition historical 25 performance, (b) post-petition performance and (c) post-

5 See Transcript February 18, 2013, p.195. 6 In re Monnier Brothers, 755 F.2d 1336, 1341 (8th Cir. 1985)(quoting United Properties, Inc. v. Emporium Department Stores, Inc., 379 F.2d 55, 64 (8th Cir. 1967)). 4 1 confirmation performance. 2 A. Pre-Petition Performance 3 The Betteroads Group first presented historical data 4 demonstrating operating losses for the four year period immediately 5 6 preceding the Debtors’ bankruptcy filing.8 Debtor does not dispute 7 that its operations had been unprofitable from 2008 to 2011. 8 Up until April 2012, the Debtor owned four asphalt processing 9 plants along with the costs associated to maintain, operate and 10 manage such facilities. Betteroads Group' expert witness testified 11 12 that Puerto Rico's economy has been undergoing tough times since 13 the local government closed in 2006. Furthermore, the economic 14 situation worsened as a result of the worldwide economic recession. 15 As a result, expenditures in the construction and asphalt 16 17 industries in Puerto Rico have declined due to increase in 18 construction costs, lack of demand and budget constraints from the 19 public and private sectors. 20 Debtor's president testified that the operation of multiple 21 plants had become a burden and an unsustainable endeavor due to the 22 23 dramatic decline in demand. With this in mind, the Debtor devised 24 a plan of reorganization that would adjust to the realities of the 25 current market for asphalt and would be sustainable by revenues from operations. Due to the decline in sales volume, such

7 In re Belco Vending Inc., 67 B.R. 234 (Bankr. D. Mass 1986)(citing (In re Agawam Creative Marketing Associates, 63 Bankr. 612, 619 (Bankr. Mass. 1986)). 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

8 Exhibit C shows Debtor’s historical performance from 2008 to the end of 2011. 6 1 excess capacity in production and the associated costs of operating 2 the plants were not compatible with the Debtor's new model focused 3 on efficiency, lower costs and modest sales estimates. 4 Historical performance is generally helpful in determining 5 6 future performance of a company, provided that the operations are 7 generally the same. However, such historic performance cannot be 8 interpreted in a void without further considerations. The Court 9 must necessarily analyze whether the Debtor has implemented 10 measures to break this trend and avoid the same mistakes that led 11 12 to operating losses and the bankruptcy filing.9 13 In the instant case, the Debtor had been operating four plants 14 prior to the filing of the petition in January, 2012. After the 15 filing of the bankruptcy petition, Debtor reduced its operations by 16 17 selling two asphalt plants and is currently marketing another plant 18 in hopes of reducing its costs and secured debt even more. Debtor’s 19 actions have been consistent with its downsizing strategy to 20 positive results. By addressing the issues that led to its 21 financial troubles, the Debtor is precisely veering away from the 22 23 unsustainable previous model and pre-petition historical 24 information will not accurately reflect the viability of its 25 enterprise.

9 In re Ridgewood Apartments of DeKalb County Ltd., 183 B.R. 784 (Bankr. S.D. Ohio 1995). 7 1 B. Post-Petition Performance 2 The Betteroads Group then claims that Debtor’s post-petition 3 performance has resulted in operating losses. Betteroads Group adds 4 that were it not for the sale of two of the Debtor's asphalt 5 6 plants, Debtor would have yielded negative income as illustrated in 7 Exhibit D-1. 8 When Debtor filed its petition it was not operating any of its 9 four plants. With the sale of the plants, Debtor was able to re- 10 launch its business. We cannot determine feasibility in a vacuum 11 12 as Betteroads would like us to do. To ascertain feasibility, we 13 will have to examine Debtor's performance after the sale of asset 14 that provided working capital to its operations. 15 In this case, the sale of assets has multiple purposes and 16 17 benefits. It reduced operating costs and wasted production capacity 18 since these plants were not being used. It prevented the 19 depreciation of the assets and maximized their value.10 It reduced 20 the amount of secured debt held by Banco Popular by $445,000 to 21 almost half of the amount listed in Debtor's schedules. It reduced 22 23 the IRS' secured debt by $111,734 to $56,971. It provided a 24 $200,000 security to MAPFRE for Debtor's possible liabilities in 25 relation to an indemnity agreement. Finally, it provided the ability to make capital investments necessary for the Debtor to re-

10 Competing bids were considered in the sale of the Toa Alta asphalt plant, thereby maximizing the returns from the sales. See Sales Order on Docket No. 63. 8 1 launch its operations without incurring in additional financing.11 2 Assets of a debtor's estate that are not necessary for the 3 reorganization process may be sold as necessary to comply with the 4 goals set forth in a Chapter 11 Plan.12 The Court agrees with the 5 6 Creditor's argument that the sale of the asphalt plants are non- 7 recurring streams of revenue; however, the reduction of secured 8 debt, operating expenses and other costs, along with the injection 9 of capital increases the possibility that the plan can be funded by 10 its operations. Consequently, the fact that operating revenue will 11 12 be the main source of funding for the Amended Plan, does not mean 13 that the sale of assets should not be accounted for as a key 14 element of Debtor's reorganization efforts. Even though Debtor 15 operated for only part of the year, it was able to close the year 16 17 with a positive cash balance and was able to re-stock inventory and 18 begin to operate under its new business model. 19 C. Post-Confirmation Projections 20 Betteroads Group also presented its own analysis of the 21 Debtor's future performance of sales, projected cash flow 22 23 statements and forecasts.13 They allege that Debtor’s projections 24

25 11 Prior to the date sale of the Toa Alta plant, the Debtor was not operating. Debtor was allowed to retain $173,265.52 from the proceeds of the sale of the Toa Alta asphalt plant and $50,000 of the proceeds from the sale of the Hatillo plant to purchase raw materials needed to re-start its operations (Dockets No. 63 & 197). 12 Betteroads Group's expert witness, Carrasquillo, acknowledged that selling unnecessary of assets is a valid reorganization goal. (Transcript February 22, 2013 hearing p. 94). 13 Exhibits E-1, F-1 & E-1. 9 1 lack credible assumptions that can justify its sales forecasts. 2 Betteroads Group specifically argues that Debtor's average 3 sales from April to December 2012 are roughly $319,720, which is 4 short of the $506,667 necessary to fund the plan and its expenses. 5 6 Using this nine month sales average, the Betteroads Group prepared 7 adjusted projections for the five year duration of the Amended 8 Plan. According to Betteroads Group's adjusted projections, 9 Debtor's expectations and operations show a negative cash balance 10 for the next four years of operation and it is not until the fifth 11 12 year that there is a positive cash balance. 13 Debtor argues that the Betteroads Group's analysis is skewed 14 to show unrepresentative figures that would necessarily lead to a 15 doomed plan. Debtor explains that it was not until the sale of the 16 17 Toa Alta plant in April 12, 2012, that it could buy materials and 18 inventory to re-start its previously ceased operations. Debtor 19 alleges that operations started in May 2012 and were fully 20 operational in June 2012. Debtor claims that the months of 21 November and December 2012 were also outlier months, which are not 22 23 representative of Debtors' operations, since November was an 24 election month and like in December several holidays were observed. 25 Debtor urges the Court to examine what it considers to be the representative months of the operations that demonstrate a positive cash balance and that Debtor will be able to meet its obligations 10 1 under the Amended Plan. 2 Upon review of Debtor's monthly operating reports, the Court 3 finds that the most representative months are June to October 2012 4 that reflect average monthly sales of $489,658.01. It has been 5 6 accepted by both the Debtor and the Betteroads Group that January, 7 February, March and November of 2012 are outlier months that are 8 not representative of the Debtor's operations. It was also 9 established that with the proceeds obtained with the sale of the 10 Toa Alta asphalt plant in mid-April 2012, Debtor purchased raw 11 12 materials in order to replenish its inventory and re-start 13 operations. Debtor argued that operations started in May 2012 and 14 it was not until June that operations were at its desired capacity. 15 As for December 2012, Betteroads Group did not challenge Debtor's 16 17 assertion that December was also an outlier month.14 18 Debtor's numbers when operating at the desired level can yield 19 the expected results or close enough to consider as a realistic and 20 reasonable assumption. This monthly sales goal, which is 21 conservative, can be reached by selling an average of 5,000 tons of 22 23 asphalt at an average price of $100 which would represent 27% of 24 the production capacity of the plant. 25

14 The Betteroads Group presented the Monthly Operating Report for the Month of December, Exhibit M, in its entirety without objecting to any of its contents. The last page of Exhibit M includes the following statement: Due to extraordinary circumstances of the months of November and December, 2012, (Elections, change in administration, uncertainty of pending jobs related to public projects and the Holidays) these two months are not and will not be representative of Debtor's operations post petition. 11 1 Betteroads Group's expert witness analysis is limited to sales 2 projections. However, we cannot determine feasibility on this 3 criteria alone. Debtor has other available funding sources such as 4 the collection of accounts receivable and the sale of the Guayama 5 6 asphalt plant which should render the necessary amount to comply 7 with plan payments. As of December 31, 2012, Debtor had an accounts 8 receivable balance of $2,272,186.30 of which $2,115,794.59 are over 9 sixty days old and $156,461.71 are under 60 days old.15 According 10 to Debtor's operating reports, 40% of accounts receivables that are 11 12 over 60 days old are expected to be collected and accounts 13 receivable under 60 days old are expected to be collected in their 14 entirety. Therefore, Debtor has over $1,000,000 worth of cash 15 collectibles that can provide extra support to its operating 16 17 revenue to fulfill its obligations and to make capital investments 18 to improve efficiency and/or yield additional revenue for the 19 benefit of the corporation.16 20 The [feasibility] test "does not require proof that the 21 economic projections is certain...The requirement is to prevent 22 23 confirmation of visionary schemes. The Court must find that the 24 financial projections [that] support a plan of reorganization are 25 derived from realistic and reasonable assumptions which are capable

15 Debtor's December Monthly Operating Report, p.4, Docket No. 295 and Exhibit M. 16 Accounts over 60 days total $2,115,794.59; 40% of these receivables equal $846,318, plus $156,461.71 from receivables under 60 days equals $1,002,779, 12 1 of being met".17 In cases such as our present case "where a 2 debtor proposes to fund a plan out of operating revenue, its 3 financial record during the pendency of the Chapter 11 is probative 4 of feasibility. Income projections indicating financial progress 5 6 must be based on concrete evidence of financial progress, and must 7 not be speculative, conjectural or unrealistic predictions".18 8 Another factor that must be considered regarding Debtor's 9 ability to meet desired results is two recent purchase orders for 10 10,000 tons of asphalt and for 8,000 tons of asphalt from late 11 12 December 2012 and early January 2013.19 Considering that the 13 Debtor’s plan is aiming for an average of 5,000 tons of monthly 14 asphalt sales, such purchase orders would represent funding for the 15 plan for three months.20 In evaluating the legitimacy of the 16 17 purchase orders, the Court considered that these types of orders 18 are the common method of securing a purchase price and delivery 19 20 21

22 which is the total expected accounts receivables to be collected by the Debtor.

23 17 In re Leominster Materials Corporation, 2005 Bankr. LEXIS 2464 (Bankr. D. Mass. 2005)(citing In re Ridgewood Apartments of DeKalb County, Ltd., 183 B.R. 24 789 (Bankr. S.D. Ohio 1985)). 18 Belco, 67 B.R. 234(citing In re Merrimack Valley Oil Co.,32 B.R. at 488). 25 19 Debtor’s Exhibits No. 3 & 4. 20 Although the purchase orders considered were for less than the sought after average purchase price of one hundred dollars ($100) per ton of asphalt, the total sales revenue would be enough to cover three month’s worth of operations costs and plan payments. (Average monthly sales $506,667 x 3 months = $1,520,001. 10,000 tons x $80 = $800,000. 8,000 tons x $86 = $688,000. Total revenue from purchase orders $1,488,000. The price of asphalt in the purchase orders was discounted by 7% to account for sales tax which was included in the quoted price. See Transcript of hearing held on February 22, 2013, pp.6-21. 13 1 of goods within the industry.21 The Court also considered that the 2 purchasing parties are Debtor’s regular customers as evidenced by 3 the parties’ transactions throughout 2012. 4 Additionally, Debtor presented as evidence of its good faith 5 6 efforts to properly reorganize, an eligibility certificate as a 7 bidder for Puerto Rico government projects valid through June 21, 8 2013.22 This certificate clears the way for the Debtor to bid for 9 public projects to supplement its business with private 10 contractors. Because Debtor is operating at a capacity of 27%, 11 12 there is room to increase production in case demand for asphalt 13 increases or new contracts are acquired. Consequently, capital 14 investments should be minimal to increase production and there is 15 potential for increased revenues. 16 17 The Betteroads Group further contends that Debtor is 18 administratively insolvent and will be unable to pay administrative 19 expenses upon the effective date of the Amended Plan. They allege 20 that administrative expenses will be higher than the $66,500 21 estimated in the Amended Disclosure Statement because Debtor's 22 23 professionals have not submitted their respective applications for 24 compensation. Debtor explained that the administrative expenses 25 included in the Amended Disclosure Statement were estimated as of June 26, 2012. Debtor argues that some of the administrative

21 As testified by Debtor’s President, Fernandez and Diaz, on the hearing held on February 22, 2013. 14 1 expenses contemplated in the Amended Disclosure Statement have been 2 paid as part of the applications already approved by the Court 3 throughout the pendency of this case. At this juncture, the total 4 amount due for professional fees is less than $8,000 and there are 5 6 no other applications pending approval.23 7 As of December 31, 2012, Debtor had $64,802 cash on hand and 8 over $1,000,000 of collectible accounts receivable; as such, even 9 if the $66,500 estimated for professional fees were considered in 10 its entirety, it would be difficult to conclude that it could not 11 12 produce the necessary funds to comply with these payments upon the 13 effective date of the Amended Plan. 14 IV - CONCLUSION 15 Debtor has been undoubtedly moving in the right direction 16 17 since the filing of the petition. It has reevaluated its business 18 model and taken concrete actions to implement more efficient 19 operations. Debtor finished the year with a positive cash balance, 20 an increase in inventory and sales commitments by its clients. 21 Debtor has taken into account the internal and external factors 22 23 that led it to file for bankruptcy in order to design a feasible 24 plan that it will be able to accomplish. Debtor has complied with 25 its obligations throughout the pendency of the case and has shown improved results congruent with the expectations and forecasts.

22 Exhibit C. 23 See Transcript February 22, 2013, p.131 and Docket No. 287. 15 1 Debtor has complied with § 1129.24 2 Chapter 11 embraces the "two recognized policies [of] 3 preserving going concerns and maximizing property available to 4 satisfy creditors”.25 The purpose of a business reorganization 5 6 case, unlike a liquidation case, is to restructure a business's 7 finances so that it may continue to operate, provide its employees 8 with jobs, pay its creditors, and produce a return for its 9 stockholders. The premise of a business reorganization is that 10 assets that are used for production in the industry for which they 11 12 were designed are more valuable than those same assets sold for 13 scrap.26 Preserving Debtor's viable business would maximize returns 14 for all creditors and it is in the best interest of the creditors 15 and the estate, when compared to an asset liquidation. 16 17

18 24 On the evidentiary hearing held on December 18, 2012, Debtor listed all the requirements of § 1129(a) and explained how the Debtor's plan complied with all 19 of them, excepting the requirements of § 1129(8). 25 7-1112 Collier on Bankruptcy P 1112.04 [5][a]; Bank of America Nat' l Trust & 20 Sav. Ass' n v. 203 N. LaSalle Street P' ship, 526 U.S. 434, 435, 119 S. Ct. 1411, 1413, 143 L. Ed. 2d 607 (1999) ; see G. Eric Brunstad, Jr. & Mike Sigal, 21 Competitive Choice Theory and the Broader Implications of the Supreme Court's Analysis in Bank of America v. 203 North LaSalle Street Partnership, 54 Bus. Law. 22 1475, 1483 (1999) (discussing the purposes of chapter 11). 26 7-1112 Collier on Bankruptcy P 1112.04 [5][a]; H. Rep. No. 595, 95th Cong. 1st 23 Sess. 220 (1977), reprinted in App. Pt. 4(d)(I) infra; See NLRB v. Bildisco & Bildisco, 465 U.S. 513, 527, 104 S. Ct. 1188, 79 L. Ed. 2d 482 (1984) ("the 24 policy of Chapter 11 is to permit successful rehabilitation of debtors"); United States v. Whiting Pools, Inc., 462 U.S. 198, 203, 103 S. Ct. 2309, 76 L. Ed. 2d 25 515 (1983) ("Congress presumed that the assets of the debtor would be more valuable if used in a rehabilitated business than if sold for scrap."); Casse v. Key Bank Nat'l Ass'n, 198 F.3d 327, 334 (2d Cir. 1999) ("11 U.S.C. § 1112(b) forms a part of Chapter 11, whose object is to permit a potentially viable debtor to restructure and emerge from bankruptcy protection") (internal quotation marks omitted); Arkansas, Inc. v. United States Trustee (In re Camden Ordnance Mfg. Co. of Arkansas, Inc.), 245 B.R. 794, 799 (E.D. Pa. 2000) (citing Treatise), aff'd, 245 B.R. 794 (E.D. Pa. 2000) ; In re Great Am. Pyramid Joint Venture, 144 B.R. 780, 788 (Bankr. W.D. Tenn. 1992). 16 1 reorganization plan is infallible, however, "success need not b 2 guaranteed" .?’ 3 After carefully scrutinizing Debtor's Amended Plan and the 4 5 objections thereto, the Court finds that the Plan sets the fort 6 ||realistic and attainable goals and it is not part of a visionar 7 |lscheme to take advantage of the reorganization process. Management! has taken the necessary measures to imoelement its new business 9 strategy and is capable of performing its duties under the Amende 10 ll Plan. 12 For the reasons stated herein, the Court denies Betteroads 13 Group's Objection to Confirmation and Request for Conversion. The 14 Court confirms Debtor's Amended Plan of Reorganization. 15 SO ORDERED. 16 17 San Juan, Puerto Rico, this 11 day of March, 2013. 18 19 20 - Ntciech Catan 22 23 . Mildred Caban Flores 24 U.S. Bankruptcy Judge 25

27 Monnier, 755 F.2d at 1341. 17