In re: El Comandante Management Company, LLC, et al.

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: March 3, 2006
• Docket: 04-10938
• Status: Unknown

Opinion

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

INRE: CASE NO. 04-10938 (ESL). 4 EL COMANDANTE MANAGEMENT CHAPTER 11 5 || COMPANY, LLC, et al., (Jointly Administered) 6 Debtors. 8 OPINION AND ORDER 9 This case came before the court on February 21, 2006, to consider the approval of the □□□□□ 10 Amended Disclosure Statement filed by the debtors (“Debtors’ Disclosure Statement”) (Docke No. 758), and the objections filed by the Puerto Rico Treasury Department (“Treasury”) (Docke

B No. 895), Wells Fargo Bank, National Association, as the Indenture Trustee (Docket No. 906) 14 || Camarero Race Track Corp. (“Camarero”) (Docket No. 908), and a limited objection filed by th 15 | Horse Racing Administrator of the Puerto Rico Horse Racing Industry and Sport Administratiot 16 (“the Administrator’), Jorge Silva Puras, as the Secretary of the Department of Economi . Development and Commerce of the Commonwealth of Puerto Rico, and Juan Vaquer Castrodad, a

19 Executive Director of the Land Administration of the Commonwealth of Puerto Rico (collectivel: 20 || “government officials”) (Docket No. 898). 21 Debtors’ Disclosure Statement 22 The debtors’ disclosure statement and proposed plan are based on an agreement reached b: 23 the Puerto Rico Horse Race Track, Inc. (PRHRT”) and debtor Housing Development Associates S.E. (“HDA”) to operate the race track. The disclosure statement and consequently, the plan, ar

26 || contingent on the approval of the license application submitted by the PRHRT to operate th 27 || business and is now pending before the Puerto Rico Racing Board. The debtors have submitte 28 documentary and testimonial evidence in support of the financial commitment entered into by th

1 || PRHRT, HDA, Newco and Banco Popular, that will enable the transaction and feasibility in whicl 2 the debtors’ disclosure statement and proposed plan are premised. The financial analysis submittec by the debtors was supported by the testimony of a certified public accountant, Ms. Doris □□□□□□□

5 Vicens, who also prepared the debtors’ financial projections. 6 Objections filed by the creditors and other parties in interest 7 Treasury objected to the approval of the debtors’ disclosure statement on several grounds 8 I to wit: (a) the disclosure statement lacks adequate information; (b) the treatment to be provided t¢ Treasury’s claim under the plan, as opposed to a Closing Agreement entered into by Treasury anc debtors prior to the filing of the petition for the payment of trust fund taxes, and a stipulation entere:

12 into by the debtors with the Indenture Trustee for adequate protection payments which □□□□□□□□□□□□ 13 || excludes payments to Treasury; (c) certain inconsistencies in the provisions of the debtors’ disclosur 14 Il statement as to the amounts owed to Treasury and the tables reflecting the financial analysis of th 15 proposed plan; (d) the “tax exemptions” provision is ambiguous, insofar as it fails to describe wha type of transactions may be subject to tax exemptions; and (e) the liquidation analysis fails to includ

ig || 2 appraisal report of the debtors’ assets. 19 The government officials objected only as to the ambiguity of the provisions of articles 4.11 20 || (“Release”), 4.11 (“Injunction and Bars Against Claims”) and 4.12 (“Intent of Injunction”) of th 21 debtors’ proposed plan, and how said provisions may have an adverse impact on the government an: certain legal actions which are now pending before the court or may be forthcoming in the future

The government officials simply requested a clarification and a more definite statement of sai

95 || provisions in the disclosure statement as well as the plan. 26 The Indenture Trustee objected to the debtors’ disclosure statement on several grounds 27 1 which Camarero joined through a separate motion. For discussion purposes only, the objections o 28 -2-

1 Il the Indenture Trustee and Camarero will be summarized together. The Indenture Trustee alleges tha the debtors’ disclosure statement is inadequate and the proposed plan is not feasible. According t the Indenture Trustee, the debtors’ disclosure statement is inadequate for it lacks information on: (a

5 the substantive consolidation of the three debtors’ estate and its impact on the noteholders; (b) ar

6 || improper classification and unfair treatment of the Indenture Trustee’s general unsecured □□□□□□□□□□ 7 || claim; (c) the PRHRT, the entity that will operate the race track in the event the debtors’ plan i: 8 confirmed, does not have a license duly issued by the Puerto Rico Racing Board, and th unlikelihood of obtaining one; (d) the proposed sale and management transaction between debto HDA and the PRHRT is questionable; (e) the impact on the feasibility of debtors’ proposed plan i

12 |} the license application of the PRHRT is denied by the Puerto Rico Horse Racing Board; (f) the term: 13 || and agreements regarding the financial commitment of Banco Popular, the PRHRT, HDA □□□ 14 || Newco, including the amount of cash to be ready available on the effective date of the plan; (g) th 15 treatment and estimated amount of the claims filed against the debtors, as well as the disputec claims, and their impact on the feasibility of the plan; (h) the liquidation analysis of the debtors 1

18 questionable; (i) the risks to confirmation, particularly if the debtors or the PRHRT failed to obtain

19 || alicense to operate the race track; (j) the tax impact, if any, that the debtors’ proposed plan will hav: 20 || on the debtors and the holders of secured claims; and (k) the feasibility of the plan. Camarero als 1 questioned the lack of information of debtors’ business operations in the Dominican Republic; th status of the contractual relationship and pending litigation between the debtors and Confederacioy

Hipica de Puerto Rico, Inc. (“Confederacién”), and the inconsistencies in the financial projection 5 || and the source(s) of the funds. 26 Debtors’ response to the objections . 27 Debtors acknowledge the debt owed to Treasury, although not the interests accrued. Debtor 28 -3-

1 | also alleged that the objection raised by Treasury is a confirmation issue rather than a disclosure statement issue, but in any event, the priority claims will be paid in full under the proposed plan. ° As to the limited objection raised by the government officials, and the clarification requestec by them, the debtors argued that the Puerto Rico Racing Administrator, the Puerto Rico Racins 6 || Board, nor Messrs. Silva Puras and Vaquer Castrodad, in their official capacities, are in a positiot 7 || to object to the confirmation of debtors’ proposed plan. Debtors clarified that the provision: 8 I te garding release and injunctions under the proposed plan will not impair the filing of counterclaim by third parties provided that the debtors are the movants or plaintiffs in the postpetition action. The debtors addressed the objections raised by Camarero separately from those made by th:

12 Indenture Trustee, insofar as they were presented separately. Debtors argued that regardless of ths 13 || several unfounded allegations made against Mr. Wilson, the agreement reached by the PRHRT an: 14 |! the debtors, specifically provides that Mr. Wilson, his family nor his corporations will participat 15 in the operations of the race track. Moreover, the agreement specifically provides that Mr. Wilso1 has to furnish a $10,000,000.00 collateral as guaranty. In other words, Mr. Wilson stands to los

18 $10,000,000.00 if he does get involved in the business operations, according to the terms an

19 || conditions set forth by Banco Popular. It is correct that the sources of the funds are not identified 20 || however, the funds will be comprised by the amount of $400,000.00 from working capital and th 21 other funds will come from investments to be provided by Newco. As to the license status of th PRHRT, the debtors argued that the process pending before the Puerto Rico Racing Board is in a

oA advanced stage; all the documents requested by the Board to the PRHRT have been submitted; th

95 || Board held an administrative hearing on February 16, 2006; Spectrum, the entity in charge o 26 || PRHRT’s investigation, has informed the debtors that the investigation has concluded and a □□□□ 27 || will be filed on or about March 3, 2006; and, the Board has scheduled a hearing for February 22 28 4.)

1 || 2006. The information regarding the professional fees of management, such as, Mr. Cuprill’s 2 compensation salary, is disclosed in the disclosure statement. Debtors clarified that in the future, Mr. Cuprill need not be the president of El] Comandante. 5 Debtors argued that their proposed plan provides a higher distribution than the Indenture

6 || Trustee’s proposed plan. This fact was admitted by the Indenture Trustee when asked by the court.’ 7 || According to the debtors, their plan offers to pay $68,000,000.00 plus, on the effective date of the 8 plan, and an additional $2,000,000.00 to be paid over the term of five (5) years. The financial projections are based on the value of the real estate, which has been estimated in the amount o! 10 $63,000,000.00 as per the appraisal report prepared by American Appraisal Associates.” Said value

12 || basnot been objected by any of the parties. The debtors will also surrender their interests under □□□□

13 || notes. Insum, more than $70,000,000.00 will be paid to creditors. Secured and unsecured creditor: 14 | will be paid in full. 15 . : . Applicable Law and Discussion 16 A. Adequate Information under 11 U.S.C. § 1125(a)(1). 17 18 Section 1125(a) of the Bankruptcy Code governs the content of the disclosure

19 || statement. The information must be adequate. Section 1125(a)(1) defines adequate information a: 20 || “information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the 21 nature and history of the debtor and the condition of the debtor’s books and records, that woul: 22 23 24 ' The Indenture Trustee, however, clarified that the higher distribution was contingen on the approval of the license to operate the business, and that the funds were available on th 25 || effective date of the plan. — 26 2 The court reminded the parties that a finding as to the value of the total assets of E 27 || Comandante has not been made by the court. The only finding that has been made is that th property has no equity due to the lien of the Indenture Trustee, which encumbers almost all of th 28 || debtors’ assets. -5-

1 || enable [a creditor] of the relevant class to make a judgment about the plan, but adequate information need not include such information about any other possible or proposed plan.” When determining whether the information provided in the disclosure statement is adequate, Norton states: 5 In adopting the “adequate information” standard, Congress provided the bankruptcy court with the ability to adopt a practical approach in 6 evaluating the nature and substance of information provided. Under this standard, bankruptcy courts are able to evaluate the adequacy of 7 the information provided in light of the circumstances in each case, including the costs of preparation of the statements and the 8 solicitation, the need for a quick solicitation and confirmation, and 9 the identity of the investors.” 10 || 4 William L. Norton, Jr., Norton Bankr. L. & Practice 2d § 86.22 (2005). i Whether or not the information provided in the disclosure statement is adequate wil 12 be determined by the Bankruptcy Code and “is not governed by any otherwise applicabl 13 i nonbankruptcy law, rule, or regulation ...”. In re Public Service Company of New Hampshire

15 43 F.3d 763, 766 (1st Cir. 1995).

16 B. Investor Typical of holders of claims or interests of the relevant class unde 11 U.S.C. § 1125(a)(2). 17 18 Section 1125(a)(2) of the Bankruptcy Code provides who is an investor typical o

19 || holders of claims or interests of the relevant class also known as the hypothetical investor. It mean 20 || an investor having “(A) a claim or interest of the relevant class; (B) such a relationship with th 1 debtor as the holders of other claims or interests of such class generally have; and (C) such abilit 22 to obtain such information from sources other than the disclosure required by this section as holder 23 of claims or interests in such class generally have.”

25 It may be assumed, thus, that the “quality of information available to members of ; 26 || given class will vary as will the sophistication of members of various classes.” 7 Lawrence P. King 27 | Collier on Bankruptcy, J 1125.02[3] 15" Edition Revised (2005). For example, a financial entit 28 -6-

1 || is presumably more sophisticated in financial matters than the trade creditor and vice versa. Id. 2 Thus, the court will determine the adequacy of the information contained in a disclosure statement ° on a case-by-case, after taking into consideration the particular needs of each class of creditors 01 the needs of a class as a whole, not the needs of a particular creditor. 4 Nortor

6 || Bankr. L. & Practice 2d § 91:4. Thus, the court will determine the adequacy of the informatior 7 || contained in a disclosure statement on a case-by-case, after taking into consideration the □□□□□□□□□□ 8 || needs of each class of creditors or the needs of a class as a whole, not the needs of a particula creditor. Norton § 91:4. C. Plan issues may be considered at a hearing on approval of disclosure statement.

12 At the hearing on the approval of a disclosure statement, the court may conside

13 || issues pertaining to the plan and rule upon such issues when the plan defects will make 1 14 unconfirmable. In re Felicity Associates, Inc., 197 B.R. 12, 14 (Bankr. D. Rhode Island 1996) 15 Relevant issues pertaining to the plan are the classification of claims, an artificial classification o a claim, whether the plan unfairly discriminates against a class of claims, and the solicitation

18 procedure. See In re Hillside Park Acts., L.P.,205 B.R. 177 (Bankr. W.D. Missouri 1997). Thus

19 || it is within this court’s discretion to address these issues prior to the confirmation of the plan 20 || although a final determination need not be made at this time. 1 D. Separate classification of deficiency claims under 11 U.S.C. § 1122. Section 1122 of the Bankruptcy Code governs the classifications of claims o

interests. Generally, the debtor may classify similar claims or interests in a particular class only 1

95 || they are substantially similar to the claims and interests of such class. 11 U.S.C. § 1122(a). The pla 26 || may also designate a separate class of claims consisting only of every unsecured claim that is les 27 || than or reduced to an amount that the court approves as reasonable and necessary for administrativ 28 -7-

1 | purposes. 11 U.S.C. § 1122(6). 2 Generally, unsecured creditors will fall in two (2) classes, priority and genera unsecured. 1 Richard I. Aaron, Bankruptcy Law Fundamentals § 12:4 (2005). Under the genera

5 unsecured creditors, it is permissible to classify claims according to their value. For example, claim:

6 || of $1,000.00 or less may be classified separately for administrative convenience. When a □□□□□□□□ 7 || objects to a classification of claims, the “burden is on the debtor to show a legitimate non 8 gerrymandering reason for separate classification and to establish how the legal nature of th separately classified claim differs.” See In re Barney & Carey Co., 170 B.R. 17, 24 (Bankr. D. Mass 1994). 12 The general rule in our circuit is that “all creditors of equal rank with claims agains 13 || the same property should be placed in the same class.” Grenada Wines, Inc., 748 F.2d 42, 4 14 | (1st Cir. 1984) (Citations omitted.) However, the First Circuit decision also stands for th 15 proposition that a separate classification for unsecured creditors is justified “where the lega character of their claims is such as to accord them a status different from the other unsecure

18 creditors.” Id. See also In re River Valley Fitness One Limited Partnership, 2003 WL 2229857.

19 || (Bankr. D. N.H. September 19, 2003). 20 E. Unfair discrimination of claims under 11 U.S.C. § 1123(a)(4). 21 Section 1123(a)(4) of the Bankruptcy Code provides that “a plan shall provide th

same treatment for each claim or interest of a particular class, unless the holder of a particular clair

or interest agree to a less favorable treatment of such particular claim or interest.” The Bankruptc 25 || Code nor its legislative history defines which are the standards of same or equal treatment of claims 26 || Collier J 1123.01[4]. “The prohibition against unfair discrimination requires equal treatment c 27 similarly situated creditors.” In re Barney, 170 B.R. at 25 (citing Granada Wines, supra). Unde 28 -8-

1 || the unfair discrimination test, the “differentiated treatment of similar classes intended merely □□ 2 induce acceptance by one class fails.” Id. (Citations omitted.) When a creditor objects to th classification of a particular class of claims, “[t]he burden is on the debtor to show that unequa

5 treatment between classes having the same priority does not constitute unfair discrimination.” Id 6 F. Disclosure Statement filed by debtors. 7 After considering the debtors’ third amended disclosure statement and the argumen 8 presented by counsel at the hearing held on February 21, 2006, the court hereby approves the sam: ° as containing adequate information in light of the nature of the debtors and the proposed Chapter 1 plan to enable a hypothetical reasonable investor typical of holders of claims or interests in the casi

12 || to make an informed judgment about the plan, provided that within five (5) days the debtor 13 || supplement the same to indicate that the secured claim filed by the bondholders, Class 2, is ai 14 impaired class entitled to vote on the plan. The disclosure statement provides a clear summary o 15 the plan, indicating the amounts that each class should receive, the source of the funds to make th payments, the corporate structure that will implement the plan, and the pending application b

18 PRERT to obtain a license to operate the horse racetrack. 19 There is no liquidation analysis. However, since the early stages of the bankruptc 20 || proceedings it has been found as an uncontested fact that under any scenario presented to the cour 21 there is no equity in any of the debtors’ assets, either individually or combined. Consequently, th proposed plan unquestionably will pay creditors more than they would receive under a Chapter ’

liquidation process. Moreover, the court may approve a disclosure statement without a valuation o

25 || debtors’ assets. 11 U.S.C. § 1125(6). 26 The debtors’ third amended plan classifies the bondholders’ deficiency clain 27 separately from other general unsecured creditors. The Indenture Trustee argues that such | 28 -9-

1 || classification makes the plan non confirmable, and, thus, the disclosure statement cannot be approved. As discussed above, such a classification is generally impermissible in this Circuit However, it is not entirely proscribed. A debtor may separately classify a deficiency claim if it cat

5 justify that the “legal character of their claims is such as to accord them a status different from th:

6 || other unsecured creditors.” Granada Wines, 748 F.2d at 46. The reason articulated by the debtor: 7 |i at the hearing is three-fold. First, deficiency claims in bankruptcy have a legal option not existen 8 elsewhere, as there is an election to be treated entirely as secured under 11 U.S.C. § 1112(b) ° Second, the bondholders’ claim is being paid an amount higher than its own plan, on both th secured and unsecured portions. Third, the debtors are surrendering their own bonds with no reques

2 for payment if the plan is confirmed. The court finds that such factors do not make the separat 13 || classification defective on its face, and warrants that the third amended plan be put to th 14 | confirmation test. 15 The testimony by the officer from Banco Popular de Puerto Rico, the financin; institution providing the funds for the plan, clearly established that the financing commitment is in

18 place and sufficient to meet the plan requirements. The testimony of Ms. Doris Barroso Vicens 19 || CPA, partner of the firm engaged by the debtors to provide accounting and financial consultin; 20 || services, who directly assisted in the preparation of the projections and proposed plan, shows tha 21 the projections are sufficiently accurate to determine the feasibility of the plan. The disclosure that the PRHRT is in the process of obtaining the license to operat

the racetrack is adequate under the circumstances. Any opinion as to the ultimate decision by th

95 || Racing Board to grant or deny the same would be speculative. That the applicant has submitted al 26 || the required documents to make it eligible is sufficient at this juncture. 27 The court also heard the objections by Camarero, the prospective purchaser in th 28 -10-

1 || plan proposed by the Indenture Trustee, and three government officers, two of which are respondents/defendants in actions initiated by the debtors, and one is the Racing Administrator. The court indicated that only the Racing Administrator is a party in interest on account of his statutory

5 duties and responsibilities over the racing industry, and so would be the Racing Board. Camarerc

6 || is not a creditor and may not vote on any plan. It may have an interest in the case as a prospective 7 || purchaser, but that interest does not necessarily mean that it is a party in interest in the case. Suct 8 Il is the case of the government officers whose only relation is that they are respondents/defendants ir ° the case. Notwithstanding, the merits of their objections do not warrant that the third amendec disclosure statement not be approved. The financing details of debtors’ plan are not only adequate

12 but have been more fully disclosed than Camarero’s source of financing to purchase the debtors 13 || assets under the plan proposed by the Indenture Trustee. The status of the license is adequatel; 14 | disclosed. Other details indicated by Camarero as lacking are not indispensable to place any clas: 15 of creditors in a position to make a judgment about the plan. The government officers’ concerns are centered on the broad injunction resultins

18 from confirmation regarding actions by claims holders. As it became apparent during the hearing 19 || the concern was misplaced and clarified by the debtors. The officers can defend themselves it 20 || actions brought by the debtors, and can counterclaim on such actions. Since they do not a claim o. 21 an interest on the debtors they are not covered by the plan’s injunctive provisions. The objection by the Treasury Department is due to its perception that the □□□□□□□□□□□

DA of its claim may not indicate that its priority portion will be paid in full. The plan states that priorit 95 || taxes will be paid in full. The law requires that priority taxes be paid in full. The priority taxes wil 26 || be paid in full in such amounts as they are finally allowed. 27 28 -11-

1 Conclusion In view of the foregoing, the debtors’ third amended disclosure statement is approved. A

separate order may be issued scheduling a hearing on confirmation of debtors’ third amended Plan

5 depending on the results of the hearing on confirmation of the plan proposed by the Indenture

6 | Trustee. 7 The debtors may not engage in solicitation of acceptances from the beneficial owners of the 8 Il bonds prior to this court approving procedures to such effect pursuant to Rule 3017(d)(e) of the ° Federal Rules of Bankruptcy Procedure. The procedures must include an “opt-out” provision fo beneficial owners of bonds who specifically request confidentiality of their identity, prior to an

12 direct solicitation from the beneficial bondholders. 13 Debtors shall move the court within twenty (20) days for approval of procedures to solici 14 || acceptances from the beneficial owner of the bonds. 15 SO ORDERED. 16 ae th In San Juan, Puerto Rico, this day of March, 2006.

18 19 □□□ raardlle, ENRIQUE S. LAMOUTTE 20 U.S. Bankruptcy Judge 21 22 23 24 25 26 27 28 -12-