1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2
3 IN RE: CASE NO. 12-03808 (ESL)
4 ERNESTO A. MELENDEZ PEREZ CHAPTER 11
5 Debtor 6 OPINION AND ORDER 7 8 This case came before the court on November 18, 2014 for an evidentiary hearing to 9 consider the confirmation of Debtor’s chapter 11 plan of reorganization dated February 27, 10 2014 (dkt. # 189) (the “plan”). Prior to the hearing, the Debtor filed his “Statement under 11 11 U.S.C. § 1129” (“1129 statement”) as required by PR LBR 3018-2 (See dkt. #234), and a 12 summary of the ballots in each class accepting and rejecting the plan, including the rejection by 13 creditor Margarita Diaz Rivera (dkt. #235). The 1129 statement intends to provide the court 14 and parties in interest with a summary of the requirements for confirmation. The only objection 15 to confirmation and plan rejection were by creditor Margarita Diaz Rivera (“Ms. Rivera”) (See 16 dkt. #230 and #232). Ms. Rivera alleges that the chapter 11 plan fails to comply with the 17 absolute priority rule under 11 U.S.C. § 1129(b)(2)(B)(ii), that the plan was not proposed in 18 good faith as required by § 1129(a)(3), that the plan is not feasible, that the plan does not 19 provide to unsecured creditors all of his disposable income as required by § 1129(a)(15), that 20 the plan does not provide for the payment of all non-dischargeable obligations, that the plan 21 fails to comply with § 1129(a)(8) because not all classes have accepted the plan, and that the 22 plan fails to comply with §§ 1129(a)(1) and (a)(2). 23 Confirmation Hearing 24 The court held a confirmation hearing as required by § 1128(a). The evidence presented 25 at the hearing was the testimony of the Debtor and Debtor’s accountant, Mr. Ricardo Justiniano 26 Lanza; and exhibits consisting of the Chapter 11 plan of Reorganization dated February 27, 27 1 2014, the supplement to the disclosure statement (see dkt. #194), a liquidation analysis, and 2 several monthly reports of operation presented by creditor Ms. Diaz. 3 At the hearing, counsel for First Bank stated that said creditor had no objection to 4 confirmation. First Bank is separately classified as a secured creditor in Class VII. Thus, it 5 appears that classes VII, VIII and IX have accepted the plan. Class X creditor Ms. Diaz has 6 rejected the plan. 7 Mr. Ricardo Justiniano Lanza, CPA, testified that he has reconciled Debtor’s bank 8 accounts, has drafted the monthly reports of operation, helped prepare the disclosure statement, 9 and prepared the cash flow and liquidation analysis. The projections submitted in the disclosure 10 statement, including income and plan payments are substantially the same as the monthly 11 reports of operation. Although the projections and monthly reports of operation show a 12 negative result, the same will be covered by Debtor’s social security income. The liquidation 13 value of Debtor’s estate is zero. Mr. Justiniano’s testimony regarding income projections and 14 ability to make payments was not clear. However, his expert opinion is that the Debtor, 15 considering his additional social security income, will be able to make the payments. On the 16 other hand, no clear contradictory evidence regarding Debtor’s ability to make the payments 17 was presented by the only objecting creditor. The objecting creditor argues that the projections, 18 in light of the information in the monthly reports of operation, show inconsistencies. After 19 considering the disclosure statement, the income projections and the testimony of Mr. 20 Justiniano, the court finds that the preponderance of the evidence tilts the scales in favor of 21 Debtor, and, consequently, the court concludes that the Debtor has prevailed in establishing 22 feasibility. 23 Ms. Diaz argued that the plan was filed in bad faith because the Debtor “has not 24 tightened his belt, continues to spend lavishly, has moved to a high end complex which pays 25 utilities in the amount of $1,000 per month.” Counsel for Ms. Diaz argues that the monthly 26 reports of operation support the statements of lavish spending. 27 1 Chapter 11 Confirmation 2 The requirements for confirmation of a chapter 11 plan are established in Section 1129 3 of the Bankruptcy Code, 11 U.S.C. § 1129. There are two means for confirming a chapter 11 4 plan. First, if the plan is consensual, that is, when the plan has been accepted by all impaired 5 classes, the provisions are in § 1129(a). Second, if not all of the impaired classes accept the 6 plan, then the applicable provisions are those in § 1129(b), commonly known as the “cram 7 down” provisions for confirmation. The cram down provisions in § 1129(b) include all the 8 requirements of § 1129(a), except for § 1129(a) (8). Since there is an impaired class that has 9 not accepted the plan (Class X – Margarita Diaz Rivera), the plan must meet the requirements in 10 § 1129(b). 11 The court will first address the objections by Ms. Diaz under § 1129(a), and will then 12 discuss the particular requirements in § 1129(b). 13 Objections under 1129(a): 14 The plan allegedly fails to comply with § 1129(a)(1,2) because the same does not abide 15 by the applicable provisions of the Bankruptcy Code as the same does not include payment of 16 all non-dischargeable debts of Ms. Diaz. There is no indication of what section of the 17 Bankruptcy Code requires that non-dischargeable debts be paid in full. 18 The first requirement for confirmation of a chapter 11 plan is that the same complies 19 with applicable provisions of the Bankruptcy Code. 11 U.S.C. § 1129(a)(1). There is no 20 requirement that non-dischargeable claims be paid in full. The end result is that if the same are 21 not paid, they survive bankruptcy. The court notes that the exceptions to discharge in § 523 22 provide separate subsections for domestic support obligations [§ 523(a)(5)] and debts incurred 23 by a debtor in the course of divorce or separation proceedings [523(a)(15)]. The legal 24 requirement for confirmation is that the post-petition domestic support obligations of an 25 individual debtor be current and that prepetition arrears be paid under the plan as the same have 26 a first priority under § 507(a)(1). 11 U.S.C. § 1129(a)(14). The plan includes the claim filed by 27 Ms. Diaz (POC # 13-2) as Class X, and will be paid in full during a term of 180 days. There is 1 no basis to sustain that the plan fails to meet the requirements in § 1122 or § 1123. Therefore, 2 the court finds that the plan complies with the requirements of 11 U.S.C. § 1129(a)(1). 3 In addition to the requirements that the plan complies with the applicable provisions of 4 the Bankruptcy Code, the proponent of the plan must also comply with the Bankruptcy Code 5 provisions. 11 U.S.C. § 1129(a)(2). Generally, this provisions ensures compliance with the 6 disclosure requirements of § 1125 and § 1126 for voting. There is no evidence that the same 7 have been violated. Therefore, the court finds that the plan proponent has met the requirements 8 in § 1129(a)(2). 9 Ms. Diaz alleges that the plan fails to meet the requirement in § 1129(a)(3), which 10 provides that a chapter 11 plan must be proposed in good faith.
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1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2
3 IN RE: CASE NO. 12-03808 (ESL)
4 ERNESTO A. MELENDEZ PEREZ CHAPTER 11
5 Debtor 6 OPINION AND ORDER 7 8 This case came before the court on November 18, 2014 for an evidentiary hearing to 9 consider the confirmation of Debtor’s chapter 11 plan of reorganization dated February 27, 10 2014 (dkt. # 189) (the “plan”). Prior to the hearing, the Debtor filed his “Statement under 11 11 U.S.C. § 1129” (“1129 statement”) as required by PR LBR 3018-2 (See dkt. #234), and a 12 summary of the ballots in each class accepting and rejecting the plan, including the rejection by 13 creditor Margarita Diaz Rivera (dkt. #235). The 1129 statement intends to provide the court 14 and parties in interest with a summary of the requirements for confirmation. The only objection 15 to confirmation and plan rejection were by creditor Margarita Diaz Rivera (“Ms. Rivera”) (See 16 dkt. #230 and #232). Ms. Rivera alleges that the chapter 11 plan fails to comply with the 17 absolute priority rule under 11 U.S.C. § 1129(b)(2)(B)(ii), that the plan was not proposed in 18 good faith as required by § 1129(a)(3), that the plan is not feasible, that the plan does not 19 provide to unsecured creditors all of his disposable income as required by § 1129(a)(15), that 20 the plan does not provide for the payment of all non-dischargeable obligations, that the plan 21 fails to comply with § 1129(a)(8) because not all classes have accepted the plan, and that the 22 plan fails to comply with §§ 1129(a)(1) and (a)(2). 23 Confirmation Hearing 24 The court held a confirmation hearing as required by § 1128(a). The evidence presented 25 at the hearing was the testimony of the Debtor and Debtor’s accountant, Mr. Ricardo Justiniano 26 Lanza; and exhibits consisting of the Chapter 11 plan of Reorganization dated February 27, 27 1 2014, the supplement to the disclosure statement (see dkt. #194), a liquidation analysis, and 2 several monthly reports of operation presented by creditor Ms. Diaz. 3 At the hearing, counsel for First Bank stated that said creditor had no objection to 4 confirmation. First Bank is separately classified as a secured creditor in Class VII. Thus, it 5 appears that classes VII, VIII and IX have accepted the plan. Class X creditor Ms. Diaz has 6 rejected the plan. 7 Mr. Ricardo Justiniano Lanza, CPA, testified that he has reconciled Debtor’s bank 8 accounts, has drafted the monthly reports of operation, helped prepare the disclosure statement, 9 and prepared the cash flow and liquidation analysis. The projections submitted in the disclosure 10 statement, including income and plan payments are substantially the same as the monthly 11 reports of operation. Although the projections and monthly reports of operation show a 12 negative result, the same will be covered by Debtor’s social security income. The liquidation 13 value of Debtor’s estate is zero. Mr. Justiniano’s testimony regarding income projections and 14 ability to make payments was not clear. However, his expert opinion is that the Debtor, 15 considering his additional social security income, will be able to make the payments. On the 16 other hand, no clear contradictory evidence regarding Debtor’s ability to make the payments 17 was presented by the only objecting creditor. The objecting creditor argues that the projections, 18 in light of the information in the monthly reports of operation, show inconsistencies. After 19 considering the disclosure statement, the income projections and the testimony of Mr. 20 Justiniano, the court finds that the preponderance of the evidence tilts the scales in favor of 21 Debtor, and, consequently, the court concludes that the Debtor has prevailed in establishing 22 feasibility. 23 Ms. Diaz argued that the plan was filed in bad faith because the Debtor “has not 24 tightened his belt, continues to spend lavishly, has moved to a high end complex which pays 25 utilities in the amount of $1,000 per month.” Counsel for Ms. Diaz argues that the monthly 26 reports of operation support the statements of lavish spending. 27 1 Chapter 11 Confirmation 2 The requirements for confirmation of a chapter 11 plan are established in Section 1129 3 of the Bankruptcy Code, 11 U.S.C. § 1129. There are two means for confirming a chapter 11 4 plan. First, if the plan is consensual, that is, when the plan has been accepted by all impaired 5 classes, the provisions are in § 1129(a). Second, if not all of the impaired classes accept the 6 plan, then the applicable provisions are those in § 1129(b), commonly known as the “cram 7 down” provisions for confirmation. The cram down provisions in § 1129(b) include all the 8 requirements of § 1129(a), except for § 1129(a) (8). Since there is an impaired class that has 9 not accepted the plan (Class X – Margarita Diaz Rivera), the plan must meet the requirements in 10 § 1129(b). 11 The court will first address the objections by Ms. Diaz under § 1129(a), and will then 12 discuss the particular requirements in § 1129(b). 13 Objections under 1129(a): 14 The plan allegedly fails to comply with § 1129(a)(1,2) because the same does not abide 15 by the applicable provisions of the Bankruptcy Code as the same does not include payment of 16 all non-dischargeable debts of Ms. Diaz. There is no indication of what section of the 17 Bankruptcy Code requires that non-dischargeable debts be paid in full. 18 The first requirement for confirmation of a chapter 11 plan is that the same complies 19 with applicable provisions of the Bankruptcy Code. 11 U.S.C. § 1129(a)(1). There is no 20 requirement that non-dischargeable claims be paid in full. The end result is that if the same are 21 not paid, they survive bankruptcy. The court notes that the exceptions to discharge in § 523 22 provide separate subsections for domestic support obligations [§ 523(a)(5)] and debts incurred 23 by a debtor in the course of divorce or separation proceedings [523(a)(15)]. The legal 24 requirement for confirmation is that the post-petition domestic support obligations of an 25 individual debtor be current and that prepetition arrears be paid under the plan as the same have 26 a first priority under § 507(a)(1). 11 U.S.C. § 1129(a)(14). The plan includes the claim filed by 27 Ms. Diaz (POC # 13-2) as Class X, and will be paid in full during a term of 180 days. There is 1 no basis to sustain that the plan fails to meet the requirements in § 1122 or § 1123. Therefore, 2 the court finds that the plan complies with the requirements of 11 U.S.C. § 1129(a)(1). 3 In addition to the requirements that the plan complies with the applicable provisions of 4 the Bankruptcy Code, the proponent of the plan must also comply with the Bankruptcy Code 5 provisions. 11 U.S.C. § 1129(a)(2). Generally, this provisions ensures compliance with the 6 disclosure requirements of § 1125 and § 1126 for voting. There is no evidence that the same 7 have been violated. Therefore, the court finds that the plan proponent has met the requirements 8 in § 1129(a)(2). 9 Ms. Diaz alleges that the plan fails to meet the requirement in § 1129(a)(3), which 10 provides that a chapter 11 plan must be proposed in good faith. The allegation is based on the 11 following grounds: that the Debtor spends lavishly, that the plan proposes to pay Ms. Diaz’ 12 claim over a period of 180 months, and that the non-dischargeable claims are not being paid in 13 full. The essence of the good faith requirement for confirmation purposes is that the plan seeks 14 to achieve a result consistent with the purposes of chapter 11. In re South Beach Sec., 606 F.3d 15 366 (7th Cir. 2010). The intent of chapter 11 is to facilitate reorganization or liquidation of a 16 financially distressed debtor and pay creditors in an orderly fashion. Good faith is a concept 17 and not a construct, derived from equity principles and determined after considering the totality 18 of the circumstances. In re Puffer, 674 F.3d 78, 82 (1st Cir. 2012). 19 Debtor’s economic problems go beyond the amounts owed to Ms. Diaz as a result of the 20 domestic support obligations and the divorce agreement on the division of the conjugal 21 partnership. Debtor’s reduced income has caused that several properties be surrendered to the 22 secured creditors holding liens over the same. The alleged lavish spending based on items 23 disclosed in the monthly reports of operation are not placed in true context. The totality of the 24 circumstances surrounding the disclosed expenses was not presented. Therefore, it is difficult 25 to make an informed judgment regarding whether the expenses were excessive or not. The 26 selective use of specific monthly reports of operation does not establish a continuous trend of 27 lavish spending. Also, the allegations of excessive expenses for personal preferences are 1 inconsistent with the contention that Debtor’s income, irrespective of expenses, is insufficient to 2 make the plan feasible. Moreover, Ms. Diaz’ claim will be paid in full during a period of 180 3 months. The allegation that 180 months is unreasonable is a conclusory statement and is not 4 supported by any evidence. Therefore, the court does not find that the plan was proposed in bad 5 faith. 6 The objecting creditor contends that the plan may not be confirmed as the same fails to 7 comply with § 1129(a)(8), as she has rejected confirmation. Indeed the plan fails to comply 8 with § 1129(a)(8). However, the effect is that the plan must then meet the requirements of § 9 1129(b). 10 Ms. Diaz alleges that the plan is not feasible and, thus, does not meet the requirement in 11 § 1129(a)(11). The basis for the objection is that there are no projections and that the Debtor’s 12 income is speculative. As stated above, the evidence presented at the evidentiary hearing in 13 support and against the Debtor’s ability to comply with the plan may not be strong either way. 14 However, the same does show that it is more probable than not that the Debtor will be able to 15 generate sufficient income from his services as an attorney and notary public, as well from his 16 social security income, to make the payments under the plan. The expert opinion of CPA 17 Justiniano supports such a conclusion. Consequently, there is a reasonable prospect of success. 18 The plan is not impractical or unreasonably optimistic. The Debtor’s testimony shows 19 commitment to make it work. Therefore, the court finds that the plan is feasible. 20 The dissenting creditor alleges that the plan fails to meet the requirements in § 1129(a) 21 (15) because the plan distributions are not equal to the Debtor’s disposable income during the 22 next five years. The provisions of § 1129(a)(15) are applicable only to individual debtors and 23 are triggered by an objection of an unsecured creditor that will not be paid in full under the plan. 24 Ms. Diaz is such a creditor. Therefore, the value of property to be distributed under the plan 25 must be no less than the “projected disposable income” of the debtor, as the term is defined in § 26 1325(b)(2), to be received during the five year period beginning when the payments are made, 27 or during the payments provided by the plan, whichever is longer. There is no evidence before 1 the court, other than the evidence presented by the Debtor, to question the credibility of 2 Debtor’s financial information. The alleged inconsistencies were drawn from the documents 3 filed by the Debtor in the case, namely, the disclosure statement, including income projections, 4 and the monthly reports of operation. The allegations are also inconsistent that the Debtor’s 5 income is insufficient to meet the plan payments. Therefore, the court finds that the plan meets 6 the requirements of § 1129(a)(15). 7 The court now turns its analysis to the requirements of 1129(b). 8 Objections under 1129(b) 9 Section 1129(b) provides debtors the means to confirm a case when a class of creditors 10 has refused to accept the plan. The chapter 11 plan may be confirmed over the objection of a 11 dissenting class if three principal requirements are met: (1) the standards in § 1129(a) are 12 satisfied, except for § 1129(a)(8) which provides for acceptance by all impaired classes; (2) the 13 plan does not discriminate unfairly against any impaired class that has not accepted the plan; 14 and (3) the plan is fair and equitable with respect to all impaired classes that have rejected 15 confirmation. 16 Pursuant to § 1129(b)(1) the class that has rejected the plan must receive treatment under 17 the plan consistent with the one being given to other classes who have comparable rights. The 18 dissenting class must not be unfairly discriminated. There are no allegations or evidence before 19 the court that the chapter 11 plan unfairly discriminated against the dissenting class. Thus, the 20 plan complies with § 1129(b)(1). 21 The chapter 11 plan must also be “fair and equitable” to the dissenting class. The 22 determination of whether the plan is fair and equitable under § 1129(b)(2) depends on whether 23 the dissenting class or creditor is secured or unsecured. Since the dissenting class and creditor 24 holds an unsecured claim, the applicable section is § 1129(b)(2)(B). There are two alternatives 25 for compliance to § 1129(b)(2)(B): the plan must provide the claim holders of the dissenting 26 class a value, as of the effective date of the plan, equal to the allowed amount of the claim, that 27 is, the present value, § 1129(b)(2)(B)(i); or no junior claim or interest receives or retains any 1 property on account of its claim or interest, § 1129(b)(2)(B)(ii). The plan provides for full 2 payment of Class X creditor Ms. Diaz, but does not provide for the payment of its present value. 3 Thus, the court centers its consideration on the second alternative, commonly referred to as the 4 absolute priority rule. 5 In order to satisfy the fair and equitable standard and the absolute priority rule, the plan 6 must not provide for the distribution or retention of property by anyone whose claim or interest 7 is junior to the dissenting class. There are no allegations regarding the distribution of property 8 to a junior class. Thus, the allegations center on the retention of property by the Debtor. The 9 Debtor is an individual. As such, § 1129(b)(2)(B)(ii), as amended, allows the individual debtor 10 to retain estate property notwithstanding the absolute priority rule, provided the individual has 11 paid all post-petition domestic support obligations, as required by § 1129(a)(14). The provisions 12 of the absolute priority rule involves an exception for individual debtors, who are allowed to 13 retain property of the estate included under § 1115, provided the requirements of § 1129(a)(14) 14 are met. There is presently controversy over the extent of this exception, centering on the 15 interpretation of the provision of “includes” in § 1129(b)(2)(B)(ii). There is disagreement over 16 the inclusion of prepetition property under the exception. Some courts have followed a narrow 17 interpretation of the statute and others have followed a broad interpretation. See In re Stephens, 18 704 F.3d 1279 (10th Cir. 2013); In re Maharaj, 681 F.3d 558 (4th Cir. 2012); In re Arnold, 471 19 B.R. 578 (Bankr. C.D. Cal. 2012); In re Lee Min Ho Chen, 482 B.R. 473 (Bankr. D. P.R. 2012) 20 (Tester, BJ); following the narrow interpretation that the absolute priority rules applies to 21 individual debtors and to pre-petition property. See also In re Friedman, 466 B.R. 471 (B.A.P. 22 9th Cir. 2012); In re Tucker, 479 B.R. 873 (Bankr. D. Ore. 2012; SPCP Grp. LLC v. Biggins, 23 465 B.R. 316 (M.D. Fla. 2011); In re Shat, 424 B.R. 854 (Bankr. D. Nev. 2010) following the 24 broad interpretation and finding that the absolute priority rule no longer applies to individual 25 debtors. The court declines to address the intellectually stimulating controversy of whether or 26 not the absolute priority rule currently applies to individual debtors. There is no evidence 27 before the court to establish that the debtor is retaining any prepetition property. Allegations by 1 || counsel do not suffice. Therefore, the court finds that the objection alleging that the plan does 2 || not meet the requirements of § 1129(b)(2)(B)(i1) has not been proven. 3 CONCLUSION 4 After considering the disclosure statement approved by the court, the chapter 11 plan 5 || dated February 27, 2014, the 1129 statement in support of confirmation, the ballots showing the 6 || acceptances and rejections to the plan, the testimony of the Debtor and CPA Justiniano, the 7 documentary evidence, and the arguments by counsel, the court concludes that the chapter 11 8 || plan before the court meets the requirements of § 1129(b). Therefore, the chapter 11 plan is 9 || hereby confirmed. 10 SO ORDERED. 11 In San Juan, Puerto Rico, this 1st day of May, 2015. 12
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