In re: MJS Las Croabas Properties, Inc.

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: May 29, 2013
• Docket: 12-05710
• Status: Unknown

Opinion

1 2 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 3 4 IN RE: : CASE NO. 12-05710(ESL) : 5 MJS LAS CROABAS PROPERTIES, INC. : CHAPTER 11 : 6 : Debtor : ____________________________________: 7 8 OPINION AND ORDER 9 This case is before the Court on the Amended Motion for Relief from Automatic Stay (the 10 "Motion for Relief") filed on November 14, 2012, by Federal Deposit Insurance Corporation, as 11 receiver for Westernbank Puerto Rico ("FDIC-R"). On November 19, 2012, Debtor filed its 12 Opposition to the Motion for Relief (the "Opposition"). Thereafter, on December 7, 2012 FDIC- 13 R filed its Reply to Debtor's Opposition (the "Reply"). Debtor and FDIC-R filed a Stipulation of 14 Facts and Evidence in Advance of Final Evidentiary Hearing on the Motion for Relief (the 15 "Stipulation"). On January 14, 2013, the Court held a final evidentiary hearing on the Motion for 16 Relief (the "Hearing"). In accordance with the evidence admitted, testimony presented and the 17 arguments of counsel for the interested parties, the Court makes the following Findings of Fact and 18 Conclusions of Law. 19 FINDINGS OF FACT 20 1. Debtor is a corporation wholly-owned by Gulfcoast Irrevocable Trust XIII ("Trust 21 XIII"). Debtor has no employees. 22 2. Michael Scarfia, Sr. ("Scarfia") is the sole officer of Debtor and the sole trustee and 23 beneficiary of Trust XIII. Scarfia is an experienced real estate developer. 24 3. Debtor is a real estate company formed in 2004 for the purpose of purchasing real 25 property and constructing residential units for marketing and resale to third parties in a development 26 located in Fajardo, Puerto Rico known as The Ocean Club at Seven Seas. 27 4. At the time of the Hearing, the Property consisted of 66 remaining unsold units (the 28 "Units") (300 were constructed, and 234 were subsequently sold) plus two undeveloped adjacent lots 1 (the "Lots"). At the time of the Hearing, of the remaining 66 Units, 7 had been approved by the Court 2 for sale but none of the sales had closed. Debtor is the owner of the Property. 3 5. Debtor is a single-asset real estate company as that term is defined in the bankruptcy 4 code as its only asset is the Property. The Court previously determined that Debtor is a single-asset 5 real estate company (Doc. 141) and hereby incorporates the findings of fact from that Order. 6 6. The Property is worth $7,150,000.00. 7 7. Save for some unfinished trim work, the Units are fully built and complete. 8 Accordingly, all that is left to be done in connection with the Property is to sell the Units and the Lots. 9 8. Originally, Debtor financed the construction and development of the Property entirely 10 with financing obtained from Westernbank Puerto Rico ("Westernbank") with the loans that 11 constitute the outstanding debt that is the subject of FDIC-R's proof of claims. 12 9. On April 30, 2010, the Puerto Rico Commissioner of Financial Institutions closed 13 Westernbank and FDIC-R was appointed receiver of Westernbank. 14 10. On March 15, 2012, FDIC-R filed a Complaint in the U.S. District Court for the 15 District of Puerto Rico seeking to enforce its loan documents against Debtor including, without 16 limitation, a foreclosure of the Property. See District Court Case Number 12-1187 (the "District 17 Action"). 18 11. On March 16, 2012, FDIC-R filed a Motion for Appointment of Receiver in the 19 District Action (Dist. Case. No. 12-1187, Doc. 6) wherein FDIC-R stated that Debtor had agreed to 20 the appointment of a receiver in previous loan agreements and related loan documents and that Debtor 21 had threatened to cease payment of certain common area expenses, including the electricity, water 22 and services for the residential units of the Property. Further, FDIC-R stated that Debtor was not 23 actively marketing the Property and was not making payments to FDIC-R. 24 12. On April 30, 2012, the District Court entered an Appointment of Receiver, which 25 appointed the Receiver as receiver over the Property and empowers the Receiver to manage the 26 Property, market and sell units in the Property, and to otherwise operate, preserve, and maintain the 27 Property and any property relating to the Property for the benefit of the Bankruptcy Estate. 28 2 1 13. The Receiver, through its agent Mario Levine ("Levine"), took possession and control 2 of the Property upon the entry of the Receiver Order on May 2 or May 3, 2012. 3 14. Levine interviewed the transition committee of the Condominium Association (the 4 "Association"), who indicated frustration with Debtor because Debtor was not funding the 5 Association with any money to maintain the common areas of the Property and there was substantial 6 delay in the transfer of ownership from Debtor to the Association. 7 15. Upon the first inspection of the Property, Levine noticed issues with deferred 8 maintenance including termite and bug infestation, mold issues, water intrusion and leaks, paint 9 issues, stucco cracking, and wood rot. 10 16. Additionally, there were damages caused by a storm that Debtor had received 11 insurance proceeds to fix, which Debtor used to pay a separate bill that was due. 12 17. Debtor did not have enough funds to complete the project and informed FDIC-R of 13 the financial condition. Upon taking possession of the Property, the Receiver took possession of the 14 bank financials and found $35,177.79 in Debtor's bank accounts, which was insufficient to pay all the 15 bills to operate the Property. 16 18. At the time the Receiver was appointed by the District Court, Debtor owed current 17 billings of approximately $35,000 for the electric bill, $55,000 for the water bill (which Debtor claims 18 were not billed due to problems with the billing authority) and approximately $23,000 to other crucial 19 vendors. FDIC-R subsequently funded the payments. 20 19. Prior to the Receiver taking possession of the Property, Debtor was not funding any 21 marketing plan. 22 20. Prior to the Receiver taking possession of the Property, Debtor had sold eight (8) units 23 from January 1, 2011 through April 30, 2012. 24 21. After taking possession of the Property, the Receiver funded a marketing plan with the 25 funds of FDIC-R and hired Ms. Cecy Alfonso to begin marketing the Property. 26 22. A non-jury trial was scheduled in the District Action for August 1, 2012. 27 23. Debtor filed for voluntary bankruptcy protection under Chapter 11 of the Bankruptcy 28 Code on Sunday, July 19, 2012 (the "Petition Date"). 3 1 24. As of the Petition Date, Debtor owed FDIC-R a total of approximately $20,478,704.36 2 for the loan granted to MJS Las Croabas, Inc. (the "MJS Loan"). The Mortgage Deeds securing the 3 MJS Loan and reflecting FDIC-R's first priority liens in the Property are perfected. 4 25. In addition, the Debtor provided a Guarantee of the amounts owed by a related debtor, 5 Sabana del Palmar, Inc. ("Sabana"), Case No. 12-6177 ESL, U.S. Bankruptcy Court for the Middle 6 District of Puerto Rico to FDIC-R, and the debt owed pursuant to the guarantee was approximately 7 $40,709.406.59 as of the Petition Date (the "Sabana Loans"). 8 26. Debtor's only other secured creditor with a filed claim is Centro de Recaudacion de 9 Ingresos Municipales ("CRIM") with a claim in the amount of $332,838.42. Iris Mirta Mendez 10 Robles ("Robles") is listed in the schedules with a contingent secured claim in the amount of 11 $250,000. The only priority unsecured creditors are Municipality of Fajardo with a claim in the 12 amount of $102,805.74 and Department of Treasury with a claim in the amount of $20,716. 13 27. There is a total of $14,158,056 in unsecured debt, in addition to the amounts owed to 14 FDIC-R, including $10,908,742 owed to Gibraltar Construction Company. 15 28. Based on the value of the Property and 11 U.S.C. § 506(a), FDIC-R's deficiency claim 16 from the MJS Loan in the amount of $13,778,204.36 is unsecured and the entire amount of the 17 Sabana Loans of $40,709,406.59 is unsecured, for a total of $54,487,610.95. 18 29. FDIC-R holds approximately 79% of the unsecured claims in this case. 19 30. The marketing efforts of Ms. Alfonso directly led to the seven (7) sales of units 20 approved by the Court since the Petition Date, two (2) of which have closed since the hearing on the 21 Motion for Relief. 22 31. It will cost approximately $4,700 in repairs and finishing work per unit to complete 23 sales of the remaining sixty-four (64) units. 24 32. FDIC-R has funded all necessary expenses of operating the Property since the Receiver 25 took possession of the Property. 26 33. Gibraltar Construction Company is wholly-owned by Gulfcoast Irrevocable Trust I. 27 Scarfia is the Trustee of Gulfcoast Irrevocable I and Gulfcoast Irrevocable Trust XIII. 28 4 1 34. Debtor submitted a Sell-Out Pro Forma (the "Pro Forma") at the Hearing wherein Debtor 2 proposes to sell the unsold units of the Property over a three-year period. Debtor's Pro Forma involves 3 managing the Property and apportioning a percentage of the proceeds of the sales of Units of the 4 Property to unsecured creditors. Further, the Pro Forma is contingent on Debtor obtaining post- 5 petition financing and giving super-priority status to the proposed lender. 6 35. Debtor's Pro Forma includes a "Phase 1" sell-out of the unsold units and a "Phase 2" 7 plan to develop the Lots. 8 36. Debtor offered no evidence as to how it would market the Units for sale other than 9 noting that it would cost $339,500 in marketing expenses in the Pro Forma. 10 37. Debtor's Pro Forma reflects that Debtor's total expenses for Phase 1 will amount to 11 $10,658,000.00 (including paying the FDIC-R a total of $7,150,000 for its secured claim without 12 allowing for the possibility of a section 1111(b) election or a different valuation of the Property at 13 confirmation) during the life of the Pro Forma and the total gross sales as to Phase 1 will only amount 14 to a maximum of $15,249,000. 15 38. Debtor testified that if FDIC-R's secured claim was $20,000,000, then it would not be 16 able to reorganize. 17 DISCUSSION 18 The automatic stay provisions of 11 U.S.C. § 362(a) are fundamental to allow a chapter 11 19 debtor a reasonable attempt to reorganize. The automatic stay acts as an injunction to protect the 20 property of the estate and becomes operative by the mere filing of a bankruptcy petition. In re Soares, 21 107 F.3d 969, 971 (1st Cir. 1997). Hence, the “automatic” reference in the statutory provision and its 22 effect. The broad scope and strength of the automatic stay in favor of the debtor is balanced by the 23 rights afforded to creditors in 11 U.S.C. § 362(d) - (g). A party seeking relief from the automatic stay 24 must file a motion under § 362(d) and Fed. R. Bankr. P. 4001. 25 An undersecured creditor may file a motion for relief from stay against property of the estate 26 on the ground that the debtor has no equity in the property and that the property is not necessary to 27 an effective reorganization. 11 U.S.C. § 362(d)(2). The party seeking relief has the burden of proving 28 that the debtor has no equity in the property, and the party opposing the relief, generally the debtor, 5 1 has the burden on all other issues. 11 U.S.C. § 362(g). In this case, it is undisputed that there is no 2 equity in the properties given as collateral to the moving creditor, the FDIC-R. Thus, the issue before 3 the court is whether the debtor has met its burden of establishing that the property is necessary to an 4 effective reorganization. 5 The Supreme Court in United Savings Association of Texas v. Timbers of Inwood Forest 6 Associates (“Timbers”), 484 U.S. 365, 375-376 (1988), indicated that there be a reasonable possibility 7 of a successful reorganization within a reasonable time. The debtor has submitted a proposed or 8 sketch chapter 11 plan purporting to show that reorganization is feasible. The court must consider 9 if it is indeed a plan that has the reasonable possibility of being confirmed within a reasonable time. 10 The court notes that on December 5, 2012 an opinion and order was entered finding that the debtor 11 is a single asset real estate case. Although the Timbers test has been limited by the 1994 amendment 12 to § 362(d)(3) of the Bankruptcy Code with respect to single asset real estate cases, the court finds 13 that such a provision need not be invoked in this case. 14 FDIC-R succeeded to all right, title and interests of Westernbank in the First Loan and Second 15 Loan, and all documents relating to these Loans pursuant to 12 U.S.C. §§ 1821(d)(2)(A)(i). FDIC-R 16 seeks relief from the automatic stay under both 11 U.S.C. § 362(d)(1) and (d)(2) seeking to enforce 17 its loan documents against Debtor including, without limitation, a foreclosure of the Property in the 18 District Court pursuant to the pending District Action. For the reasons stated below, FDIC-R is 19 entitled to relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(2) as Debtor does not have 20 equity in the Property and the Property is not necessary to an effective reorganization: 21 The Court finds that Debtor has no equity in the Property. FDIC-R, as movant on the Motion 22 for Relief, has the burden to prove that Debtor lacks equity in the Property pursuant to 11 U.S.C. § 23 362(g)(1). It is undisputed that the Debtor has no equity in the Property as FDIC-R’s debts secured 24 by liens on the Property exceed the value of the property. FDIC-R's debts of over $60,000,000 25 secured by liens on the Property drastically exceed the Property's value of $7,150,000. 26 The FDIC-R having met its initial burden of showing that there is no equity in the properties 27 given as collateral to its loans, the Debtor must show that the Property is necessary for an effective 28 reorganization. Pursuant to 11 U.S.C. § 362(g)(2), Debtor has the burden of proof on all issues 6 1 |besides lack of equity in regards to relief from the automatic stay under 11 U.S.C. § 362(d)(2). In 2 particular, Debtor has the burden to prove a “reasonable possibility of a successful reorganization 3 a reasonable time." In re Anderson, 913 F. 2d 530, 531 (8th Cir. 1990). Debtor's Property is 4 |not necessary to an effective reorganization unless Debtor proves a “reasonable possibility of a 5 |lsuccessful reorganization within a reasonable time." United Sav. Ass'n of Tex. v. Timbers of Inwood 6 ||Forest Assocs., Ltd., 484 U.S. 365, 375-76 (1988). As stated by the Eleventh Circuit, “[flor property 7 ||to be ‘necessary to an effective reorganization’ of the debtor . . . it must be demonstrated that an 8 |leffective reorganization is realistically possible; the mere fact that the property is indispensable to the 9 |\debtor’s survival is insufficient.” In re Albany Partners, Ltd., 749 F. 2d 670, 673, n. 7 (Bankr. 11" 10 1984) (Bankruptcy was dismissed and automatic stay annulled where court found it unlikely that 11 Debtor operator of a hotel could implement an effective Chapter 11 reorganization.); In re Snapwoods 12 |Apartments of Dekalb County, Ltd., 153 B.R. 524, 526 (Bankr. D. Ohio 1993) (Automatic stay lifted 13 to secured creditor where Debtor could not demonstrate that successful reorganization was likely 14 the Debtor’s past and current net operating income of apartment complex was considerably less 15 |than their projected amount.); In re Canal Place Ltd. Partnership, 921 F. 2d 569, 577 (Bankr. La. 16 1991) (Automatic stay lifted where Debtor’s entire plan was based on avoiding foreclosure while 17 |lawaiting more favorable economic conditions.); In re Bloomington Investors, Limited Partnership, 18 B.R. 174 (D. Minn. 1990) (Stay lifted where hotel was worth approximately $6,000,000 less than 19 famount of secured claim and Debtor did not meet its burden of effectuating successful 20 |\reorganization). 21 The court finds that the Debtor has not met its burden to demonstrate a reasonable possibility 22 reorganization within a reasonable amount of time. The Court did not consider the Debtor's plans 23 |\regarding development of the Lots as "Phase II" as part of its analysis because, admittedly, those plans 24 not feasible within a reasonable amount of time. The evidence showed that Debtor has little 25 |lpossibility of a successful reorganization for the following reasons. 26 It is unlikely that Debtor can generate enough income to pay the secured debt owed to FDIC- 27 particularly if FDIC-R makes an 11 U.S.C. § 1111(b) election. Ifthe FDIC-R makes a §1111(b)(2) 28 |lelection, the Debtor would be required to treat the entire amount of FDIC-R's claim as secured,

1 without regard to the value of the Property. See In re Jones, 152 B.R 155, 158 (Bankr. E.D. Mich. 2 1993) ("[A]n undersecured creditor can defend itself against strip down by making the § 1111(b)(2) 3 election, which generally permits the creditor to maintain secured status with respect to its entire 4 claim, rather than in an amount equal only to the collateral's value."); In re Griffiths, 27 B.R. 873, 5 876-77 (Bankr. D. Kan. 1983) (Creditor's § 1111(b)(2) election prevents a "cram down" of creditor's 6 secured claim). Specifically, Debtor's assets are worth far less than the amount of FDIC-R's secured 7 claims. If Debtor were to "operate," Debtor would not be able to generate more than the value of the 8 unsold units of the Property, which are completely encumbered by FDIC-R. Therefore, all income 9 received by Debtor through the sale of its properties would be directed to satisfy FDIC-R's right to 10 payment based on its secured claim. See 11 U.S.C. §1129(b)(2)(A)(1) (absolute priority rule as it 11 applies to secured creditors); In re Swedeland Development Group, Inc., 16 F. 3d 552, 567 (3d Cir. 12 1994) (Court "will not hold that a debtor can achieve an effective reorganization by diminishing the 13 value of its pre-petition creditor's lien interest" and where "the net present value of" Debtor's 14 anticipated cash flow "would be insufficient to satisfy" secured creditor's claim.). Debtor's Pro Forma 15 demonstrated that the maximum amount that can be generated from the sales of the Property is 16 $15,249,000, which pales in comparison to the amount of $61,188,110.95, which is the amount owed 17 by Debtor to FDIC-R that is secured by liens on the Property. In addition, in view of the uncontested 18 $7,150,000 value of the Property, the Debtor's $15,249,000 estimate is suspect, and if proven true at 19 confirmation, would suggest the true value of the Property is higher than $7,150,000, and FDIC-R's 20 secured claim would thus be higher, even with a § 1111(b) election. Further, in the event FDIC-R 21 makes an election under § 1111(b) in connection with both of the Loans or just the MJS Loan, Debtor 22 admits that it would not be able to present a feasible plan to the Court as Debtor would be required 23 to treat FDIC-R's electing claim as fully secured under 11 U.S.C. § 1111(b)(2) and pay FDIC-R 24 $61,188,110.95: According to Debtor's own testimony, Debtor cannot even reorganize if FDIC-R's 25 claim was $20,000,000. Accordingly, Debtor has not met its burden of proof that it can effectively 26 reorganize in a reasonable amount of time. In re River East Plaza, LLC, 669 F. 3d 826, 833-34 (7th 27 Cir. 2012) (Bankruptcy court properly dismissed case in single-asset real estate case and granted 28 primary creditor relief from the automatic stay where creditor made an 1111(b) election opting to treat 8 1 entire claim, including deficiency of approximately $25,000,000, as secured for purposes of 2 bankruptcy plan and debtor could not provide creditor substitute collateral to satisfy the requirements 3 of the Bankruptcy Code.) 4 Debtor cannot reorganize within a reasonable amount of time as it has no ability to fund 5 operations, including marketing efforts, either during or after bankruptcy. Debtor's projected source 6 of funds is entirely from the sale of the Units, Debtor currently has very little funds, and Debtor would 7 rely on post-petition financing to fund the operations and marketing of the Property. The Debtor was 8 doing no marketing prior to the Petition Date and offered no evidence on what sort of marketing the 9 Debtor planned if it got control of the Property again. With regard to the post-petition financing, 10 Debtor submitted a letter from FYM Hughes, LLC that says FYM Hughes will provide a maximum 11 of $500,000 in Debtor in Possession to Debtor, provided various conditions were met by the Debtor 12 (the "Potential Financing"). Notably, no representative from FYM Hughes testified at the hearing and 13 the Potential Financing is dependent on "Debtor in Possession" and not exit financing. Further, the 14 Potential Financing is contingent on FYM Hughes, LLC obtaining "a priority claim over all secured 15 creditors and a secured priority payment over the bankruptcy estate." The Potential Financing is 16 governed by 11 U.S.C. § 364(d), which requires Debtor to provide adequate protection of FDIC-R's 17 secured claim in the Property in order to obtain the Potential Financing. The Court finds that Debtor 18 is not likely to obtain the Potential Financing as Debtor presented no evidence to show that it can 19 provide FDIC-R the necessary adequate protection under 11 U.S.C. § 364(d). Debtor failed to prove 20 that the Potential Financing would maintain or increase the value of the Property to protect FDIC-R's 21 secured interests in the Property. In re 495 Central Park Ave. Corp., 136 B.R. 626, 631 (S.D.N.Y. 22 1992) (Goal of adequate protection for purposes of provision entitling Debtor to obtain financing 23 secured by liens senior to all other interests is to safeguard secured creditor from diminution in value 24 of its interest.); Suntrust Bank v. Denmark Construction, Inc., 406 B.R. 683, 700-701 (E.D.N.C. 25 2009) (Slim equity cushion and speculative possibility of enhancement of secured creditor's collateral 26 did not qualify as adequate protection for Debtor seeking financing on superpriority basis.); In re 27 Mosello, 195 B.R. 277, 287-88 (S.D.N.Y. 1996) (Debtor could not provide adequate protection 28 necessary to secured creditor necessary to obtain superpriority financing as there was only speculative 9 1 benefit to secured creditor that property's value would increase more than the amount of the financing 2 as it was not clear that the financing would increase the value of the property). In re Timber Products, 3 Inc., 125 B.R. 433, 437 (Bankr. W.D. Pa. 1990) (Debtor not entitled to superpriority loan due to 4 insignificant equity cushion in property securing secured creditor's lien); Matter of St. Petersburg 5 Hotel Associates, Ltd., 44 B.R. 944, 946 (M.D. Fla. 1984) (Debtor not entitled to superpriority loan 6 since secured creditor was already undercollateralized). To the contrary, the evidence showed that 7 FDIC-R is already severely undercollateralized and there is no source of funding other than sale of 8 FDIC-R's collateral (the Property), and that such sale would not generate new or replacement 9 collateral for FDIC-R but instead would diminish FDIC-R's collateral further. Accordingly, Debtor 10 cannot obtain superpriority funding in this case. Further, Debtor has not offered any evidence that 11 it can obtain debtor-in-possession or exit financing from any other source and it is doubtful that it can 12 since the Debtor has no operating income, its assets are fully encumbered, and Debtor's principal, Mr. 13 Scarfia, Sr., has recently filed personal bankruptcy. Accordingly, the Debtor has not provided 14 evidence demonstrating that it can obtain financing or otherwise generate enough money to pay the 15 $10,658,000 in Debtor's own estimate of expenses necessary to operate the Property during the life 16 of the Pro Forma. 17 The Debtor has not shown that it will be able to meet the requirements of 11 U.S.C. § 18 1129(a)(10) in obtaining the approval of at least one qualified impaired class of creditors as FDIC-R 19 is in control of all conceivable qualified voting classes and has stated that it will not vote to approve 20 a plan filed by Debtor due to Debtor's past mismanagement and poor financial performance. 21 In any plan submitted by the Court, assuming no § 1111(b) election, FDIC-R's secured claim 22 will be in its own separate class in the amount of $7,150,000, the value of the Property pursuant to 23 11 U.S.C. § 506(a). The secured class containing FDIC-R's secured claim will be impaired and will 24 not vote to approve any plan proposed by Debtor in this case. The deficiency for FDIC-R's secured 25 claim on the MJS Loan in the amount of $13,778,204.36 and the entire claim on the Sabana Loan of 26 $40,709,406.59 will be part of the unsecured class of creditors, making FDIC-R's unsecured claim 27 $54,487,610.95 (treatment of which is discussed below). The only other secured creditor that has 28 filed a proof of claim is CRIM, which cannot vote to approve a plan as a secured tax creditor entitled 10 1 to priority is not an impaired creditor. 2 The only unsecured priority claims are held by Municipality of Fajardo and the Department 3 of Treasury (the "Priority Tax Creditors"). In any plan submitted to the Court, the Debtor must assign 4 the priority tax creditors to their own unimpaired class pursuant to 11 U.S.C. § 1122. This class is not 5 permitted to vote on any proposed plan. In re Equitable Development Corporation, 196 B.R. 889, 893 6 (Bankr. S. D. Ala. 1996) (holding priority tax creditors are not an impaired class eligible to vote on 7 a plan of reorganization); Travelers Ins. Co. v. Bryson Properties XVIII, 961 F. 2d 496, 501 n. 8 (4th 8 Cir. 1992) ("[P]riority tax claimants, which receive preferential treatment under the Code, are not an 9 impaired class that can accept a plan and bind other truly impaired creditors to a cram down".). As 10 to nonpriority unsecured debt, Debtor owes a total of $68,645,667 in unsecured debt, including 11 $54,487,610.95 to FDIC-R. Unless it elects otherwise, FDIC-R undeniably will be in control of the 12 unsecured class as it holds 79% of the claims in the unsecured class. Since FDIC-R is in control of 13 more than one-third of the amount owed to unsecured creditors in this case, the unsecured class can 14 only accept a plan if FDIC-R votes to approve a plan, which FDIC-R has stated it will not do. See 15 11 U.S.C. § 1126(c) ("A class of claims has accepted a plan if such plan has been accepted by 16 creditors that hold at least two-thirds in amount and more than one-half in number of the allowed 17 claims of such class held by creditors that have accepted or rejected such plan."). Accordingly, the 18 unsecured class will be impaired and likely will not be voting to approve any plan proposed by Debtor 19 in this case. 20 Further, an insider of Debtor hold $10,908,742 of the unsecured debt not held by FDIC-R and 21 thus their votes do not count toward the one accepting class requirement of § 1129(a)(10). Gibraltar 22 Construction, Inc. ("GCI"), a company controlled by Scarfia, is allegedly owed $10,908,742 by 23 Debtor. GCI is an insider of Debtor as defined under § 101(31), which states an "insider" includes 24 "an insider of an affiliate as if such affiliate were the debtor." Debtor is wholly-owned by Trust XIII. 25 GCI is wholly-owned by Gulfcoast Irrevocable Trust I ("Trust I"). Michael Scarfia ("Scarfia") is the 26 trustee and sole beneficiary of both Trust I and Trust XIII (collectively, the "Trusts"). Scarfia also 27 is the sole director and officer of Debtor. Scarfia is an affiliate of Debtor. An affiliate includes, inter 28 alia, an "entity that directly or indirectly owns, controls, or holds with power to vote, 20 percent or 11 1 more of the outstanding voting securities of the debtor." 11 U.S.C. § 101(2). An entity includes a 2 person pursuant to 11 U.S.C. § 101(15). In the instant case, Scarfia is in complete control of Trust 3 XIII, which holds 100 percent of Debtor's voting securities. Accordingly, GCI is an insider of Debtor. 4 Pursuant to 11 U.S.C. § 1129(a)(10), in determining whether there is at least one class accepting a 5 plan, the acceptance by insiders must not be considered. FDIC-R holds 94% ($54,487,611 of 6 $57,736,925) of the unsecured claims to be considered for the purpose of determining whether or not 7 the unsecured class has accepted a plan of reorganization. 8 The Pro Forma outlined by Debtor at the Hearing is in contravention of the Bankruptcy Code 9 and cannot be confirmed for other reasons. Debtor's proposal to distribute proceeds of the sales of 10 the Property to unsecured creditors is in violation of the absolute priority rule. As described in detail 11 above, Debtor's assets are worth far less than the amount of FDIC-R's secured claim. If Debtor were 12 to "operate," it would never be able to generate more than the value of the unsold units of the 13 Property, which are completely encumbered by FDIC-R. Therefore, all income received by Debtor 14 through the sale of its Property would be directed to satisfy FDIC-R's right to payment. See 11 U.S.C. 15 §1129(b)(2)(A)(1) (absolute priority rule as it applies to secured creditors); In re Swedeland 16 Development Group, Inc., 16 F. 3d at 567 (3d Cir. 1994) (Court "will not hold that a debtor can 17 achieve an effective reorganization by diminishing the value of its pre-petition creditor's lien interest" 18 and where "the net present value of" Debtor's anticipated cash flow "would be insufficient to satisfy" 19 secured creditor's claim.). Debtor may not circumvent the absolute priority rule to pay unsecured 20 creditors until FDIC-R is paid in full, which is impossible in this case based on the value of the 21 Property. 22 The plan described by Debtor would have to include improper gerrymandering to circumvent 23 the requirement of 11 U.S.C. § 1129(a)(10) and the fact that FDIC-R is in control of all conceivable 24 impaired classes. Debtor may not separate FDIC-R's unsecured claims from the remainder of the 25 unsecured claims absent a legitimate business reason. In re Boston Post Road Ltd. Partnership, 21 26 F. 3d 477, 483 (2d Cir. 1994) (Debtor must provide credible proof for any legitimate reason for 27 segregating principal creditor's unsecured claim from general unsecured claims.); In re Barakat, 99 28 F. 3d 1520, 1526 (9th Cir. 1996) (Debtor impermissibly classified secured creditor's deficiency claim 12 1 from general unsecured claims without legitimate business reason.). Debtor has not and cannot 2 provide a legitimate business reason to treat FDIC-R's unsecured claim any differently than the other 3 unsecured creditors in this case. 4 FDIC-R also sought relief from the automatic stay pursuant to 11 U.S.C. 362(d)(1) for cause 5 on the grounds that Debtor filed this case in bad faith and cannot propose a plan in good faith as 6 required by 11 U.S.C. §1129(a)(3). As this Court has stated, "[t]he determination of whether the 7 movant has established prima facie that there is a lack of good faith (or bad faith) in the filing of a 8 bankruptcy petition is a fact intensive inquiry in which the court analyzes the totality of the 9 circumstances." In re Costa Bonita Beach Resort, Inc., 479 B.R. 14, 40 (Bankr. D.P.R. 2012) 10 (citations omitted). Courts consider a number of factors in determining whether a petition has been 11 filed in bad faith. In re Village Green Realty Trust, 113 B.R. 105, 115-16 (Bankr. Mass. 1990). Based 12 on a review of the relevant factors and the evidence presented, the Court finds that this case was not 13 filed in bad faith and the request for relief under §362(d)(1) is denied. While the evidence showed 14 that there were maintenance issues due to shortage of funds, they did not rise to the level of bad faith 15 or mismanagement. 16 CONCLUSION 17 The Court, based on the Findings of Fact and Conclusions of Law stated herein, hereby grants 18 the Motion for Relief (Doc. 114) filed by FDIC-R and hereby grants FDIC-R relief from the automatic 19 stay pursuant to 11 U.S.C. § 362(d)(2) in order to permit FDIC-R to enforce its loan documents against 20 Debtor including, without limitation, a foreclosure of the Property in the District Action as FDIC-R has 21 proven there is no equity in the Property and Debtor has failed to prove that it can successfully 22 reorganize in a reasonable amount of time. 23 SO ORDERED. 24 25 26 27 28 13 1 In San Juan, Puerto Rico, this 29th day of May, 2013. 2 3 4 5

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