In re Manuel Mediavia Villa, Inc.

IN RE: MANUEL MEDIAVIA VILLA, INC., Debtor

IN RE: MANUEL MEDIAVILLA & MAYDIN G. MELENDEZ, Debtors

CASE NO. 13-2800 (MCF)

CASE NO. 13-2802 (MCF)

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO

June 16, 2015

CHAPTER 11

OPINION AND ORDER

Before the Court are the confirmation of the Amended Chapter 11 Joint Plan (the "Joint Plan") filed by Manuel Mediavilla, Inc. (the "corporate debtor") and Manuel Mediavilla and Maydin Melendez (the "individual debtors")(collectively referred to as "Debtors"), the objection to confirmation and subsequent request for conversion to a Chapter 7 case filed by PRLP 2011 Holdings LLC ("PRLP"). For the reasons included herein, the Court orders Debtors to amend the Joint Plan and denies the request to convert both cases to Chapter 7.

I - JURISDICTION

The Court has jurisdiction to hear this case, pursuant to 28 U.S.C. § 157(a) and the general order of the United States District Court dated July 19, 1984, which refers title 11 proceedings to the Bankruptcy Court (Torruellas, C.J.). This is a core proceeding, pursuant to 28 U.S.C. § 157(b).

II - CASE BACKGROUND

Debtors own several commercial real properties in Humacao, Puerto Rico. In 2006, the corporate debtor obtained a loan from Banco Popular de Puerto Rico ("BPPR") which was guaranteed by the individual debtors and all but one of Debtors' commercial properties.¹ BPPR transferred the loan to PRLP in 2011. Debtors and PRLP were unable to renegotiate the terms of the loan, resulting in the filing of a local court action for collection and foreclosure proceedings. The local court litigation spilled over to the bankruptcy court when the corporate and individual debtors filed for bankruptcy to prevent the execution of a pre-judgment attachment of their rents, the foreclosure of their real properties and with the hope of re-negotiating the loan obligation with PRLP. Through the pendency of this case the parties have arduously litigated their positions resulting in the necessary extension of the confirmation process for over a year. After resolving a myriad of matters that directly impacted confirmation, Debtors' objections to PRLP's claims and PRLP's request for conversion or outright prevented the hearings from taking place the Court held its first of five hearings on February 24, 2015, and concluded on June 1, 2015.²

III - FINDINGS OF FACTS AND PROCEDURAL HISTORY

1. The corporate debtor is a corporation incorporated under the laws of the Commonwealth of Puerto Rico whose sole shareholder is Mr. Manuel Mediavilla.

2. The individual debtors are the personal and joint guarantors of the corporate debtor's obligations to PRLP.

3. PRLP is a corporation incorporated under the laws of the Commonwealth of Puerto Rico. 4. Debtors are dedicated to the commercial leasing and management of several real estate properties.

5. The corporate debtor owns several properties located at Font Martelo Ave. 146-152 and Asturianas Ward valued at $2.1 million.³

6. The individual debtors own several commercial real estate properties located at Font Martelo Ave. 124-126 valued at $400,000.⁴

7. Debtors' main income is derived from the rents received from leasing and administering the commercial properties.⁵

8. Prior to the filing of the petition, on August 16, 2006, the corporate debtor obtained a loan for $2,700,000 with an interest rate of 8.99% and a maturity date of 25 years from BPPR. The parties were to renegotiate the terms of the loan in five years.

9. To guarantee its loan, BPPR and the corporate debtor executed several mortgage agreements whereby the commercial properties would serve as collateral to the loan.

10. As an additional guarantee, BPPR and the individual debtors executed mortgage agreements whereby their commercial property would also serve as collateral for the loan.

11. The individual debtors executed several agreements whereby they would personally guarantee the loan.

12. BPPR obtained additional collateral from Debtors through several assignment of lease agreements whereby all the rent proceeds of Debtors' mortgaged properties would serve as collateral in favor of BPPR.⁶

13. The commercial loan between BPPR and Debtors underwent several amendments between 2006 and 2011 in order to enhance the collateral provided to BPPR, adjust the interest rate and extend the maturity period of the loan.

14. On September 29, 2011, BPPR transferred its claims to PRLP as part of purchase of credits agreement between the two entities.

15. At the time of the transfer, Debtors were making monthly payments of $17,400 on the loan with a revised interest rate of 5% amortized over 25 years and they were current on the revised payments.

16. Debtors and PRLP were unable to renegotiate the terms of the agreement upon maturity of the loan and PRLP decided to request full payment of the loan and foreclose on the collateral.

17. On September 19, 2012, PRLP commenced a civil action against Debtors for collection of money and foreclosure of mortgages in the Commonwealth of Puerto Rico Court of First Instance, Humacao Section.

18. On March 8, 2013, the local court issued an order of attachment on Debtors' personal property, including all rents produced by Debtors' real properties encumbered by PRLP.

19. On March 25, 2013, Debtors filed a certiorari before the Commonwealth of Puerto Rico Court of Appeals.

20. On April 11, 2013, before the appellate court resolved the matter, each debtor filed for bankruptcy under Chapter 11 and the local court case was stayed.

21. On May 23, 2013, the corporate and individuals' cases were administratively consolidated.⁷

22. On July 11, 2013, PRLP filed Proof of Claim No. 1 in the corporate case for $2,635,138.28 as fully secured.

23. On July 11, 2013, PRLP filed Proof of Claim No. 9 in the individual debtors' case for $2,635,138.28 as fully secured.

24. On October 22, 2013, PRLP amended both claims to include supporting documentation for its claims.

25. On October 22, 2013, the Court issued an opinion and order determining that PRLP had a perfected security interest over Debtors' rent proceeds which are PRLP's cash collateral.⁸

26. On November 20, 2013, the Debtors filed a Joint Disclosure Statement and Plan.⁹

27. On January 9, 2014, the Court approved a stipulation for the use of cash collateral whereby corporate and individual debtors would provide a monthly payment of $22,739 to PRLP.¹⁰

28. On January 29, 2014, the Court allowed the filing of one joint disclosure statement and plan stating that "The Debtors can file one plan and one disclosure statement. However, the Debtors will have to independently classify and treat all secured and unsecured claims for the corporate and individual cases."¹¹ The Joint Disclosure Statement was approved subject to the supplement required by the Court.¹²

29. On March 19, 2014, PRLP filed a motion to convert Debtors' cases to Chapter 7.¹³

30. On April 12, 2014, Debtors filed the Joint Plan.¹⁴

31. On April 21, 2014, Debtors filed an objection to PRLP's Proof of Claim No. 1 in the corporate case as amended and PRLP's Proof of Claim No. 9 in the individuals' case as amended.¹⁵

32. On May 21, 2014, PRLP amended both claims for a second time to include $66,672.78 of pre-petition legal expenses which would increase the total amount of its claim to $2,701,810.06 in both cases. PRLP also amended the classification of its claims separating them into secured and unsecured in each case. Claim No. 1 in the corporate case as amended included a $2,110,000 secured portion and a deficiency of $591,812.06 as unsecured. Claim No. 9 in the individuals' case included a $400,000 secured portion and a deficiency of $2,301,811.06 as unsecured.

33. After addressing several related issues that needed to be resolved before a hearing on confirmation and conversion could take place, the Court scheduled a confirmation hearing for February 24, 2015.

34. As of February 18, 2015, Debtors had paid PRLP a total of $355,721.58 on post-petition adequate protection payments, which have been applied to the principal balance of the loan.¹⁶ Debtors have continued making adequate protection payments which will be applied towards the principal of the debt until confirmation.

35. On February 24, 2015, the Court held the first of five hearings to address Debtors' confirmation and all related matters. The parties presented their opening statements and Mr. Manuel Mediavilla was duly sworn and testified.

36. At the hearing, the Court granted in part and denied in part PRLP's Objection to CRIM's claims, effectively disallowing the unsecured portion in the corporate debtor's claim and included in Class 5 as untimely filed, but allowing the secured portion of the claim filed in both cases included in Class 3A and 3B of the Joint Plan.

37. On March 2, 2015, Mr. Victor Quiñones was qualified as Debtors' expert witness, duly sworn and testified in favor of confirmation.

38. On March 9, 2015, Mr. Eduardo Soria was qualified as PRLP's expert witness, duly sworn and testified against confirmation.

39. On April 13, 2015, Mr. Eric Higuera, First Vice President of CPG Island Servicing was duly sworn and testified.¹⁷

40. On June 1, 2015, the parties presented their closing arguments and the Court took the matter under advisement.

IV - OBJECTION TO CONFIRMATION

Debtors' Joint Plan contemplates payment of 100% of secured claims and a 5% distribution for unsecured creditors. After considering the fact that the cases had been administratively consolidated, the Court authorized the filing of one joint plan for both the individual and the corporate debtors despite PRLP's objections.¹⁸ Nevertheless, since the cases had not been substantively consolidated, the Court requested that the Debtors independently classify and treat all secured and unsecured claims for the corporate and individuals' cases.¹⁹ As such, Debtors filed a Joint Plan whereby the classes are either unique to each debtor or theclasses are subdivided to clearly identify and treat the corporate claims and the individuals' claims...