In re Manuel Mediavilla, Inc.

IN RE: MANUEL MEDIAVILLA, INC., Debtor

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

CASE NO. 13-2800 (MCF)

CASE NO. 13-2802 (MCF)

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO

December 30, 2015

CHAPTER 11

OPINION AND ORDER

Before the Court are cross motions for partial reconsideration by PRLP 2011 Holding, LLC ("PRLP"), the individual and corporate debtors, Manuel Mediavilla, Maydin G. Melendez and Manuel Mediavilla, Inc., respectively ("Debtors") of the Opinion and Order entered on June 16, 2015. For the reasons stated below, the Court denies PRLP's motion for partial reconsideration and grants Debtors' motion for reconsideration in part. Debtors are ordered to file an amended Joint Plan subject to the conditions stated herein within thirty (30) days.

I. Factual Background

Debtors contracted as co-obligees, a loan agreement with creditor Banco Popular de Puerto Rico. Each co-debtor provided real properties as collateral in guarantee of the obligation in case of default. Each co-debtor provided personal joint and several liability guarantees. On September 29, 2011, Banco Popular de Puerto Rico transferred its claims to PRLP as part of purchase of credits agreement. Upon the loan's maturity, Debtors and PRLP were unable to renegotiate the terms of the loan agreement. Thereafter PRLP requested full payment of the loan. Unable to collect, a year later, 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.

The foreclosure proceedings prompted Debtors to file for bankruptcy under Chapter 11 on April 11, 2013, staying the Commonwealth court proceedings. On July 11, 2013, PRLP filed Proof of Claim No. 1 in the corporate case for $2,635,138.28 as fully secured and filed Proof of Claim No. 9 in the individual debtors' case for $2,635,138.28 as fully secured. On May 21, 2014, PRLP amended both claims to include $66,672.78 of pre-petition legal expenses, increasing the total amount of its claims to $2,701,810.06 in both cases. PRLP also changed the classification of its claims by separating them into secured and unsecured portions in each case. Amended Claim No. 1 in the corporate case included a $2,110,000 secured portion and a deficiency of $591,812.06 as unsecured. Amended Claim No. 9 in the individuals' case included a $400,000 secured portion and a deficiency of $2,301,811.06 as unsecured.

II. Case Background

To resolve several matters surrounding the Joint Plan's confirmation, Debtors' objections to PRLP's claims and PRLP's request for Debtors' conversion to Chapter 7, the Court held the first of five hearings on February 24, 2015, and concluded on June 1, 2015. On June 16, 2015, the Court entered an order denying the Joint Plan's confirmation for failure to provide for Debtors' substantive consolidation of the two cases. Debtors seek reconsideration of the Court's denial of Joint Plan's confirmation. The Court also denied several of PRLP's objections to the Joint Plan's confirmation, among them, the impairment of local taxing authority, Centro de Recaudación de Ingresos Municipales's ("CRIM") secured tax claims classified in Classes 3Aand 3B of the Joint Plan. PRLP requests the Court's reconsideration of the order, solely on this issue.

III. Standard for Rule 9023 motions

Rule 9023 of the Federal Rules of Bankruptcy Procedure makes Rule 59 of the Federal Rules of Civil Procedure applicable to bankruptcy proceedings.¹ Rule 59(e) allows a party to file "[a] motion to alter or amend a judgment. . ." Although Rule 59(e) does not provide specific grounds to obtain the remedy requested, the Court of Appeals for the First Circuit in Marie v. Allied Home Mortg. Corp., 402 F.3d 1, 7 n.2 (1st Cir. 2005), highlighted the following four grounds for granting a motion for reconsideration under Rule 59(e): (1) manifest errors of law and fact; (2) newly discovered or previously unavailable evidence; (3) manifest injustice; and (4) an intervening change in controlling law. Marie, 402 F.3d at 7 (citing 11 C. Wright et al., Federal Practice & Procedure § 2810.1 (2d ed. 1995)).

Reconsideration of a judgment under Rule 59(e) is an extraordinary remedy which should be used sparingly and only when the need for justice outweighs the interests set forth by a final judgment. The underlying policy of reconsideration is to provide a court with a means to correct its own errors. Aybar v. Crispin-Reyes, 118 F.3d 10, 16 (1st Cir. 1997). Conversely, Rule 59(e) does not exist to allow parties a second chance to prevail on the merits. Voelkel v. General Motors Corp., 846 F. Supp. 1482, 1483 (D. Kan. 1994), aff'd, 43 F.3d 1484 (10th Cir. 1994). "Motions under Rule 59(e) must either clearly establish a manifest error of law or must present newly discovered evidence . . . [t]hey may not be used to argue a new legal theory." Jorge Rivera Surillo & Co. v. Falconer Glass Indus., 37 F.3d 25, 29 (1st Cir. P.R. 1994).

IV. PRLP's motion for partial reconsideration

PRLP seeks reconsideration of the Court's Opinion in regard to CRIM's secured claims classified as Classes 3A and 3B in Debtors' Joint Plan. In its motion, PRLP avers that CRIM's secured tax claims are entitled to priority treatment under 11 U.S.C. § 1129(a)(9)(C) by way of § 1129(a)(9)(D).² PRLP argues that, because of this treatment, CRIM's secured tax claims should not be considered impaired. The end result would preclude CRIM's Classes 3A and 3B from voting to accept the Joint Plan for purposes of "cramdown" confirmation under Section 1129(b) and block confirmation of Debtors' Joint Plan for failure to have one consenting impaired class in the individuals' case, pursuant to § 1129(a)(10).

Section 1129(a)(9)(C) provides for payment of tax claims under § 507(a)(8) in Chapter 11 as follows:

(9) Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that—

. . .

(C) with respect to a claim of a kind specified in section 507(a)(8) of this title, the holder of such claim will receive on account of such claim regular installment payments in cash—

(i) of a total value, as of the effective date of the plan, equal to the allowed amount of such claim;

(ii) over a period ending not later than 5 years after the date of the order for relief under section 301, 302, or 303; and

(iii) in a manner not less favorable than the most favored nonpriority unsecured claim provided for by the plan (other than cash payments made to a class of creditors under section 1122(b)). . .

11 U.S.C. § 1129(a)(9)(C).

Accordingly, unsecured tax claims that fall under § 507(a)(8) are entitled to priority treatment and may not be separately classified as impaired in a class of its own or as part of an impairedcreditor class. On the other hand, secured tax claims are specified in subsection § 1129(a)(9)(D), which reads:

(9) Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that—

. . .

(D) with respect to a secured claim which would otherwise meet the description of an unsecured claim of a governmental unit under section 507(a)(8), but for the secured status of that claim, the holder of that claim will receive on account of that claim, cash payments, in the same manner and over the same period, as prescribed in subparagraph (C).

11 U.S.C. § 1129(a)(9)(D).

This section provides for payment of secured tax claims in the same manner as unsecured priotity tax claims, except to the extent that the holder of the claim has agreed to a different treatment.

PRLP contends that CRIM's secured tax claim is not impaired due to the statutory treatment afforded under § 1129(a)(9)(C) by way of § 1129(a)(9)(D). PRLP cites In re Bryson Properties, 961 F.2d 496 (4th Cir. 1992) for the proposition that secured tax claims cannot be impaired due to the Bankruptcy Code's treatment of a secured tax claim similar to that of a priority tax claim under § 1129(a)(9)(C). The Court in Bryson stated that unsecured priority tax claims may not be designated as an impaired class with a right to vote on a plan because unsecured priority tax claims under § 1129(a)(9)(C) are expressly excluded from classification pursuant to § 1123(a)(1).

This case and other cases cited by PRLP do not convince the Court that secured tax claims should be considered unimpaired, other than for the Code's priority treatment afforded to secured tax claims under § 1129(a)(9)(C) by way of § 1129(a)(9)(D). Bryson is only relevant to unsecured priority tax claims which fall under § 507(a)(8) and are excluded from designation asa class under § 1123(a)(1).³ Furthermore, at the time of Bryson's pronouncements on unsecured tax claim treatment, § 1129(a)(9)(D) had not been enacted by BAPCPA to provide for the manner in which secured tax claims should be paid. In re Tree of Life Church, 522 B.R. 849, 860 (Bankr. D.S.C. 2015).

Although § 1129(a)(9)(D) provides for payment of certain secured tax claims in the same manner as unsecured priority tax claims, it neither expressly states or passively implies that such treatment prohibits the classification of a secured tax claim for purposes of voting and cramdown considerations. The Court adopts the position taken in In re Tree of Life Church, which held that:

Although the amendments to the Code provided by BAPCPA now allow secured tax claims to qualify for treatment similar to unsecured priority tax claims, BAPCPA did not alter the language of § 1123(a)(1); secured tax claims are not—and were not at the time of Bryson Properties—a type of claim which a debtor was unable to designate as part of a class for voting purposes in accordance with § 1123(a)(1). If in passing and enacting BAPCPA Congress intended to exclude secured tax claims from classification for voting purposes, it would have done so in the same express manner in which claims under §§ 507(a)(2), (3), and (8) were

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