PRLP 2011 Holdings LLC v. Manuel Mediavilla, Inc. (In re Manuel Mediavilla, Inc.)

568 B.R. 551

IN RE MANUEL MEDIAVILLA, INC., Debtor.

PRLP 2011 Holdings LLC, Appellant/Cross–Appellee,

v.Manuel Mediavilla, Inc., Appellee/Cross–Appellant.

In re Manuel Mediavilla and Maydin G. Meléndez, Debtors.

PRLP 2011 Holdings LLC, Appellant/Cross–Appellee,

v.Manuel Mediavilla and Maydin G. Meléndez, Appellees/Cross–Appellants.

BAP NOS. PR 16–053

PR 16–056

Bankruptcy Case No. 13–02800–MCF

BAP NOS. PR 16–054

PR 16–057

Bankruptcy Case No. 13–02802–MCF

United States Bankruptcy Appellate Panel of the First Circuit.

June 16, 2017

Ubaldo M. Fernández, Esq., and David P. Freedman, Esq., on brief for Appellant/Cross–Appellee.

Carmen D. Conde Torres, Esq., and Luisa S. Valle Castro, Esq., on brief for Appellees/Cross–Appellants.

Before Feeney, Finkle, and Fagone, United States Bankruptcy Appellate Panel Judges.

Per Curiam.

PRLP 2011 Holdings LLP ("PRLP") appeals from the bankruptcy court's order confirming the Second Amended Joint Plan of Reorganization (the "Second Amended Plan") filed by the individual debtors, Manuel Mediavilla and Maydin G. Meléndez (the "Individual Debtors"), and Manuel Mediavilla's wholly owned corporation, Manuel Mediavilla, Inc. (the "Corporate Debtor" and, together with the Individual Debtors, the "Debtors"), in their jointly administered cases. PRLP also appeals from several prior orders relating to plan confirmation and relating to a settlement agreement between the parties. The Debtors have filed cross-appeals with respect to a prior order relating to their request to designate and disqualify PRLP's votes rejecting the plan pursuant to Bankruptcy Code § 1126.¹

Although the parties raise a plethora of issues relating to voting and plan confirmation, we conclude that the bankruptcy court erred in confirming the Second Amended Plan because it summarily determined that a certain settlement agreement (the "Settlement Agreement") resolving pending confirmation issues did not exist. The bankruptcy court made erroneous factual findings and committed legal error with respect to the threshold issue of whether there was a valid, binding, and enforceable settlement agreement between the parties and, as a result, the bankruptcy court erred in confirming a plan containing terms materially different from the terms of the Settlement Agreement. As a result, we VACATE the confirmation order and REMAND to the bankruptcy court for further proceedings consistent with this opinion.

BACKGROUND

I. Pre–Bankruptcy Events

We recite the lengthy background of these bankruptcy cases to provide a complete and accurate understanding of the disputes between the parties, the events that led to settlement negotiations, the confirmation of a plan, and the filing of these appeals.

Both the Corporate Debtor and the Individual Debtors are engaged in the leasing and management of commercial real estate, and they separately own several commercial real properties in Humacao and Guaynabo, Puerto Rico. The Debtors rent the commercial properties to various tenants, and their main source of income is rents received from these tenants. In 2006, the Corporate Debtor obtained a $2,700,000 loan from Banco Popular de Puerto Rico ("BPPR"), as evidenced by a promissory note in that amount ("Note"), which was secured by, among other things, mortgages on most of the Debtors' real properties (including the Individual Debtors' residence), and assignments of rental proceeds from all of the commercial real estate. The Individual Debtors also gave personal guarantees of the Note.

In 2011, BPPR transferred the loan to PRLP, and, when the Note matured in January 2012, the Debtors and PRLP were unable to renegotiate new terms and PRLP called the loan. Unable to collect, PRLP commenced an action against both the Corporate Debtor and the Individual Debtors in the Puerto Rico Court of First Instance, Humacao Section ("Local Court"), and, in March 2013, that court issued orders for the attachment of the Debtors' personal property, including all rental proceeds, and the appointment of a receiver.

II. The Bankruptcy Case

A. Case Commencement

In April 2013, the Individual Debtors and the Corporate Debtor filed separate chapter 11 petitions, thereby staying the case in the Local Court. Thereafter, the bankruptcy court authorized joint administration of the bankruptcy cases. The disputes between the Debtors and PRLP which engendered the action in the Local Court persisted and pervaded the bankruptcy cases from their commencement through these appeals.

In its schedules, the Corporate Debtor listed PRLP as a secured creditor with a disputed and contingent claim in the amount of $2,469,874.01, secured by liens on three commercial properties valued at $2,241,000.00, with an unsecured portion of $228,874.01. It also listed Centro de Recaudación de Ingresos Municipales ("CRIM") as a secured creditor with an unliquidated and disputed tax claim in the amount of $14,654.72. It did not list any creditors holding priority or nonpriority unsecured claims.

The Individual Debtors listed three secured creditors on their Amended Schedule D: (1) PRLP with a disputed and unliquidated claim in the amount of $500,000.00, secured by a lien on real property valued at $400,000.00, with an unsecured portion of $100,000.00; (2) CRIM with an unliquidated and disputed property tax claim in the amount of $1,486.96; and (3) Doral Bank with a claim in the amount of $342,689.30, secured by a lien on the Individual Debtors' Guaynabo residence valued at $650,000.00. The Individual Debtors did not list any creditors holding priority unsecured claims, but they did list unsecured nonpriority claims totaling $3,104,841.00.

At the outset of these bankruptcy cases, PRLP moved the court to prohibit the Debtors' use of cash collateral (namely, the rental income from their commercial properties). After extensive litigation relating to the Debtors' use of cash collateral, including a disputed Emergency Motion to Use Cash Collateral filed by the Debtors, and an Opinion and Order of the bankruptcy court, the parties executed a Stipulation for Use of Cash Collateral, pursuant to which the Debtors agreed to make monthly adequate protection payments to PRLP. In early January 2014, the court approved the stipulation and the Debtors made adequate protection payments to PRLP throughout the course of the bankruptcy cases. Nevertheless, the adversarial relationship between the parties with respect to other issues continued, dominating the entire record of the proceedings in the bankruptcy court.

B. Proofs of Claim by PRLP and CRIM

PRLP filed separate proofs of claim asserting in each case a secured claim in the amount of $2,635,138.28. It later amended its proofs of claim to include $66,672.78 for pre-petition legal expenses, increasing the total claimed amount to $2,701,810.06 in both cases.² It also separated the claimed amount in each case into secured and unsecured portions as follows: (1) in the Corporate Debtor's case, $2,110,000.00 secured and $591,812.06 unsecured claims;³ and (2) in the Individual Debtors' case, $400,000.00 secured and $2,301,811.06 unsecured.⁴ The Debtors objected to PRLP's amended claims.⁵

CRIM filed a proof of claim in the Corporate Debtor's case for unpaid property taxes in the amount of $14,185.65, with a secured portion of $13,539.97 and an unsecured portion of $645.68. In the Individual Debtors' case, CRIM filed a proof of claim asserting a secured claim for unpaid property taxes in the amount of $745.52. PRLP objected to CRIM's claims, alleging, among other things, that the unsecured portion was untimely filed after the bar date for governmental claims.

C. Original Joint Disclosure Statement and Joint Plan of Reorganization

In November 2013, the Debtors filed in both cases a Joint Disclosure Statement and a Joint Plan of Reorganization ("Original Plan").⁶ The Original Plan divided the creditors into the following seven classes:

(1) Class 1—Allowed administrative expenses payable in full on the effective date of the plan or as agreed by the Debtors and the claimants;

(2) Class 2—Allowed secured claim of Doral Bank (in the Individual Debtors' case) payable pursuant to the terms and conditions of the loan;

(3) Class 3—Allowed secured claim of CRIM, payable in full in 36 monthly installments together with interest at the rate of 4.25%;

(4) Class 4—Allowed secured claim of PRLP, payable in full in 60 monthly installments of $12,348.00, with a lump sum at the end of the 60–month term, calculated by amortizing the loan amount over 30 years at 4.25% interest;

(5) Class 5—Allowed unsecured claims of governmental units in Corporate Debtor's case (consisting of Puerto Rico Treasury Department and CRIM), to be paid a dividend of 5% in equal monthly installments over 60 months;

(6) Class 6—Allowed general unsecured claims (consisting of PRLP's deficiency claims), to be paid a 5% dividend in 60 monthly installments; and

(7) Class 7—Equity security holders and/or other interest holders, to receive no payments. The Debtors identified Classes 3, 4, 5 and 6 in the Original Plan as impaired classes of claims.

PRLP objected to the Joint Disclosure Statement, arguing, among other things, that: (1) it did not provide "adequate information" because it failed to independently classify and treat PRLP's secured and unsecured claims in each case; (2) it did not provide a sufficient basis to assess the feasibility of the Original Plan; and (3) the Original Plan was unconfirmable on its face for numerous reasons.

After a hearing on January 29, 2014, the bankruptcy court directed the Debtors to supplement their Joint Disclosure Statement to "independently classify and treat all secured and unsecured claims for the corporate and individual cases." Thereafter, the bankruptcy court approved the Joint Disclosure Statement, as amended by the supplement, directed the Debtors to solicit votes pursuant to § 1125, and scheduled a confirmation hearing for April 22, 2014. PRLP moved for reconsideration of the order approving the Joint Disclosure...