Vaqueria Las Martas, Inc. v. Condado 5, LLC (In re Vaqueria Las Martas, Inc.)

638 B.R. 482

VAQUERIA LAS MARTAS, INC., Debtor.

Vaqueria Las Martas, Inc., Appellant,

v.Condado 5, LLC, Appellee.

BAP NO. PR 21-017

Bankruptcy Case No. 18-07304-ESL

United States Bankruptcy Appellate Panel of the First Circuit.

April 21, 2022

Richard L. Antognini, Esq., and Lysette A. Morales Vidal, Esq., on brief for Appellant.

Sonia E. Colón, Esq., Gustavo A. Chico-Barris, Esq., San Juan, and Frances C. Brunet-Uriarte, Esq., on brief for Appellee.

Before Cary, Fagone, and Katz, United States Bankruptcy Appellate Panel Judges.

Cary, U.S. Bankruptcy Appellate Panel Judge.

Vaqueria Las Martas, Inc. (the "Debtor") appeals from the bankruptcy court's order dismissing its chapter 12 case for "unreasonable delay prejudicial to creditors" and "failure to file a timely confirmable plan."¹ For the reasons set forth below, we AFFIRM .

BACKGROUND

The Debtor is a duly licensed dairy farm in Puerto Rico. Its assets include livestock and a raw milk production quota authorizing it to produce fresh milk in a prescribed amount every 14 days.²

I. Pre-Petition Events

In January 2005, Banco Popular de Puerto Rico ("BPPR") loaned $1,850,000 to the Debtor, secured by 58,700 quarts of the Debtor's milk quota and real property owned by J.M. Dairy, Inc. and Juan M. Barreto Ginorio (the president and owner of both the Debtor and J.M. Dairy, Inc.). BPPR subsequently assigned the loan to a third party, who in turn assigned it to Condado 5, LLC ("Condado"). The Debtor has been in default of its obligations under the loan since January 2015.

II. The Bankruptcy Filing and Post-Petition Events

The Debtor first filed for bankruptcy relief under chapter 12 in June 2011. That case was eventually dismissed in August 2018 and, three-and-a-half months later, on December 14, 2018, the Debtor commenced this case. On its amended schedules, the Debtor indicated that it owned 45 cows, 13 of which were designated as milking cows. The Debtor also scheduled Condado as the holder of a $1,619,500.29 claim, secured by the Debtor's milk quota, which it valued at $1,017,400.00.

A. Condado's Motion to Prohibit Use of Cash Collateral and the Debtor's Objection

In February 2019, Condado filed proof of claim no. 6, asserting a $1,626,362.59 claim for "[m]oney loaned," secured by a lien on real estate.³ In the same month, citing § 363(e), Condado filed a motion to prohibit the Debtor from using its cash collateral and to obtain an order authorizing Condado to collect the proceeds from the Debtor's milk production (the "Motion to Prohibit Use of Cash Collateral"). In support, Condado asserted it held a "first priority pre-petition security interest over the Debtor's milk quota" and "the Debtor's income from the milk quota." The court scheduled the motion for a hearing and entered an interim order prohibiting the use of cash collateral.

In its objection, the Debtor countered that Condado was already "receiving 100% of the [proceeds of] milk production." In addition, the Debtor asserted that Condado's claim was unsecured because its UCC-1 Financing Statements had "lapsed."

B. The Debtor's Cash Collateral Motion and the March 2019 Hearing

On March 4, 2019, the Debtor filed a motion seeking a determination that its milk quota did not constitute cash collateral (the "Debtor's Cash Collateral Motion"). In the alternative, the Debtor offered $1,300 monthly payments "to adequately protect Condado ... for the use of its cash collateral."

At the March 2019 hearing on the motion, the court ruled that Condado was a secured creditor with a lien on the Debtor's milk quota but questioned whether that lien extended to the proceeds from the sale of the raw milk. The court, therefore, ordered briefing on the issue.

On March 18, 2019, in its court-ordered brief, Condado asserted that the parties’ security agreement granted Condado a lien "over the interests, rents and proceeds arising from the milk quotas and the continuing production of milk under the quotas every 14 days." It also challenged the Debtor's assertion that Condado's claim was unsecured because its UCC-1 Financing Statements had lapsed, maintaining that the relevant security agreement had been timely and duly registered.

C. The First Motion to Dismiss and the Order to Show Cause

Meanwhile, on March 18, 2019, the bankruptcy court issued an order to show cause, directing the Debtor to demonstrate why its case should not be dismissed for failure to file a plan. The Debtor responded by asserting that the omission was an oversight, its Cash Collateral Motion remained pending, and its attorney was experiencing medical issues.⁴

Two days after the court issued the order to show cause, Condado filed its first motion to dismiss the Debtor's chapter 12 case under § 1208(c) (the "First Motion to Dismiss"), arguing, among other things, that the Debtor failed to file any monthly operating reports ("MORs"). After the Debtor filed MORs in May, June, and July 2019, the court denied the First Motion to Dismiss, reasoning "dismissal [wa]s not in the best interest of the estate, [and] the MORs [we]re current, albeit not timely filed ...."⁵ Although the court acknowledged that Condado "ha[d] a lien over the milk quota," it questioned whether "the milk produced by the cows" was also subject to that lien. After requiring further briefing, the court took this question under advisement on December 11, 2019.

D. The April 15, 2020 Ruling Regarding the Extent of Condado's Lien

On April 15, 2020, the court issued an opinion and order, concluding that neither the milk produced by the Debtor's cows nor the income generated from the sale of that milk were subject to Condado's lien (the "April 15, 2020 ruling"). It reasoned:

The security agreement does not specify that the dairy cows or the raw milk produced by Debtor's dairy farm operation serve as collateral to the loans. The milk is produced by the cows.... Since Condado's collateral does not include the cows, it may not claim that its security interest attaches to any identifiable proceeds of the cows.

In re Vaqueria Las Martas, Inc., 617 B.R. 429, 441 (Bankr. D.P.R. 2020). Thereafter, Condado filed a motion for reconsideration, which the court denied in July 2020. Condado then appealed the April 15, 2020 ruling to the district court (No. 20-cv-01344-ADC).

E. The Plan, Objections to Confirmation, and the Order Denying Confirmation

On June 1, 2020, approximately a year-and-a-half after the commencement of its bankruptcy case, the Debtor finally filed a chapter 12 plan (the "Plan"). Among other things, the Plan provided: (1) Condado would "cease collection" of the proceeds of the sale of the Debtor's milk to Suiza Dairy and would "immediately reimburse" the Debtor for payments made by Suiza Dairy to Condado from September 15, 2018 through at least May 31, 2020; (2) Condado would be paid $313,118.00 on its secured claim, with $2,395.33 monthly payments commencing within 30 days of confirmation and continuing for 15 years; and (3) Condado would receive a 29% dividend on its unsecured claim. With the anticipated milk proceeds that Condado would cease to collect, the Debtor would fund the Plan.

The court scheduled a hearing for October 27, 2020 to consider Plan confirmation. In the interim, on June 29, 2020, the Trustee objected to confirmation, asserting the Plan was not feasible under § 1225(a)(6) because: (1) success of the Plan depended on the Debtor's ability to obtain "full access" to the proceeds of its milk production; and (2) the financial condition of the Debtor did not support the Plan projections.

On August 31, 2020, Condado also filed an objection to confirmation, arguing the Plan's proposed treatment of its claim ignored its security interest in the Debtor's milk quota. Asserting that its claim was "fully secured by a lien over the totality of the Debtor's milk quota," Condado further complained that the Plan proposed to pay Condado only $313,118.00 on its $1,626,362.59 secured claim and nearly tripled "the original repayment term." Moreover, Condado maintained the Plan was "entirely speculative," because it was contingent on the immediate reimbursement of the proceeds from the Debtor's milk production, the termination of the collection of those proceeds, and the outcome of the district court appeal of the April 15, 2020 ruling.

On October 2, 2020, the bankruptcy court entered an order rescheduling the hearing on confirmation from October 27, 2020 to January 26, 2021. A week before that hearing, the Trustee again objected to confirmation, reasserting that the Plan failed to satisfy the feasibility requirements of § 1225(a)(6). As grounds, he maintained: (1) the "Debtor's business depend[ed] on the reimbursement of at least $77,925 from Condado"; (2) the Debtor "failed to submit monthly operating reports for November and December 2020"; and (3) the outcome of the district court appeal "might adversely affect the feasibility" of the Plan.

On January 24, 2021, two days before the confirmation hearing, the Debtor filed a combined response to the Plan confirmation objections of Condado and the Trustee (the "Debtor's Combined Response"). Asserting that Condado continued to seize all the proceeds from the sale of the Debtor's milk, the Debtor maintained that confirmation was not "viable." The Debtor blamed Condado for its inability to propose a feasible plan. In addition, the Debtor reported that its milk production had dwindled to 5.7% of its quota. Accordingly, the Debtor asked the court to overrule the objections to confirmation, adding "[t]he case [wa]s not ready for confirmation" and the Plan would not be confirmable until the Debtor recouped the milk proceeds seized by Condado.

The next day, the Debtor filed a motion seeking an order under § 105 directing Condado to turn over all of the "milk proceeds" it seized during the case (the "Motion to Enforce").

F. Order Denying Confirmation

Following a hearing on January 26, 2021, the bankruptcy court entered an order, memorialized in the minutes of the hearing, denying...