United Sur. & Indem. Co. v. López-Muñoz (In re López-Muñoz)

• Decision Date: 09 August 2017
• Docket Number: No. 16-9007,16-9007
• Citation: 866 F.3d 487
• Parties: IN RE: Pedro LÓPEZ–MUÑOZ, Debtor United Surety & Indemnity Company, Appellant, v. Pedro López–Muñoz, Appellee.
• Court: U.S. Court of Appeals — First Circuit

866 F.3d 487

IN RE: Pedro LÓPEZ–MUÑOZ, DebtorUnited Surety & Indemnity Company, Appellant,

v.Pedro López–Muñoz, Appellee.

No. 16-9007

United States Court of Appeals, First Circuit.

August 9, 2017

Carlos Lugo Fiol, with whom Héctor Saldaña–Egozcue, Hato Rey, PR, José A. Sánchez Girona, and Saldaña and Saldaña–Egozcue, PSC, San Juan, PR, were on brief, for appellant.

Luisa S. Valle Castro, with whom Carmen D. Conde Torres and C. Conde and Associates, San Juan, PR, were on brief, for appellee.

Before Howard, Chief Judge, Torruella and Barron, Circuit Judges.

BARRON, Circuit Judge.

This case concerns an appeal from a bankruptcy court's decision, under 11 U.S.C. § 1104(a), to deny a creditor's motion to appoint a trustee for the bankruptcy estate to replace the debtor in possession of that estate. We affirm.

I.

The appellee in this case is the debtor in possession of the estate, Pedro López–Muñoz. Prior to filing a petition for bankruptcy under Chapter 11 of the Bankruptcy Code, López was an owner, either in whole or in part, of two petroleum products companies. The two companies were Western Petroleum Enterprises, Inc. ("WP"), of which López owned 50% of the shares, and Hi Speed Gas Corp. ("HSGC"), of which López owned 100% of the shares. In re Muñoz , 544 B.R. 266, 269 (Bankr. D.P.R. 2016). The appellant in this case is United Surety and Indemnity Co. ("USIC"), which is one of López's creditors. USIC became a creditor of López by obtaining an indemnity agreement that López guaranteed for certain of WP's obligations. Id.

Although a debtor who has filed a petition for bankruptcy under Chapter 11 generally continues to manage the bankruptcy estate as the debtor in possession, the bankruptcy court may, pursuant to § 1104(a), appoint a trustee to manage the estate instead of the debtor. Specifically, § 1104(a) provides that "the [bankruptcy] court shall order the appointment of a trustee—(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement ...; or (2) if such appointment is in the interests of creditors...." This appeal concerns the motion that USIC filed under § 1104(a) to have the Bankruptcy Court appoint a trustee of the bankruptcy estate to replace López.

Given the large number of issues USIC asks us to resolve in this appeal, we need to review in some detail the facts underlying the dispute, the arguments that the parties made to the Bankruptcy Court and the Bankruptcy Appellate Panel ("BAP"), and the rulings that those courts made below. This review will help clarify the issues, if any, that USIC is now raising for the first time in this appeal and thus that are not properly before us.

We begin by recounting certain undisputed facts that concern the run-up to López's filing of his petition for bankruptcy under Chapter 11. We then review the travel of the case following that filing, including the decisions below.

A.

In March 2013, López owned 100% of the shares of HSGC. Muñoz , 544 B.R. at 269. At that time, HSGC owned a gas station in Hormigueros, Puerto Rico ("Hormigueros station"). Id. Also, at the same time, López personally owned a gas station in Mayagüez, Puerto Rico ("Mayagüez station"). Id. at 270.

On April 8, 2013, López, acting on behalf of HSGC, executed a 20–year lease of the Hormigueros station with Puma Energy Caribe LLC ("Puma"). Id. at 269–70. HSGC's lease to Puma of the Hormigueros station called for an initial $32,000 monthly rental payment from Puma to HSGC. Id. The HSGC lease to Puma of that station also provided that Puma would make an advance payment to HSGC of $125,000. Id. at 270. Under that lease, HSGC was to repay the advance payment through a $500 per month reduction in the monthly rental payment that Puma owed to HSGC under the lease of that station. Id.

On the same day, April 8, 2013, López, acting on his own behalf, executed a 20–year lease to Puma of the Mayagüez station that he personally owned. Id. That lease provided for an initial $18,000 monthly rental payment from Puma to López. Id. That lease also provided for an advance payment of $125,000 from Puma to López, which would be repaid to Puma by López by means of a $500 per month reduction in the monthly rental payment that Puma owed to López under the lease on the Mayagüez station. Id. Both leases to Puma made Puma responsible for "all costs related to their operation," such that "the rents received by [HSGC] and by the debtor under these leases were free and clear of any operating expenses." Id. at 272.

On April 11, 2013, López transferred his interest in the Mayagüez gas station, including the lease to Puma, to HSGC in return for $5,000. Id. at 270. That same day, López transferred his shares in HSGC by "donat[ing]" them to a trust. Id. The trust, named the "La Familia Trust," had been created by López's son on April 1, 2013. That trust named López as the sole beneficiary of the La Familia Trust and López's children as substitute beneficiaries. The trustee of that trust was listed as López's spouse. Id. at 271.

On May 17, 2013, after López had made the two transfers (of the Mayagüez station to HSGC and of the HSGC shares to the La Familia Trust), one of WP's creditors, Banco Santander Puerto Rico, garnished $182,435.66 in funds from López's personal bank account. Id. at 270. Banco Santander Puerto Rico did so based on López's personal guarantee of WP obligations to Banco Santander Puerto Rico. Id. The amount garnished included the $125,000 that Puma had paid to López as Puma's advance payment on the lease that Puma had executed with López for the Mayagüez station. Id.

B.

On October 1, 2013, López filed his petition for bankruptcy under Chapter 11. In the initial statement of financial affairs that he submitted with the filing, López disclosed the pre-petition transfer of the Mayagüez gas station to HSGC and the transfer of the HSGC shares to the La Familia Trust. López's statement did not specifically disclose the revenue that was owed by Puma under the two gas station leases that had been executed with Puma. Id. at 272–73.

In the initial statement of financial affairs, López wrote that the date for the transfer of the HSGC shares to the La Familia Trust was March 2013. The date of the transfer was actually April 11, 2013. Id. at 273. López also represented in the initial statement of financial affairs that the shares of HSGC that had been transferred to the La Familia Trust had "no value." Id. The statement also disclosed that, after filing the bankruptcy petition, López collected $5,000 a month from HSGC in salary for his work as an officer of the company and $10,000 a month in rent from HSGC for office space that he leased to HSGC. Id. at 272.

On November 1, 2013, the first meeting of creditors in connection with López's bankruptcy filing was held. Id. At that first meeting of creditors, USIC inquired about the transfer of the HSGC shares to the La Familia Trust that López had disclosed on his initial statement of financial affairs. Id. López stated at that meeting that the beneficiaries of the La Familia Trust were his four children. He did not state that he was in fact the sole beneficiary of that trust and that his children were merely substitute beneficiaries. Id. at 272–73.

On April 15, 2014, López filed a disclosure statement with the Bankruptcy Court in which he indicated that his purpose in transferring the Mayagüez station to HSGC was to "preserve the property because of difficulties in making mortgage payments." Id. at 273–74. This disclosure statement, like his earlier initial statement of financial affairs, did not disclose either of the gas station leases that Puma had executed. And that statement did not disclose the amount of money that Puma owed in connection with its lease for either the Mayagüez station or the Hormigueros station. Id. at 274.

On July 17, 2014, USIC filed an objection to the disclosure statement that López had filed with the Bankruptcy Court and a request that the Bankruptcy Court appoint a trustee under § 1104(a). Id. at 268. In that motion, USIC contended, among other things, that the transfer of the Mayagüez gas station to HSGC and the transfer of the HSGC shares to the La Familia Trust constituted transfers to "hinder, delay, or defraud" a creditor under 11 U.S.C. § 548(a)(1)(A). That provision of the Bankruptcy Code authorizes the trustee of the bankruptcy estate to avoid certain pre-petition transfers made with such an intent. Id. Accordingly, USIC argued that the bankruptcy estate had a cause of action against HSGC to avoid the transfers under § 548 and recover the assets for the benefit of the estate. USIC further contended that López, due to his ties to HSGC, had a conflict of interest with respect to bringing that action. USIC therefore requested that the Bankruptcy Court appoint a trustee of the bankruptcy estate under § 1104(a)"so that [the trustee] can pursue for the benefit of the bankruptcy estate the avoidance and recovery" of the challenged transfers.

On August 29, 2014, López rescinded the transfer of the Mayagüez gas station to HSGC and the transfer of the HSGC shares to the La Familia Trust. Id. at 274. On that same day, López filed with the Bankruptcy Court an amended "disclosure statement, schedules, and statement of financial affairs to disclose the reversal of the asset transfers." Id. The filings also disclosed the lease that López had executed with Puma for the Mayagüez station. Id.

Notwithstanding López's rescission of the transfers of the Mayagüez station to HSGC and of the HSGC shares to the La Familia Trust, HSGC did not repay to the bankruptcy estate the lease income that HSGC collected from Puma during the time that HSGC owned the Mayagüez station in consequence of the prior transfer by López of that station to HSGC. Id. at 274.

After the rescission of the transfers, López began receiving only $5,000 a month in rent from HSGC for the office space that he had leased to HSGC. Id. at 272. Prior to the rescission, López had been receiving...