La Trinidad Elderly LP SE v. Loíza Ponce Holdings LLC (In re La Trinidad Elderly LP SE)

• Decision Date: 03 June 2021
• Docket Number: BAP NO. PR 20-014,Bankruptcy Case No. 19-01830-ESL
• Citation: 627 B.R. 779
• Parties: LA TRINIDAD ELDERLY LP SE, Debtor. La Trinidad Elderly LP SE, Appellant, v. Loíza Ponce Holdings LLC, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, First Circuit

627 B.R. 779

LA TRINIDAD ELDERLY LP SE, Debtor.La Trinidad Elderly LP SE, Appellant,

v.Loíza Ponce Holdings LLC, Appellee.

BAP NO. PR 20-014

Bankruptcy Case No. 19-01830-ESL

United States Bankruptcy Appellate Panel of the First Circuit.

June 3, 2021

Wigberto Lugo Mender, Esq., Guaynabo, on brief for Appellant.

Jorge Peirats, Esq., San Juan, on brief for Appellee.

Before Hoffman, Cary, and Panos, United States Bankruptcy Appellate Panel Judges.

Panos, United States Bankruptcy Appellate Panel Judge.

La Trinidad Elderly LP SE (the "Debtor") appeals from the bankruptcy court's order dismissing its chapter 11 petition and the order denying reconsideration. For the reasons below, we AFFIRM both orders.

BACKGROUND ¹

To properly frame the issues that we have considered and decided in this appeal, it is necessary to recount in some detail the facts and travel of this case.

I. Pre-Bankruptcy Events

In 2005, FirstBank Puerto Rico ("FirstBank") loaned $5,000,000.00 (the "Loan") to Inmobiliaria La Trinidad, Inc. pursuant to a certain Credit Agreement and mortgage note in the original principal amount of $4,000,000.00. To secure its obligations with respect to the Loan, Inmobiliaria La Trinidad, Inc. granted FirstBank a first-priority mortgage (the "Mortgage") on real property in Ponce, Puerto Rico (the "Property"), a security interest in personal property, an assignment of rents, and other collateral. The Property is improved by a 130-unit apartment building which provides subsidized housing to eligible low-income elderly tenants pursuant to federal and local rental subsidy programs. In August 2010, the Debtor acquired the Property from Inmobiliaria La Trinidad, Inc. under a certain Deed of Sale and became the primary obligor on the Loan pursuant to an Assumption and Modification of Loan Agreement.

In August 2010, the Debtor also entered into a Subaward Agreement with the Puerto Rico Housing Finance Authority (the "PRHFA"), pursuant to which it received an approximate $14,500,000.00 grant to partially fund the development of the Property. The grant was for a 15-year term which expires in 2027. The Debtor was not required to repay the PRHFA grant unless there was a "recapture event" prior to the expiration of the term. In 2010, the Debtor also entered into a forbearance agreement with FirstBank, which subsequently sold the Loan to CPG/GS PR NPL, LLC ("CPG").

On November 1, 2012, CPG filed a complaint against the Debtor in the Puerto Rico Court of First Instance (the "local court"), seeking to collect monies due under the Loan and to foreclose the Mortgage (the "local court action"). In that action, the local court appointed Star Management Corporation ("Star Management") to administer the Property.

On May 27, 2016, the local court entered an order in favor of CPG authorizing the foreclosure of the Mortgage. Several months later, on October 28, 2016, CPG sold and assigned all of its rights, title, and interests in and to the Loan, the Mortgage, and other collateral to the appellee, Loíza Ponce Holdings LLC ("Loíza Ponce").² On the same date, Loíza Ponce and the Debtor executed a Forbearance and Settlement Agreement, whereby the Debtor acknowledged its indebtedness to Loíza Ponce, as well as its default under the Loan, in exchange for Loíza Ponce's forbearance from exercising its remedies under the Loan documents. Specifically, the Debtor admitted it owed Loíza Ponce the principal amount of $3,682,427.00, plus $2,554,205.91 in interest. Pursuant to that agreement, the Debtor and Loíza Ponce also entered into a Stipulation for the entry of judgment in the local court action. The local court entered judgment on November 17, 2016 (the "foreclosure judgment").

The Forbearance and Settlement Agreement expired by its terms on October 27, 2017. The Debtor failed to comply with the terms of that agreement and negotiations to extend it were unsuccessful.

On June 11, 2018, Loíza Ponce obtained an Order of Execution of Judgment and a corresponding Writ of Execution. The public auction to sell the Property was scheduled for September 26, 2018.

II. The First Bankruptcy Filing

On September 25, 2018, the day before the auction, the Debtor filed a chapter 11 bankruptcy petition (the "first petition"). Loíza Ponce sought to dismiss the first petition, alleging it was filed in bad faith. After conducting a three-day evidentiary hearing between November 2018 and January 2019 (the "Prior Case Hearings"), the bankruptcy court dismissed the first petition on January 29, 2019, on the grounds that it was not filed by an authorized partner or agent.

III. The Second Bankruptcy Filing

A. The Petition

Following the dismissal of the first petition, Loíza Ponce renewed its request for execution of the local court judgment, and a public sale was scheduled for April 3, 2019. On the day before the public sale, the Debtor filed a second petition for chapter 11 relief (the "current case").

On its Schedule A/B, the Debtor listed assets totaling approximately $4.8 million, including: the Property (valued at $3.5 million); accounts receivable ($63,000.00); inventory ($4,500.00); furniture ($17,600.00); machinery, fixtures, and equipment ($189,000.00); a $531,000.00 claim against Loíza Ponce; a contingent and unliquidated insurance claim in the amount of $30,000.00 for hurricane damage; sums held in four operating accounts maintained by Star Management totaling approximately $249,000.00; and an operating reserve held by PRHFA in the approximate amount of $214,000.00. The Debtor's Schedule D indicated that, in addition to Loíza Ponce, its only other secured creditor was "Aut para el Financiamiento de Vivienda," with a $14.5 million claim. On Schedule E/F, the Debtor listed unsecured claims totaling approximately $946,000.00. The largest among those was Alpha Capital Solution LLC's claim for $664,779.00 (which the Debtor later amended to $864,779.00). On Schedule E/F, the Debtor also listed: a $364.08 claim in favor of CRIM for property taxes; a $15,658.84 claim owed to the Internal Revenue Service; a $4,282.44 claim owed to the Puerto Rico Treasury Department; a $3,566.68 claim in favor of State Insurance Fund Corporation for employment insurance; a $130,000.00 claim in favor of Affordable Housing Living Inc., representing a "management fee"; and a $127,688.20 claim, representing a judgment debt. In its Statement of Financial Affairs, the Debtor listed the local court action and indicated its status as "concluded."

B. The Motion to Dismiss

On April 13, 2019, Loíza Ponce filed a motion to dismiss the Debtor's petition on the grounds it was filed in bad faith and there was no reasonable likelihood of rehabilitation. In support, Loíza Ponce cited In re Plaza Antillana Inc., No. 13-10013 (ESL), 2014 WL 585299, at *7 (Bankr. D.P.R. Feb. 14, 2014), for the proposition that lack of good faith (or bad faith) in filing a chapter 11 petition constitutes "cause" for dismissal under § 1112(b)(1). Citing Phoenix Piccadilly, Ltd. v. Life Ins. Co. of Va. (In re Phoenix Piccadilly, Ltd.), 849 F.2d 1393 (11th Cir. 1988), Loíza Ponce argued that all six criteria identified in that case for establishing a "bad faith" filing were present and requested dismissal of the current case.

C. The Debtor's Objection to the Motion to Dismiss

The Debtor filed an opposition to the Motion to Dismiss, arguing there was no cause for dismissal. The Debtor challenged the validity of the Forbearance and Settlement Agreement, asserting the agreement was "void ab initio " because it was entered into in violation of the Debtor's partnership agreement.

The Debtor also disputed Loíza Ponce's assertion that filing for bankruptcy in "the midst of a foreclosure" was an "abuse of the bankruptcy process." In support, the Debtor cited Fields Station LLC v. Capitol Food Corp. of Fields Corner (In re Capitol Food Corp. of Fields Corner), 490 F.3d 21, 25 (1st Cir. 2007), wherein the First Circuit stated that "[c]atastrophic business events, such as an imminent or threatened foreclosure on the debtor's interests in real property essential to successful reorganization efforts, are precisely the sort of imminent financial distress for which debtors routinely seek chapter 11 protection." (citation omitted). The Debtor also contended that the dismissal of the current case would be detrimental not only to its estate and creditors, but also to "the elderly population in the community of Ponce." It explained that the foreclosure of the Property, which was likely to follow a dismissal of the current case, could result in the loss of rental assistance subsidies from the Puerto Rico Department of Housing and the acceleration of other obligations. Finally, the Debtor disputed the amount it owed to Loíza Ponce, asserting that the estate held "valid claims" against Loíza Ponce which had yet to be asserted in an adversary proceeding. Insisting it was "in compliance with its duties as a debtor," the Debtor urged the court to deny the Motion to Dismiss.

Thereafter, the parties agreed to submit the Motion to Dismiss on the evidence presented during the Prior Case Hearings. As ordered by the bankruptcy court, the parties filed proposed findings of fact based upon the evidence that was presented at those hearings.

D. The Plan of Reorganization, Disclosure Statement, and Objection Thereto

On July 1, 2019, the Debtor filed its Disclosure Statement and Plan of Reorganization (the "Plan"), both of which presented two scenarios for reorganization and treated Loíza Ponce as a Class 5, unsecured creditor with a disputed claim. In the Disclosure Statement, the Debtor explained that it had appealed the foreclosure judgment and that the appeal remained pending.³ The Plan contemplated the filing of an adversary proceeding against Loíza Ponce or an objection to Loíza Ponce's claim, and provided that any potential dividend to Loíza Ponce would be paid "only after the entry of final judgment" in the to-be-filed adversary proceeding or contested matter.

Scenario 1 under...