LASER REALTY INC

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
In re: :
:
ANTONIO A. FERNANDEZ, : Case No. 04-10585 (GAC)
MARTHA BERTRAN, :
:
Debtors : Chapter 11
___________________________________:
:
In re: :
:
LASER REALTY, INC., : Case No. 04-12634 (GAC)
:
Debtor : Chapter 7
___________________________________:
:
In re: :
:
CORUS HARDWARE, CORP., : Case No. 07-00067 (GAC)
:
Debtor : Chapter 11
___________________________________:
:
In re: :
:
LASER REALTY, INC., :
:
Plaintiff :
:
v. : Adv. No. 06-00189 (GAC)
:
ANTONIO FERNANDEZ, ET AL., :
:
Defendants :
___________________________________:
DECISION AND ORDER
BACKGROUND
On October 31, 2008, a settlement agreement (“Settlement
Agreement”) was filed between the captioned debtors, the Chapter 7
trustee for the estate of Laser Realty, Inc. (“Laser”),
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International Steel and Tube, S.A. (“IST”), Florida Tube
Corporation (“FTC”) and Citibank, N.A. (“Citibank”). The captioned
corporate debtors, IST and FTC are all related corporations and
were all operated by the individual debtors, Antonio A. Fernandez
and Martha Bertran (the “Fernandez debtors”).
In essence, the agreement proposes monetary compensation to
Citibank, in exchange for settlement of all of the protracted
litigation between the parties. Citibank had sought conversion of
the bankruptcy case of the Fernandez debtors to Chapter 7.
Citibank has an unsecured claim against Laser in the amount of
$11,164,539.56, which was objected to by the Chapter 7 trustee,
Noreen Wiscovich Rentas (“NWR”). Citibank also has a claim against
Corus Hardware, Corp. (“Corus”) of $11,164,539.56, of which
$4,050,342.00 was claimed as secured. Citibank had also sought the
conversion of Corus’ Chapter 11 proceeding to Chapter 7 and had
objected to the disclosure statement. Various other contested
matters have existed between Citibank and the Fernandez debtors,
which are not detailed in the Settlement Agreement.
In the adversary proceeding, NWR had objected to the
dischargeability of debts, sought avoidance of alleged transfers of
property and recovery of fraudulent conveyances. IST is a
defendant in this litigation.
In the Settlement Agreement, Citibank has agreed to accept
$7,000,000, to release Laser and all co-borrowers and guarantors
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(i.e. the Fernandez debtors, Corus, FTC and IST) from all
liabilities related to its claims. Citibank is also withdrawing
its motions to convert and will affirmatively vote for confirmation
of the plans of reorganization in the bankruptcy cases of the
Fernandez debtors and Corus.
The terms of the payment to Citibank are immediate payment of
$3,500,000.00 by all captioned debtors, FTC and/or IST, which will
reduce the claims against all estates by this amount. Laser will
also make a partial distribution to Citibank in the amount of
$500,000.00. This distribution, and a prior payment of $94,637.02
to Citibank, will be applied against the final dividend payable to
Citibank. The remaining balance to complete the $7,000,000.00
payment, will be paid by the Fernandez debtors, Corus, FTC and/or
IST in sixty equal monthly installments of $25,000.00, plus
interest at the prevailing prime rate. The Settlement Agreement
provides that in the event of default in the payment of two
installments, Citibank’s claim against the Fernandez debtors and
Corus will revert to the original amount claimed of $11,751,856.59,
less payments received, and will be considered non-dischargeable as
to the Fernandez debtors. Laser is also to receive $150,000.00,
from the Fernandez debtors, Corus and/or IST in exchange for
settlement of all claims and disputes.
The Court entered an order granting the Settlement Agreement
unless an objection was filed within twenty days. American
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Acquisition, L.L.C. (“American”), an unsecured creditor of the
Fernandez debtors, claiming to be owed $7,850,869.50, filed an
objection, alleging that the payment of $3,500,000.00, and the
subsequent installments, are prejudicial to the unsecured
creditors, if the funds are paid from the bankruptcy estate of the
Fernandez debtors and are greater than the distribution to other
unsecured creditors. American also contends that the
nondischargeability provisions, in the event of default, are unfair
and adversely discriminate against other unsecured creditors, since
Citibank’s claim would not otherwise be nondischargeable.
Citibank, NWR and the Fernandez debtors replied to the
objection in separate motions. Citibank contends that the
$3,500,000.00 payment is being made by IST, FT and/or Corus and
that the installment payments will be made by IST or Corus, less
the distributions from the liquidation of Laser. Citibank also
represents that if payments are made by the Fernandez debtors, they
will be limited or made in pari passu with the payments received by
other creditors in the same class. Citibank indicates that it has
conceded to a significant reduction of its claim, which inures to
the benefit of the other unsecured creditors. Citibank contends
that the nondischargeability provision must be considered in the
context of the complete Settlement Agreement and is only triggered
in the event of default. If the payments are made, the Fernandez
debtors will be released from the obligation to pay payment of any
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balance of the original debt.
NWR also represents that from the estate of Laser, Citibank
will receive the same percentage of its allowed claim, like every
other general unsecured creditor. NWR also points to the
significant reduction in Citibank’s claim, the benefit of the
injection of $150,000.00 into Laser’s estate and the otherwise
prolonged and expensive litigation costs.
The Fernandez debtors, who control Corus and IST, state that
the initial payment and the installments will be made by Corus and
IST and that if payments are made by them, they will not exceed
dividends to be received by other claimants in the same class. The
Fernandez debtors argue in favor of adoption of the
nondischargeability provision, because of the benefit they will
receive in being released from the balance of the original debt if
the payments are made.
At a hearing held on December 11, 2008, the Court granted
American ten days to supplement its objection and granted General
Electric Capital Corporation (“GECC”) until January 4, 2009 to
submit its position. The Court then took the matter under
advisement. American filed a submittal of citation after the
hearing.
On December 24, 2008, GECC, a creditor claiming to be owed
$2,537,663.00, filed an objection to the proposed agreement. GECC
argues that the Settlement Agreement does not indicate the amounts
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that will be paid by each of the debtors and the other parties and
thus, GECC is unable to evaluate whether the Settlement Agreement
is reasonable, fair or equitable and in the best interests of the
creditors of each estate. GECC objects to all parties being
jointly and severally liable for the entirety of the $7,000,000.00
obligation to Citibank. GECC notes that there is an objection to
Citibank’s claim in the bankruptcy case of the individual debtors
and that, if granted, the indebtedness to Citibank would be
eliminated. GECC contends that in the event of default, Corus
becomes liable for the entire debt, which would have a disparate
and inequitable impact on its creditors and that Citibank could
receive substantially more than its pro rata share of the Corus
estate. GECC also objects to payment of interest on Citibank’s
unsecured claim, since no interest payments are being provided to
similarly situated creditors of the estates. GECC opposes the
nondischargeability provisions as to the Fernandez debtors and
contends that the Settlement Agreement is inequitable since it
provides for interim distribution to Citibank without also
providing for interim distribution to other unsecured creditors.
GECC supplemented its objection to assert that it opposes any
contemplated source of payment from assets not identified on the
schedules and liabilities of any of the debtors, including a life
insurance policy issued on the life of Antonio A. Fernandez.
NWR and Citibank replied to GECC’s objection. NWR argues that
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the Settlement Agreement does not provide for joint and several
liability. Citibank reiterates the sources of payment, as argued
in its reply to American’s objection, discusses the life insurance
policy and argues that the standards for approval of the Settlement
Agreement have been met.
DISCUSSION
In deciding whether to approve a proposed settlement, the
Court begins with the principle that compromises are favored in
bankruptcy and are to be encouraged. In re Healthco Int’l, Inc.,
136 F.3rd 45, n. 5 (1st Cir. 1998). The four factors to be
considered in deciding whether to approve a compromise are:
(I) the probability of success in the litigation being
compromised; (ii) the difficulties, if any, to be
encountered in the matter of collection; (iii) the
complexity of the litigation involved, and the expense,
inconvenience and delay attending it; and (iv) the
paramount interest of the creditors and a proper
deference to their reasonable views in the premise.
In re Indian Motorcycle Co., Inc., 289 B.R. 269, 283 (B.A.P. 1st
Cir. 2003)(citing Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir.
1995)). “In other words, therefore, a compromise will be approved
when it is both ‘fair and equitable’ and in the best interests of
the estate.” 10 Collier on Bankruptcy ¶ 9019.02 (15th ed. rev.).
The Court concludes that the uncertainty of the litigation
between the debtors and Citibank weighs heavily in favor of the
approval of the Settlement Agreement. The Court is familiar with
all of the contested matters between these parties and concludes
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that it is highly unlikely that the debtors would prevail in their
objections to Citibank’s claims and achieve the result of
eliminating Citibank’s claims and status as a creditor. The
parties have engaged in extensive litigation in numerous contested
matters, which has come at great expense and has caused years of
delay. Given the history of these cases and a cursory review of
the ample dockets, it would be unrealistic to conclude that the
disputes between the debtors and Citibank could be expeditiously
and inexpensively resolved, with the debtors prevailing in all of
the litigation. The Court also notes that at one point, the
bankruptcy cases of the Fernandez debtors and that of Corus, were
on the verge of conversion to Chapter 7. The Court concludes that
the debtors, Citibank, NWR and IST reached an informed agreement,
after diligent investigation, that it would be prudent to eliminate
the inherent risks, delays and expense of prolonged litigation in
uncertain causes.
The Court also concludes that the interest of the creditors
and a proper deference to their views weighs in favor of approval
of the stipulation. Citibank is a large, if not the largest,
creditor in all of the cases. And of the many creditors in these
cases, only two have voiced objection. Notwithstanding, the Court
recognizes that both American and GECC have substantial claims and
are among the numerous creditors with multi-million dollar claims
against these estates. The Court has duly considered the
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objections of American and GECC and with all due respect to their
concerns that Citibank is receiving preferred treatment, to the
extent that it will receive interim distribution, interest and the
possible nondischargeability of its debt as to the Fernandez
debtors (in the event of default), the Court concludes that this
preferred treatment is adequately balanced by Citibank agreeing to
accept $7,000,000.00 in exchange for its $11,751,856.59 claim,
which will greatly benefit all unsecured creditors. Foregoing the
continued litigation expense will also benefit the unsecured
creditors. Moreover, with this resolution, the Court anticipates
the expeditious conclusion of these bankruptcy cases and the
attendant distribution to all other creditors.
The Court will not consider the specifics of the source of
funds. The payments will largely be made by a third party, IST,
who would not otherwise be subject to the jurisdiction of this
Court, except as a defendant in the adversary proceeding in Laser.
It is sufficient that the parties have represented that no
bankruptcy estate will be required to provide Citibank with more
than its pro rata share of estate assets. The Court concludes that
the Settlement Agreement does not provide for the joint and several
liability of all debtors for the entire debt to Citibank. Thus,
the Court concludes that approval of the Settlement Agreement, as
modified by the subsequent representations of the parties, is fair
and equitable and in the best interest of these estates.
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ORDER
WHEREFORE IT IS ORDERED that the Settlement Agreement is
APPROVED, as modified by the subsequent representations of
Citibank, the captioned debtors and NWR, to the effect that no
bankruptcy estate will be required to provide Citibank with more
than its pro rata share of estate assets. The objections by
American and GECC are DENIED.
SO ORDERED.
San Juan, Puerto Rico, this 31st day of March, 2009.
BY THE COURT:
s/ Gerardo A. Carlo
_______________________
GERARDO A. CARLO
U.S. Bankruptcy Judge
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