523 B.R. 862
Bankr. M.D. Fla.2015Background
- Debtors Scrub Island Development Group Ltd. and Scrub Island Construction Ltd. operate a resort in the British Virgin Islands; they defaulted on roughly $110–122 million in loans from FirstBank Puerto Rico (the Bank).
- Partially constructed villas (notably Blue Water Traders and Linares/Foster) and a desalinization plant were critical assets; the Bank held first-priority liens on certain villas and had an option relating to the plant.
- Debtors alleged the Bank conspired with the Debtors’ project manager (Taitón) to thwart a third‑party note sale; the court found the Bank conspired and reserved remedy issues in an adversary proceeding.
- Debtors proposed and the court confirmed a complex chapter 11 plan offering two treatment options for the Bank: Option A (a $37.5M treatment mirroring a prior term sheet) and Option B (a §1111(b)–compliant treatment: a $122.5M secured claim paid over 30 years funded by annual payments, sinking fund proceeds, and shareholder/debtor contributions).
- The confirmed plan (inter alia) provides that Blue Water Traders and Linares/Foster will convey villas to Debtors while the Bank retains liens until sale and will be paid on sale; Debtors exercise a purchase option for the desalinization plant and Scrub Island Utilities consents; a sinking fund secures proceeds from future collateral sales.
- FirstBank appealed confirmation and sought a stay pending appeal arguing lack of jurisdiction, lack of statutory authority to alter its lien/contractual rights, and noncompliance with §1129(b)(2)(A). The bankruptcy court denied the stay.
Issues
| Issue | Plaintiff's Argument (FirstBank) | Defendant's Argument (Debtors) | Held |
|---|---|---|---|
| Jurisdiction over foreign/non‑debtor property | Court lacks authority over BVI property/non‑debtors; confirmation impermissibly affects foreign property | Court has jurisdiction under 28 U.S.C. §1334(e) over estate property abroad; plan modifies contractual rights and enjoins Bank from suing non‑debtors (not in‑rem control of foreign non‑debtors) | Court has jurisdiction; relief modifies contractual rights and enjoin suits against non‑debtors, not exercising in rem jurisdiction over foreign property |
| Statutory authority to alter Bank’s contractual and lien rights | Bankruptcy Code does not expressly authorize stripping liens or forcing substitute collateral | §1123(b)(6) and §105 grant broad authority to approve plan provisions not inconsistent with Code; Energy Resources supports equitable, plan‑necessary relief | Court may approve plan provisions that modify contractual rights if not inconsistent with the Code; Bank’s strict textual view rejected |
| Compliance with §1129(b)(2)(A) — lien retention / indubitable equivalent | Plan forces substitution of collateral and thus fails to let Bank retain liens or receive indubitable equivalent | Bank retains liens on villas until sale; sinking fund and other payments produce present value >= allowed secured claim; substitute collateral is not less valuable/volatile than original | Court found plan satisfies §1129(b)(2)(A); Bank unlikely to show clear error on appeal |
| Stay factors: irreparable harm, harm to Debtors, public interest | Immediate acquisition of assets would irreparably harm Bank’s lien rights and could moot appeal | Debtors will be irreparably harmed by delay: $18.5M capital infusion needed immediately or resort and reorganization will fail; public interest favors implementation | Stay denied — Bank unlikely to succeed; Debtors would suffer irreparable harm; public interest favors permitting confirmed plan to proceed |
Key Cases Cited
- United States v. Energy Resources Co., 495 U.S. 545 (1990) (bankruptcy courts may approve plan provisions not explicitly in Code when necessary to effectuate reorganization)
- In re Transit Group, 286 B.R. 811 (Bankr. M.D. Fla. 2002) (framework for evaluating third‑party releases/bar orders in chapter 11 plans)
- In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002) (factors for approving third‑party releases in unusual cases)
- AAL High Yield Bond Fund v. Deloitte & Touche, 361 F.3d 1305 (11th Cir. 2004) (addressed bar order issue in the context of class action settlement — not directly on §105 bar orders in bankruptcy)
- River East Plaza, 669 F.3d 826 (7th Cir. 2012) (substitute collateral must be comparable in value/stability to satisfy indubitable equivalent)
- In re McCarty, 69 B.R. 377 (Bankr. M.D. Fla. 1987) (rejecting plan that deprived creditor of lien on proceeds used to fund reorganization)