553 B.R. 179
1st Cir. BAP2016Background
- Debtor Pedro López-Muñoz owned 50% of Western Petroleum and wholly owned Hi Speed Gas Corp.; Western had issued surety bonds from USIC backed by Debtor's indemnity. Western ceased operations in 2013 and creditors pressed collection against the Debtor.
- In April 2013 Debtor caused: (1) Hi Speed and Debtor to each execute 20-year triple-net leases with Puma (large monthly rents and $125,000 advances), (2) sale of Debtor’s Station to Hi Speed (Hi Speed assumed the mortgage), and (3) transfer (donation) of Debtor’s Hi Speed shares to the Familia Trust (Debtor was sole beneficiary). These events occurred shortly before Debtor’s Oct. 2013 Chapter 11 filing.
- Debtor’s schedules and SOFA disclosed the transfers but misstated dates and initially omitted clear reference to the Puma leases and his sole-beneficiary status; USIC later learned of leases via investigation and deposition.
- USIC moved to appoint a Chapter 11 trustee under 11 U.S.C. § 1104(a)(1) (cause) and (a)(2) (in creditors’ interest), alleging pre-petition fraudulent transfers, post-petition omissions/misrepresentations, insider dealings, and a colorable estate claim against Hi Speed for lease proceeds.
- At a two-day evidentiary hearing the bankruptcy court credited Debtor’s testimony and CPA Barroso (for Debtor), who concluded the transfers had no material adverse effect on the estate because Puma rents were applied to mortgages and operating costs; USIC’s expert was limited to rebuttal and failed to contradict Barroso.
- The bankruptcy court denied USIC’s trustee motion; the BAP affirmed, finding ample factual findings supported the court’s credibility assessments and that USIC failed to carry its burden under § 1104(a)(1) or (a)(2).
Issues
| Issue | Plaintiff's Argument (USIC) | Defendant's Argument (López‑Muñoz) | Held |
|---|---|---|---|
| Whether "cause" exists under §1104(a)(1) to appoint a trustee based on fraud, dishonesty, or gross mismanagement | Pre‑petition transfers, post‑petition omissions/misstatements, insider transfers to trust and Hi Speed show fraudulent intent and mismanagement warranting a trustee | Transfers were legitimate efforts to protect rents for benefit of creditors, errors were inadvertent, and rescission and disclosures cure concerns | Denied — court found USIC failed to prove fraud/gross mismanagement; Debtor rebutted presumption and credibility findings supported no intent to defraud |
| Whether appointment is in creditors’ interests under §1104(a)(2) | Trustee should pursue turnover claims (approx. $119,500) and likely generate net benefit exceeding trustee costs | No colorable turnover claim proven; appointing trustee would impose substantial administrative cost and delay reorganization | Denied — court found USIC did not show benefits would outweigh trustee costs nor loss of creditor confidence or rehab prospects justifying trustee |
| Whether Puerto Rico presumption of fraudulent transfers (P.R. Laws tit. 31 §3498) shifts burden and was rebutted | §3498 creates a presumption of fraud for transfers for inadequate consideration; Debtor failed to overcome it | Debtor rebutted presumption with credible testimony and expert accounting showing no material estate loss | Held — court accepted presumption but found Debtor rebutted it; BAP found no clear error in that finding |
| Sufficiency and weight of expert evidence about monetary loss and diversion | USIC: CPA Villarini would show estate was harmed and funds diverted; absence of timely listing limited his testimony | Debtor: CPA Barroso credibly testified transfers caused no material estate loss and traced receipts to mortgages/expenses | Held — bankruptcy court credited Barroso; USIC’s expert failed to rebut; no clear error in giving Barroso decisive weight |
Key Cases Cited
- Martin v. Bajgar, 104 F.3d 495 (1st Cir. 1997) (discusses standards for trustee appointment and related creditor remedies)
- Marrama v. Citizens Bank of Mass. (In re Marrama), 445 F.3d 518 (1st Cir. 2006) (identifies objective indicia/badges of fraudulent intent using circumstantial evidence)
- Husky Int'l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (U.S. 2016) (holds that “actual fraud” includes fraudulent transfers)
- G-I Holdings, Inc. (In re G-I Holdings, Inc.), 385 F.3d 313 (3d Cir. 2004) (addresses burden and standards for appointing a chapter 11 trustee)