FROM THE BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT
Lugo Fiol, with whom Héctor Saldaña-Egozcue,
José A. Sánchez Girona, and Saldaña and
Saldaña-Egozcue, PSC, were on brief, for appellant.
S. Valle Castro, with whom Carmen D. Conde Torres and C.
Conde and Associates, were on brief, for appellee.
Howard, Chief Judge, Torruella and Barron, Circuit Judges.
BARRON, CIRCUIT JUDGE.
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
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.
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.
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.
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.
March 2013, López owned 100% of the shares of HSGC.
Muñoz, 544 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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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 $10, 000 a month
in rent from HSGC for the office space that he had leased to
HSGC. Id. The reduction reflected the fact that,
after the rescission, HSGC was managing only one gas station.
14 and 15, 2015, the Bankruptcy Court held an evidentiary
hearing on USIC's motion to appoint a trustee of the
bankruptcy estate pursuant to § 1104(a). At that
hearing, López testified as follows regarding the
reason for the transfer of the Mayagüez gas station to
HSGC and the transfer of the HSGC shares to the La Familia
Trust: "I could not pay the mortgage. We were losing
money, that's why we took the decision, and also to
protect the income."
then testified that, after he had transferred the
Mayagüez station to HSGC, he used the revenue that HSGC
received from Puma under its lease of the Mayagüez
station to make the payments for the mortgage on that
station. López also testified that, after the transfer
to HSGC of that station had been rescinded, he continued to
use that revenue to pay the mortgage on the Mayagüez
station. In addition, López testified that the
incorrect date on the disclosure of the transfer of the HSGC
shares was an "honest mistake, " and that the
incorrect identification of his children as the beneficiaries
of the La Familia Trust was the result of his thinking that
"at first I'm the beneficiary. The thing is that the
law of life is that I'm supposed to go first so at the
end they will be the beneficiary; that's why I answer
certified public accountant ("CPA"), Doris Barroso,
also testified at the evidentiary hearing. Barroso had
performed a valuation of the shares of HSGC. Barroso
explained that she based her valuation on audited financial
statements of HSGC that were dated June 30, 2013. Barroso
testified that HSGC had a negative book value, because
HSGC's liabilities exceeded its assets. Barroso also
testified that, during the time that HSGC owned both the
Mayagüez and Hormigueros stations, the operation of each
station created negative cash flow because HSGC's
expenses for each station exceeded the lease revenue that
HSGC received from Puma for each station. Barroso explained
in this regard that all of the lease revenue that HSGC
received from Puma was "used to pa[y] the . . .
mortgage, to pay the minimum . . . operating expense[s] that
they have, and their rent to Mr. Pedro López" for
the office space that HSGC leased from López.
addition, Barroso testified that she found no evidence of
fraud, diversion of funds, or hiding of assets in
López's bankruptcy filings. She explained that
López's filings regarding the two transfers
contained "no falsification of information" and
"no omission of information." Finally, Barroso
concluded that ...