HECTOR JUAN FIGUEROA VINCENTY

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
IN RE: : CASE NO. 04-07370 (ESL)
, || HECTOR JUAN FIGUEROA VINCENTY,: CHAPTER 11
4 Debtor 2
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6 OPINION AND ORDER
7 This case is before the court upon the court’s order of June 15, 2005, to the debtor
8 to show cause why the case should not be converted to one under chapter 7 of the
9 Bankruptcy Code. Fox Sports Latin America Ltd. (“Fox”) has renewed its request that
; the case be dismissed.
10 Background
43 Debtor filed a voluntary petition under chapter 11 of the Bankruptcy Code on July
14 13, 2004. According to debtor, his bankruptcy filing was precipitated by the dismissal of
1 the bankruptcy case of his corporation, Sport International Inc., case no. 03-09956, on
6 June 15, 2005, based upon this court’s finding that Sport International Inc. is not a duly
; organized corporation under the laws of the Commonwealth of Puerto Rico.'
49 Fox filed a motion requesting dismissal of this case on October 26, 2004, and
20 renewed their request for dismissal on December 20, 2004. On January 4, 2005, the court
21 entered an order directing the debtor to show cause within twenty days why the case
aa should not be dismissed for bad faith filing and lack of a reasonable likelihood of
; rehabilitation. Debtor filed an answer to the motion(s) to dismiss on January 25, 2006,
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96 ‘Sport International Inc. filed a voluntary petition under chapter 11 of the Bankruptcy
Code on September 11, 2003.

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and corrections thereto on January 26, 2006.
1 Debtor’s attorney filed a motion resigning legal representation on January 31,
2 2005. An application to employ new attorneys was filed on March 2, 2005, and an order
° approving said application was entered on April 11, 2005.
Fox filed a motion requesting that their motion to dismiss be granted on May 5,
6 2005, and the court scheduled a hearing for June 15, 2005. At the conclusion of the
7 hearing, the court entered an order finding that the petition was not filed in bad faith.
8 However, in light of the following findings: (1) the debtor had sold substantially all of
9 his properties and used the proceeds to fund his operations, with a balance of
; approximately $20,000.00; (2) the only remaining real property, debtor’s residence, is
0 over-encumbered; (3) debtor’s only assets are his art collection and potential cause of
13 action against Fox; (4) debtor’s testimony as to future contracts was speculative; and (5)
14 debtor’s monthly operating reports do not reveal income; the court concluded that there is
"5 ongoing diminution of the estate and no reasonable likelihood of rehabilitation.
° Accordingly, the court ordered the debtor to show cause within twenty days why the case
; should not be converted to chapter 7.
49 Debtor argues in his motion to stay conversion that the case should not be
20 converted because: (1) he is committed to paying all of his bona fide debts through
21 chapter 11 reorganization; (2) he is opposed to liquidation under chapter 7; (3) he is
- involved in several projects that will result in his earning enough income to pay all of his
; bona fide debts; and (4) he is confident that the district court will reverse this court’s
95 finding that his business is not a corporation under the laws of Puerto Rico, resulting in
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the reinstatement of Sport International Inc.’s bankruptcy petition and the return of
$400,000 to the estate of Sport International Inc., which will then benefit the creditors of
the estates of both Sport International Inc. and debtor, without the need to liquidate either
one.

Fox argues that the status of the appeal in the Sport International, Inc. case is
irrelevant to debtor’s bankruptcy case and will have no impact on the trust funds released
to Fox in the California case because they result from the California court’s determination
that debtor is personally liable to Fox for his breach of the license agreement for the 2002
Copa Libertadores soccer tournament.

Discussion

Section 1112 of the Bankruptcy Code provides that upon request of a party in
interest, and after notice and a hearing, the court may convert a case under chapter 11 to a
case under chapter 7, or dismiss the case, whichever is in the best interest of the creditors
and the estate, for cause, including “continuing loss to or diminution of the estate and
absence of a reasonable likelihood of rehabilitation”. 11 U.S.C. § 1112(b)(1).’ The
decision as to whether to convert a case from chapter 11 to chapter 7 is one which is
firmly within the court’s discretion. 7 Lawrence P. King, et al., Collier on Bankruptcy

{ 1112.04 (15 ed. rev’d 2005); In re Consolidated Pioneer Mortgage Entities, 248 B.R.

368 (9" Cir. BAP 2000). “In order to avoid the costs of chapter 11 in cases in which they

Section 1112(b) was amended by the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23 § 442 (Apr. 20, 2005), effective for
all cases filed on or after October 27, 2005; hence, the amended provisions to not apply
herein.

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are not justified, section 1112(b) was designed to provide the court with a powerful tool
to weed out inappropriate chapter 11 cases at the earliest possible stage.” Collier,
§ 1112.04[2] at 1112-23.

In determining whether a case is “appropriate” for chapter 11 or not, the court
must first examine the concept of “cause”, then examine the limits of its discretion to
refrain from converting or dismissing a case even if cause exists. As to the former,

Collier notes “each of the general categories of cause enumerated in the statute involves a

situation in which it is typically unlikely that the benefits of reorganization will be
achieved within a reasonable amount of time or at an acceptable cost’; in other words, the
circumstances in which it is unreasonable for the chapter 11 case to proceed. J 1112.04[3]
at 1112-24. As to the latter, the commentator observes “the court may exercise its
discretion and deny relief if mitigating factors demonstrate that, notwithstanding the
presence of cause, it remains likely that the benefits of reorganization will be achieved at
an acceptable cost consistent with the requirements and limitations of the Code.” Id. at
1112-25. Thus, in cases where there is a continuing loss to, or diminution of, the chapter
11 estate, and an absence of a reasonable likelihood of rehabilitation of the chapter 11
debtor, it is appropriate to convert the case to chapter 7 or dismiss it, because it is
unlikely that the debtor’s reorganization will be achieved in a reasonable amount of time
or at a reasonable cost, unless the court finds that there are mitigating circumstances
which show that reorganization can be achieved within acceptable parameters.

The standard set forth in § 1112(b)(1) has two basic requirements: first, whether

the debtor has a negative cash flow or declining asset values, and second, whether there is

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a reasonable likelihood that the debtor’s losses can be stemmed and the business placed
back on a solid financial footing within a reasonable amount of time. An examination of

debtor’s operating reports yields the following information:

Date Cash on Hand Income Disbursements Profit/Loss
07/04? $12,073.78 $2,511.53* $11,100.87 $3,484.44
08/04" $3,484.44 $9,366.35° $7,676.15 $5,174.64
09/04 $100.00 $4,920.00’ $1,659.40 $3,360.60
10/048

11/04 $24,239.23 $0 $8,055.03 $16,184.20
12/04 $16,190.69 $10,000.00? $5,947.00 $20,243.69
01/05 $20,243.69 $30,386.94" $13,930.14 $36,700.49
02/05 $12,813.65 $112,933.58!! $16,406.91 $109,340.32

3Debtor filed two operating reports, dkts. #13 and 50. The first listed cash on hand of
$1,844.68, no income, and disbursements of $7,581.76, for a loss of $5,737.08. The text
of this opinion includes the figures from the second operating report filed.

“Income from salary and commissions.

Debtor filed two operating reports for this period, dkts. #34 and 51. The first listed cash
on hand of $100.00, income of $2,500, disbursements of $6,685.16, and a loss of
$4,085.16. The text of this opinion includes the figures from the second operating
report.

‘Income from salary and commissions.

Debtor notes this income is from loans from his wife’s brother, sister and credit card.
8No operating report was filed for this period.

*Income received as deposit from sales contract for condominium in Hato Rey.

‘Part of income, $6,500.00, from the sale of artwork and $23,886.94 from the sale of the
condominium in Hato Rey.

"Debtor filed two different operating reports for this period. Income includes $23,886.94
from the sale of condominium in Hato Rey, $87,746.64 from the sale of property on
Calle Sol, and $1,300.00 in casino winnings.

5

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03/05 $108,040.37 $800.00 $38,840.85 $69.999.52
04/05 $70,978.15 $325.00" $51,941.88 $19,361.27
1 05/05 $19,361.27 $398,500.00"* $11,885.67 $405,975.60
06/05 $405,975.60 $1,819.58" $404,806.38 $2,988.80
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3 No operating reports have been filed since June, 2005. The reports which have been filed
4 demonstrate a consistent negative cash flow since the inception of this case. The
5 debtor’s only income since September, 2004 has been loans, refunds, casino winnings,
6 and proceeds from the sale of art and real property. Further, as the court recognized at the
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hearing on June 15, 2005, the value of debtor’s assets has declined since the
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9 commencement of the case as all unencumbered property has been sold. Accordingly, the
10 court finds that the facts of this case establish a continuing loss to, and diminution of, the
1 debtor’s estate.
12 However, the court must consider whether there is any reasonable prospect for
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reversing the debtor’s losses and revitalizing the debtor as a viable business enterprise. In
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+5 his response to the order to show cause, debtor’s only argument is that if the California
16 district court returns the $400,000.00 in trust funds it ordered distributed to Fox to be
17 returned to Sport International, the creditors will be benefitted and the estate(s) will not
18 have to be liquidated. Setting aside the possibility of that turn of events, even if it were to
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happen, the same does not establish that debtor’s business can be successfully
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Income from casino winnings.
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3Source of income not included in operating report.
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M4Tncome includes $500.00 loan reimbursement and $398,500.00 from what turned out to
24 be a forged check.
2 Income from health insurance refund.
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rehabilitated. The standard is whether the debtor’s business prospects justify continuance

of the reorganization effort. Collier, § 1112.04[5][a][ii]. The court must determine

whether the causes of the debtor’s continuing losses can be corrected and whether the
debtor is capable of remedying the problem - which, in most cases, depends on whether
the debtor has formulated a reasonably detailed business plan, or can do so within a
reasonable amount of time. Id. The debtor’s opportunity to reorganize should be
balanced against the protection of the creditors and the needs of the chapter 11 system as
a whole. Id. “However honest in its efforts the debtor may be, and however sincere its
motives, the District Court is not bound to clog its docket with visionary or impractical
schemes for resuscitation.” Id., citing Tennessee Publishing Co. v. American Nat’| Bank,
299 U.S. 18, 22, 57 S. Ct. 85, 81 L. Ed. 13 (1930).

The court does not doubt that debtor is committed to repaying his bona fide
creditors; it has already found that the petition was not filed in bad faith. Nor does the
court doubt that the debtor opposes conversion. However, the debtor has not established
that he has the means to rehabilitate his business nor a plan for doing so. He has not
presented to this court that his business prospects justify the continuance of his chapter 11
case. There is no indication that any potential benefits of reorganizing debtor’s business
affairs under chapter 11 will be achieved within a reasonable amount of time or at an

acceptable cost to the creditors and the bankruptcy system.

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Conclusion
The court finds that it is in the best interest of the estate and the creditors to
convert this proceeding to one under chapter 7 of the Bankruptcy Code.
SO ORDERED.

In San Juan, Puerto Rico, this 20" day of January, 2006.

ENRIQUE S. LAMOUTTE
United States Bankruptcy Judge