EL COMANDANTE MANAGEMENT COMPANY LLC

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1 IN THE UNITED STATES BANKRUPTCY COURT

9 FOR THE DISTRICT OF PUERTO RICO

3 || IN RE: CASE NO. 04-10938 (ESL)

4 EL COMANDANTE MANAGEMENT CHAPTER 11

5 || COMPANY, LLC, et al.,

(Jointly Administered)

6 Debtors.

7

8 OPINION AND ORDER

9 This case came before the court on November 16, 17 and 20, 2006, for a hearing to
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consider the confirmation of the Second Amended Joint Plan of Reorganization for Debtors and

11 .
b Debtors-in-Possession El Comandante Management Company, LLC (““ECMC”), Housing
3 Development Associates, S.E. (“HDA”), and El Comandante Capital Corp. (“ECCC”) dated

14 || August 4, 2006, filed by Caribbean Thoroughbred Racing Company, Inc., (“the Caribbean’s

15 || Plan”) (Docket No. 1431) and subsequently modified on November 15, 2006 (Docket No. 2095).

16 On December 5, 2006 the court granted ECCC’s motion for voluntary conversion to Chapter 7 of

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the Bankruptcy Code, therefore, Caribbean’s Plan shall be considered as a joint plan only as to
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19 debtors HDA and ECMC. (Docket No. 2172). The court hereby allows Caribbean’s non-material

99 || modifications of its Second Amended Joint Plan filed on November 15, 2006 as being for the

21 || benefit of creditors. (Docket No. 2095),

22 The following objections to the confirmation of Caribbean’s Plan were filed and heard:

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Opposition of Wells Fargo Bank, NA in its capacity as Indenture Trustee, (1) to Caribbean

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Thoroughbred Racing Company, Inc.’s Restated Second Amended Joint Plan of Reorganization

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96 || for Debtors and (2) to Caribbean’s Statement Regarding Requirements of Section 1129(a) (the
27 || “Indenture Trustee’s Opposition”) (Docket No. 1954), Treasury Department’s Objection To

28 | Confirmation Of Caribbean Thoroughbred Racing Company, Inc.’s Restated Second Amended.

AUTHENTICATED /
U.S. GOVERNMENT
INFORMATION
GPO

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Joint Plan of Reorganization (Docket No. 1947); Motion of Camarero Race Track Corp. to Join
in and Support the Objections of the Indenture Trustee to (I) Debtors’ Plan and (IT) Caribbean’s
Plan; and, the Horse Racing Administrator’s position (Dkt, No. 1942), On November 20, 2006
Puerto Rico Horses Race Track, Inc. withdrew its objection to the confirmation of Caribbean’s
Plan filed on October 20, 2006, Docket No. 1944. (Docket No. 2109).
Jurisdiction
This court has jurisdiction to entertain Caribbean’s request to confirm its proposed plan,

pursuant to 28 U.S.C. §§ 1334 and 157. This is a core proceeding under 28 U.S.C.

§ 157(b)(2)(L), and venue of debtors’ jointly administered cases is proper in the District of
Puerto Rico, pursuant to 28 U.S.C. § 1408(a), and the Order entered by the United States
Bankruptcy Court for the District of Delaware, on October 22, 2004, wherein venue was
transferred to this District, pursuant to 28 U.S.C. § 1412. (Docket No. 42).

Factual and Procedural Background

On October 15, 2004, El Comandante Management Company, LLC (“ECMC”), Housing
Development Associates, SE (“HDA”), and El Comandante Capital Corp. (“ECCC”)
(collectively the “debtors”), filed three separate petitions under chapter 11 of the Bankruptcy
Code before the United States Bankruptcy Court for the District of Delaware. On October 20,
2004, debtors moved the court to allow the joint administration and procedural consolidation of
the three separate petitions (Docket No. 8). Debtors’ request for a joint administration and
procedural consolidation was granted by the court on October 22, 2004. (Docket No. 36). Upon
the request of the Treasury Department of the Commonwealth of Puerto Rico, and the Horse
Racing Administrator of the Puerto Rico Horse Racing Industry and Sport Administration, on

October 22, 2004 the Delaware Bankruptcy Court granted the transfer of venue to the United

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States Bankruptcy Court for the District of Puerto Rico, (Docket No. 42).

On August 4, 2006, the court entered a Joint Solicitation Procedures Order for all three
plans filed in this case, that is, the secured creditor (Indenture Trustee) plan, the debtors’ plan and
Caribbean’s Plan. On December 5, 2006, the court granted ECCC’s motion to convert to chapter
7.

The court will address in this order the contested issues as they were presented in the
motions and hearings concerning the August 4, 2006 plan, as modified.

Caribbean’s Plan

Caribbean is a domestic corporation organized and authorized to do business under the laws
of the Commonwealth of Puerto Rico on September 1, 2005. Its current shareholders and directors
are: Charles A. Cuprill Hernandez, Pedro A. Feliciano Benitez, Luis A. Rivera Siaca, J. Adalberto
Roig Ferre, The Casper Callen Trust, with a combined share of 63.79314%, and Puerto Rico Horses
Race Track, Inc. with a share of 36.20685%. Caribbean was formed for the purpose of purchasing
debtors’s assets, operate the racetrack and assume its control and operation if finally granted a
license by the Racing Board. Caribbean’s Plan is premised on the sale of debtors’ assets upon
confirmation of the proposed plan, pursuant to the terms of the Asset Purchase Agreement. A
license to operate El Comandante Racetrack is not a condition or requirement for Caribbean to
purchase debtors’ assets. The purchase price for the acquisition of debtors’ assets by Caribbean, has
been increased to $83,375,000.00, which will be derived from a $75,750,000.00 loan by
Westernbank, and capital contributions to be provided by Caribbean’s shareholders in the amount

of $14.5 million.! Debtors’ assets to be sold include the racetrack, the real property, equipment,

* On November 17, 2006, during the hearing on confirmation of Caribbean’s Plan, Mr.
Charles A. Cuprili Hernandez testified that Caribbean’s shareholders would make a capital call in
the event of a shortfall if all contingency claims are allowed, in order to pay all creditors in full in

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books and records, intellectual property, supplies, permits (to the extent such are transferable and
assignable), and goodwill. Caribbean’s Plan provides for payment in full to all creditors.

In support of the confirmation of their Plan Caribbean presented the following testimony: Mr.
Charles A. Cuprill, president of Caribbean, CPA Jose A. Monge Robertin, Mr. Stanley Pinkerton,
Vice President and Chief Financial Officer of ECMC and Mr. Gabriel Montanez, Vice President
of Westermbank’s Business Credit Division. On rebuttal the Indenture Trustee presented the expert
testimony of Mr. Jeffrey Sutton from Mahoney, Cohen & Co., Liquidation Analysts.

Applicable Law and Discussion

Section 1 128(a) of the Bankruptcy Code requires that an actual hearing on confirmation of
a plan be held. Section 1128(b) of the Code provides that any party in interest may object to the
confirmation ofaplan. Section 1109(b) of the Code provides a nonexclusive definition of party in
interest.2 A party may object to the treatment of its claim under a proposed plan, regardless of
whether the claim is impaired or unimpaired. “An impaired creditor, for example, always has
standing to object to its treatment under the best interest of creditors’ test. Even if the plan declares
a certain creditor to be unimpaired, that creditor should have standing to contest that categorization.”
Collier on Bankruptcy, § 1129.02[3].

In the instant case, the confirmation hearing on Caribbean’s Plan was held on November 16,

accordance with Caribbean’s Plan. No other evidence was presented supporting Mr. Cuprill’s
statements. No written document or testimony of the other shareholders was submitted. In fact, Mr.
Cuprill testified that the agreement among the shareholders to contribute additional funds if
necessary was not reduced to writing. This court finds that Mr. Cuprill’s testimony alone, in this
regard, is not sufficient to establish that in fact additional funds will be provided by Caribbean’s
shareholders if need be.

* 11 ULS.C. § 1109(b) provides that: “A party in interest, including the debtor, the trustee,
a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder,
or any indenture trustee, may raise and may appear and be heard on any issue in a case under this
chapter.”

-4.

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17 and 20, 2006, after due notice to all creditors and parties in interest. The objections to
confirmation of Caribbean’s Plan were also heard on the same dates.

Section 1129 of the Bankruptcy Code governs the requirements for confirmation of a
proposed chapter 11 plan. Section 1129(a) specifically provides that a plan shall be confirmed only
if all the requirements are met. The proponent of a plan has the burden of showing that the plan
complies with all the requirements of section 1129(a) of the Code. Ifall classes do not accept the
plan, then, it is a non consensual plan, and the proponent must show that the plan meets the
requirements of section 1129(a), other than section 1129(a)(8), and section 1129(b). “In either
situation, the plan proponent bears the burden of proof by a preponderance of the evidence.”
7 Lawrence P. King, Collier on Bankruptcy, § 1129.02[4], 15" Revised Edition 2005.

The members of the impaired Classes 2 and 5 in HDA, and Classes 2 and 5 in ECMC of
Caribbean’s Plan, rejected the same, thus, if all requirements of 1129(a), except for 1129(a)(8), are
met, the requirements of the cram down provisions of Section 1129(b) become applicable as to the
rejecting classes. (See, Voting Tabulation, Docket No. 1865 Exhibits C-1, C-2).

Requirements of 11 U.S.C. § 1129(a)

1. Section 1129(a)(1) requires that the plan complies with all applicable provisions of the
Bankruptcy Code. The Indenture Trustee allege that the plan fails to meet the requirements of
1129(a)(1) because it fails to comply with section 1122 by the improper separate classification of
the bondholders’ deficiency claim from the other general unsecured creditors. It should be noted that
even though the bondholders are classified separately from the other unsecured creditors, all

unsecured creditors will receive the same treatment; they will be paid in full. See, Informative

Motion filed by Caribbean on August 15, 2006 (Docket No. 1497), Indenture Trustee’s Objection

to Informative Motion filed on August 15, 2006 (Docket No. 1501), Caribbean’s Reply filed on

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August 15, 2006 (Docket No. 1503) and Order entered on August 16, 2006. (Docket No. 1511).

The improper classification of the bondholders’ deficiency claim was also raised by the
Indenture Trustee as an objection to the disclosure statement, on April 6, 2006 (Docket No. 1047)
and April 21, 2006. (Docket No. 1084). Caribbean filed a response to the objection on April 22,
2006. (Docket No. 1090). In the Opinion and Order entered on May 30, 2006, approving the
disclosure statement submitted by Caribbean, this court expressed that the classification may be
permissible upon the particular circumstances of this case and that the Indenture Trustee is not
foreclosed from renewing its objection as one to the confirmation of the plan.

In its response to the Indenture Trustee’s objection, after acknowledging that the separate
classification of the Indenture Trustee’s claim is for the purpose of facilitating reorganization and
not for abusive or manipulative purposes, Caribbean cited in part the case of Inre Gato Realty Trust
Corp., 183 B.R. 15, 23 (Bankr. D. Mass. 1995), as follows:

This Court is unable to find an “unlawful purpose” in the act of separately classifying a

claim holding rights greatly in excess of other unsecured creditors. Nor does this court

find such a classification to be an improper manipulation. A far better example of
manipulation can be found in the failure of a deficiency claim holder to exercise a §

1111(b) election, not because it desires the same treatment afforded unsecured creditors,

but because it is certain that the combination of its deficiency claim with the claims of

other unsecured creditors will be the death knell of the plan. The obvious drafting goal of

every Chapter 11 debtor is to gain approval of a plan. A debtor's attempt to satisfy a

requirement of confirmation, that is § 1129(a)(10), by separately classifying claims with

decidedly different rights should not be the target of criticism.

The motivation for Caribbean to separately classify the bondholders’ deficiency claim

was to obtain a confirmable plan as it knew that the Indenture Trustee had clearly manifested its

opposition to confirmation.

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The statutory provision governing the classification of claims or interests is set forth in
section 1122:

(a) Except as provided in subsection (b) of this section, a plan may place a claim or an

interest in a particular class only if such claim or interest is substantially similar to the

other claims or interests of such class.

(b) A plan may designate a separate class of claims consisting only of every unsecured

claim that is less than or reduced to an amount that the court approves as reasonable and

necessary for administrative convenience.
11 USC § 1122.

The debtor may classify similar claims or interests in a particular class only if they are
substantially similar to the claims and interests of such class. 11 USC § 1122(a). The plan may
also designate an administrative convenience class consisting only of every unsecured claim that
is less than or reduced to an amount, for example claims of $1,000.00 or Sess, that the court
approves as reasonable and necessary. 11 USC §1122(b). But aside from this separate
classification of unsecured claims specifically allowed by the Bankruptcy Code, the general rule
in our circuit is that “all creditors of equal rank with claims against the same property should be

placed in the same class.” Granada Wines, Inc. v. New England Teamsters and Trucking Industry

(In re Granada Wines, Inc.), 748 F.2d 42, 46 (1* Cir, 1984)(citations omitted), In re Greystone UT

Joint Venture, 995 F.2d 1274, 1278 (5" Cir. 1991) (“One cannot conclude categorically that §
1122(a) prohibits the formation of different classes from similar types of claims. But if § 1122(a)
is wholly permissive regarding the creation of such classes, there would be no need for § 1122(b)
specifically to authorize a class of smalier unsecured claims, a common feature of plans in
reorganization cases past and present. The broad interpretation of § 1122(a) ... would render §
1122(b) superfluous, a result that is anathema to elementary principles of statutory

construction.”). The Granada Wines court further provided that “separate classification for

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unsecured creditors are only justified where the legal character of their claims is such as to

accord them a status different from the other unsecured creditors ...”. Id. The Granada Wines

court rejected the separate classification of an unsecured claim for “withdrawal liability” under

the Multiemployer Pension Plan Amendments Act of 1980 holding that the difference between

the withdrawal liability claim and the other unsecured claims affected only the allowable amount

of the claim and not its legal nature. Granada Wines, 748 F.2d at 47. The question here is,

whether the legal nature of a deficiency claim, such as the bondholders’ in this case, accords
them a different status from the other unsecured claims, and more precisely, whether the
bondholders’ unsecured deficiency claim is “legally different” from that of other unsecured
claims because it arises statutorily pursuant to 11 USC § 1111{b), when an undersecured creditor
has the option to elect to have its claim treated as fully secured.

The bankruptcy courts within the First Circuit have adopted different positions on this

matter, while acknowledging that Granada Wines is the controlling authority on claim

classification in this circuit. In the case relied on by Caribbean, Gato Realty, the court began its
discussion by stating that the majority of courts, including the courts in that district, have denied
confirmation of plans that separately classify deficiency claims from other general unsecured
claims. Gato Realty, 183 B.R. at 20 citing Boston Post Road, Ltd. Partnership, 21 F.3d 477 (2d

Cir. 1994); John Hancock Mut. Life Ins. Co. v. Rt. 37 Bus. Park Assocs., 987 F.2d 154 (3rd

Cir.1993); In re Lumber Exch, Bldg. Lid. Parinership, 968 F.2d 647 (8th Cir.1992); In re Bryson

Properties XVIU, 961 F.2d 496 (4th Cir.1992), cert. denied, 506 U.S. 866, 113 S.Ct. 191, 121

L.Ed.2¢ 134 (1992); In re Greystone IM] Joint Venture, 948 F.2d 134 (5th Cir.1991), as amended

following reh'g en banc, 995 F.2d 1274 (Sth Cir.1991), cert. denied, --- U.S. ----, 113 S.Ct. 72,

121 L.Ed.2d 37 (1992); In re Barney & Carey Co., 170 B.R. 17 (Bankr. D. Mass. 1994); In re

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Cranberry Hill Associates Ltd. Partnership, 150 B.R. 289 (Bankr. D. Mass. 1993); In re
Cantonwood Associates Ltd. Partnership, 138 B.R. 648 (Bankr. D. Mass. 1992); In re L.G. Salem
Lid. Partnership, 140 B.R. 932 (Bankr. D. Mass. 1992); Collier on Bankruptcy { 1122.03[6][c] p.
1122-30. The Gato Realty court explains that the reasoning of the majority approach rejects the
notion that § 1111(b) makes a deficiency claim different from other general unsecured claims,
aud rejects separate classification of unsecured claims solely to create an impaired assenting
class. Gato Realty, 183 B.R. at 20 citing Boston Post Road, Lid. Partnership, 21 F.3d 477.
However, the Gato Realty court determined that a “deficiency claim subject to §1111(b) enjoys
the right to assume a different rank, status and character than other unsecured creditors against
property of the estate” and therefore can be separately classified from other unsecured creditors.
Gato Realty, 183 B.R. at 21. Judge Boroff’s reasoning is that the deficiency claimants will
always vote in the interest of the secured claim, so on the principles of basic voting democracy it
does not make sense to have a claimant with that different motivation to be in the same class as

the other claimants. Gato Realty, 183 B.R. at 22; See also, Beal Bank, S.S8.B. v. Waters Edge

Lid. Partnership, 248 B.R. 668, 691 (D. Mass., 2000).

In the often cited case of Phoenix Mut. Life Ins. Co. v. Greystone ITI Joint Venture (In re

Greystone II Joint Venture), 995 F.2d 1274 (5" Cir. 1991), followed by the majority bankruptcy
courts in our circuit, the court entertained a situation very similar to the one before us. In that
case, the holder of a nonrecourse mortgage was undersecured, and pursuant to 11 USC § 1111(b)
the nonrecourse mortgage was automatically converted to recourse giving the mortgagee two
claims; one secured and the other unsecured. Anticipating that the mortgagee would not vote in
favor of the plan because of its opposition to the reorganization, the debtor hoped to confirm its

plan of reorganization by separately classifying the deficiency claim, comply with the

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requirement of 11 USC § 1129(a)(10) by getting the acceptance of the unsecured class (an
impaired class), and requesting the confirmation pursuant to the cram down provisions of
1129(b). On the petition date, the debtor, Greystone, owed the mortgagee approximately
$9,325,000, trade creditors approximately $10,000, and taxing authorities approximately
$145,000. The mortgagee’s secured claim was valued at $5,825,000, the appraised value of the
office building serving as collateral, leaving the mortgagee an unsecured deficiency of
approximately $3,500,000, In Greystone the Fifth Circuit Court of Appeals cited the one clear
rule that emerges from the case law on § 1122 claims classification: “thou shall not classify
similar claims differently in order to gerrymander an affirmative vote on a reorganization plan.”
Greystone IIL, 995 F.2d at 1279. Citing to the Sixth Circuit, the Greystone court observed “[t]here
must be some limit on a debtor’s power to classify creditors in such a manner ... Unless there is
some requirement of keeping similar claims together, nothing would stand in the way of a debtor
seeking out a few impaired creditors (or even one such creditor) who will vote for the plan and
placing them in their own class.” Id. In rejecting the argument that the § 1111(b) election makes

the deficiency claim legally different, the court expressed the following:

The purpose of § 1111(b) is to provide an undersecured creditor an election with respect
to the treatment of its deficiency claim. Generally, the creditor may elect recourse status
and obtain the right to vote in the unsecured class, or it may elect to forego recourse to
gain an allowed secured claim for the entire amount of the debt. If separate classification
of unsecured deficiency claims arising from non-recourse debt were permitted solely on
the ground that the claim is non-recourse under state law, the right to vote in the
unsecured class would be meaningless. Plan proponents could effectively disenfranchise
the holders of such claims by placing them in a separate class and confirming the plan
over their objection by cramdown. With its unsecured voting rights effectively
eliminated, the electing creditor's ability to negotiate a satisfactory settlement of either its
secured or unsecured claims would be seriously undercut. It seems likely that the creditor
would often have to “elect” to take an allowed secured claim under § 1111(b)(2) in the
hope that the value of the collateral would increase after the case is closed. Thus, the
election under § 1111(b)} would be essentially meaningless. We believe Congress did not
intend this result.

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1 | Greystone I[f, 995 F.2d at 1280. Lastly, the Greystone court entertained the argument, also made

2 in this case, that the Bankruptcy Code’s policy favors reorganization, although resulting in a
3
violation to §1122 by gerrymandering the plan vote in order to obtain a §1129(b) cramdown
4
5 confirmation.
6 Policy considerations do not justify preferring one section of the Code, much less
elevating its implicit “policies” over other section, where the statutory language draws no
7 such distinctions... If Phoenix’s unsecured claim were lower and the trade debt were
higher, or if there were other impaired classes that favored the plan, a cramdown plan
8 would be more realistic. That Greystone’s cramdown plan may not succeed on the facts
9 before us does not disprove the utility of the cramdown provision.
10 |} Id.
11 In the case of National/Northway Limited Partnership, 279 B.R. 17 (Bankr. D. Mass.
12
2002) the court provided a summary of several opinions from bankruptcy courts in this circuit,
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4 written on this subject. The court, agreeing with the majority, concluded that a deficiency claim
15 || may not be separately classified from the other unsecured creditors. Judge Rosenthal in

16 || National/Northway agreed with Judges Goodman in In re Cantonwood, 138 B.R. 648, Hillman in

17 || Inre L.G. Salem Ltd Partnership, 140 B.R. 132, and Kenner in In re Cranberry, 150 B.R. 289 and

18 concludes that their decisions represent the approach that the First Circuit would adopt if faced
19

with this issue. The court expressed that “[g]errymandering is still unacceptable, and in this
20
1 circuit at least, because section 1122 remained unchanged, unsecured claims, whether trade or

37 |; deficiency claims, must be classified together.” National/Northway, 279 B.R. at 29.

23 After a careful review of the different opinions discussing this matter, this court agrees
24 | with the majority and rejects the position that the right to make an election under 1111(b) is

°° sufficient to justify separate classification of the undersecured creditor’s recourse claim, as there
a is no legal distinction between the deficiency claim and the other unsecured claims. The

9g || deficiency claim and the general unsecured creditors are treated equally, that is, both will be paid

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1 || in full. Thus, they should be placed in the same class. To classify the deficiency claim

z separately is only intended to obtain an accepting class.’ Therefore, Caribbean’s Plan improperly

classifies the bondholders’ deficiency claim.

5 2. Section 1129(a)(2) requires that the proponent of the plan complies with the applicable

6 || provisions of the Code. The disclosure and solicitation requirements are not challenged and the

7 {| court finds that they have been fully met.

8 3. Section 1129(a)(3) requires that the plan be proposed in good faith and not by means

? forbidden by law. A “good faith plan” is “one which complies with and satisfies the goal of
| reorganization.” Collier on Bankruptcy, ¥ 1129.03[3][a][ii]. “Section 1129(2)(3) speaks only to
12, || the proposal of a plan and does not address acceptance of such plan. Bad faith in the solicitation
13 || process seems to have been given over to section 1126(e) which recognizes the possibility of a
14 || bad faith acceptance.” Id. The plan must be viewed in light of the totality of the circumstances.
IS Collier on Bankruptcy, § 1129.03[3][a][iti][A]. Good faith has been interpreted to mean “a
. reasonable likelihood that the plan will achieve a result consistent with the objectives and
1g || Purposes of the Bankruptcy Code.” In re Madison Hotel Associates, 749 F.2d 410 (7" Cir. 1984).
19 The Indenture Trustee argues that Caribbean’s Plan does not treat the bondholders in a
20 || fair way because it “(i) proposes to pay the Indenture Trustee less than the amount to which it is
21 entitled to receive as a distribution for its allowed secured claims and makes no provisions for the
. payment in full on the effective date as require (sic) under Section 1129(b); (ii) fails to propose
' fair distribution or any payment on the Indenture Trustee’s unsecured claims, and improperly and
95 || arbitrarily classifies the deficiency claims and direct unsecured claim against Debtor ECMC and
26
27 3? The beneficial holders have expressly voted against confirmation of Caribbean’s Plan, even

though it pays more to the deficiency claims. Had the deficiency claimants voted to accept the Plan,

28 || then the separate classification may have been irrelevant.

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claims against Debtor HDA in classes treated as subordinate in priority to the general unsecured
creditors and attempts to cap the deficiency claims despite no such cap on the proposed payment
of other general unsecured claims; (iit) unfairly discriminates against the Indenture Trustee in the
amount and timing of distributions; and (iv) forces the Indenture Trustee to incur a severe risk
that the Caribbean plan will never be funded.” Indenture Trustee’s Opposition, Docket No. 1954,
p49.

Caribbean’s Plan proposes to pay all creditors in full upon the effective date. Moreover,
Caribbean’s Plan, on its face, pays more to all creditors, including the bondholders, than the plan
proposed by the Indenture Trustee. Consequently, the court rejects the argument made by the
Indenture Trustee and finds that the plan has been proposed in good faith.

4, Section 1129(a)(4) requires that any payment to be paid under the plan for services or
for costs and expenses in or in connection with the case, or the plan, has been approved or is
subject to court approval, as reasonable. Caribbean’s Plan offers to pay all creditors in full, thus,
the amounts to be paid to Caribbean for costs and expenses related to these cases will not affect
creditors. Under these circumstances the court finds that disclosure requirements have been fully
met.

5. Section 1129(a)(5) requires disclosure and approval of the postconfirmation
management of the revested debtor. The court finds that, since the debtors’ assets will be sold to
anew entity, the information disclosed by Caribbean, and its financial resources and license
requirements, is sufficient to meet the requirements of section 1129(a)(5). Moreover, Caribbean
has disclosed that upon confirmation of the Plan, Mr. Rafael Martinez Margarida will be
appointed Plan Administrator. Thus, the required disclosures were made and are only subject to

approval upon the entry of a confirmation order.

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6. Section 1129(a)(6) requires that any governmental regulatory commission with
jurisdiction, after confirmation of the plan, over the rates of the debtor has approved any rate
change provided for in the plan, or such rate change is expressly conditioned on such approval.
The court finds that this requirement does not apply to Caribbean’s Plan as the income to fund
the same comes from the sale of debtors’ assets.

7. The Indenture Trustee argued at the confirmation hearing that Caribbean failed to meet
its burden to establish the best interests of creditors requirements of Section 1129(a)(7) because it
did not present evidence to prove that the unsecured creditors of ECMC and HDA will receive
more than they would receive in a Chapter 7 liquidation. The evidence presented satisfies the
court that should all the debtors be liquidated, unsecured creditors will not receive a distribution,
and that even if there are any unencumbered assets in ECMC’s or HDA’s estate, any distribution
will be de minimis, considering the combined value of debtors’ estates. The value of the
combined assets of the debtors does not exceed $70 million dollars as per stipulation filed and
the secured claim of the Indenture Trustee is in the amount of $89 million. Therefore, the
Indenture Trustee is an undersecured creditor and there is no equity in debtors’ estates.

8. The requirements of section 1129(a)(8) have, admittedly, not been met because there
are two classes in each of the two plans that rejected the same.

9. The Treasury Department of the Commonwealth of Puerto Rico (“ Treasury”) opposes
the confirmation of Caribbean’s Plan because such plan does not propose to pay its priority claim
in its full amount as required by section 1129(a)(9). Caribbean’s Plan proposes to pay priority
tax claims from the Allowed Priority Tax Claim Reserve, which means $2,100,000.00 to be
reserved for the payment of the priority tax claims. (See, Docket No. 2095 p. 2). Treasury’s

claim number 77 is for the total amount of $4,930,090.34, including the sum of $3,636,768.27

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entitled to priority under 11 USC § 507(a)(8). Debtors and the Indenture Trustee objected to the
amount of $2,607,426.34. The Camarero Racetrack and the Indenture Trustee filed a settlement
withdrawing the objection to Treasury’s claim but debtors’ objection is still pending
determination. (Docket No. 2122). However, Caribbean clarified to the court’s satisfaction,
through the testimony of Mr. Jose Monge Robertin, that there was an additional reserve for
claims in relation to which objections are pending or on appeal, so that, if the objection is ruled
in favor of Treasury, Caribbean will have sufficient funds to pay the claim in full as required.
Consequently, the court finds that Caribbean’s Plan complies with section 1129(a)(9).

10. Section 1129(a)(10) requires the acceptance of the plan by at least one class of
impaired creditors. Caribbean’s Plan fails to comply with this requirement for both debtors
ECMC and HDA, considering this court’s finding of Caribbean’s improper classification of the
bondholders’ deficiency claim.

11. Section 1129(a)(11) requires that the proposed plan be feasible and that it is not
likely to be followed by the liquidation, or the need of further financial reorganization, of the
debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is
proposed in the plan. Caribbean presented the testimony of Mr. Gabriel Montafiez, Vice
President of Westernbank’s Business Credit Division, to establish that it had the financial
resources to fund the plan. (See, Docket No. 2151 pages 6-67). Mr. Montafiez was the
underwriter of the Loan and Security Agreement (the “Loan Agreement”), (Ex. XII). The
specific Loan and Security Agreement before the court was signed earlier in the moming of the
second day of the confirmation hearing, that is, November 17, 2006.

The financing structure consists of a loan of $75,750,000 and capital contributions of

$14,500,000 for a total of $90,250,000. From the total amount, the following must be deducted:

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1 || a suppressed availability of $250,000, a 1.5% closing fee or $1,136,750; and the balance

2 remaining from the $5,000,000 capital expenditure reserve, or $3,400,000; for total deductions of
$4,786,250. The available balance is $85,463,750. Mr. Montafiez’ testimony shows that of the

5 $14,500,000 in capital contributions, only $7,350,000 had been deposited. The balance was in

6 || checks tendered on the day of the hearing and would be deposited on the next working day,

7 || excepting a check for $1,750,000, which, at the request of the investor, would be deposited

8 |! within a week.

° The Loan Agreement also calls for the borrower to maintain at all times an adjusted net
, worth of $11,500,000. The Loan Agreement provides in paragraph (q), page 16, for a capital

12 contribution of up to $5,000,000 by the shareholders. As of the date of the hearing only Mr.

13 || Charles A. Cuprill had signed off on this provision.

14 One of the conditions precedent in the Loan Agreement is that the borrower’s account

1 receivable be in a condition acceptable to the lender. As of the date of the hearing the lender had
. not reviewed the same. Another condition precedent is that the shareholder agreement be

18 acceptable to the lender. As of the date of the hearing, the lender had not reviewed the

19 || shareholders’ agreement. Also, the lender had not received all the documents required to protect

20 |! and perfect its security interest, specifically, the documentation respecting the ownership in the

21 new company purchasing debtors’ assets. The Loan Agreement also gives the lender the right to
. review the background checks on the borrower’s shareholders, As of the day of the hearing the
, same had not been performed.

25 Mr. Montafiez testified that he does not know of any reason that would prevent the

26 || closing of the loan and the disbursement of the funds. However, several conditions precedent, as

27 ¥ outlined before, had not been met, and Caribbean has not submitted any subsequent evidence to

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establish that they have been met.

This court has thoroughly analyzed the expected distribution under Caribbean’s Plan as
of November 30, 2006 and finds that Caribbean will have sufficient funds to pay all creditors in
full, as proposed, if the financing agreement is finalized and the funds are made available to
Caribbean. According to the testimony of Mr. Jose Monge Robertin, as provided in Exhibit IX,
Caribbean will have available to distribute to creditors after confirmation the total amount of
$86,103,750. Mr. Monge further testified that the total amount of claims expected to be allowed
and reserves is $73,293,146, leaving a difference for contingent claims and claims pending court
determination of $12,810,604. Mr. Monge states that, based on his analysis, the total amount of
claims that are contingent and pending court determination amount to $12,059,519.21, fora
leftover amount of $751,084.79.

The rebuttal testimony of Mr. Sutton showed that Mr. Monge failed to deduct certain
amounts which Caribbean will need to pay in accordance with its plan. First, the loan agreement
with Westernbank requires the amount of $250,000.00 as suppressed capital which needs to be
deducted from the funds available at confirmation, for an adjusted total of $85,853,750. Mr.
Sutton testified that the amount of claims expected to be allowed and reserves as per Caribbean’s
Plan of $73,293,146 needs to be adjusted as follows: an increase in administrative claims in the
amount of $380,000 as noted in the debtors’ Schedule of administrative expenses, an expected
allocation of fees and expenses attributable to the bonds held by ECMC in the amount of
$1,000,000 (11% of 9,000,000 in estimated fees and expenses for Noteholders) and the claim of
Confederacion Hipica de Puerto Rico (“Confederacion”) in the amount of $2,394,685 needs to be
included with the unsecured creditors, plus 1,000,000 as part of the appealed orders. The total

amount of Mr. Sutton’s adjustments is approximately $5,024,685, which in turn is the

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1 || approximate amount of the shortfall of Caribbean’s Plan.

2 On cross examination Mr, Sutton testified that in the administrative claims category he
did not consider the amounts to be paid by debtors in the ordinary course, which will necessarily
5 reduce the amount to be paid on the effective date. However, the professional fees estimates

6 || used by Mr. Monge did not contemplate legal and professional expenses after August, for

7 || example the fees generated by the litigation on the motion filed by debtors under 11 USC §

8 364(d) are not included, thus, it is clear the administrative clatms will have to be adjusted

, although the exact amount is yet undetermined. The allocation of fees and expenses attributable
7 to ECMC’s bonds is certainly appropriate, although the exact amount is subject to the court’s

12 determination of reasonableness. See, Opinion and Order, Docket No. 2185, p. 8. The
13 || adjustment requiring the inclusion of Confederacion’s claim is not appropriate because they

14 | agreed with Caribbean to be paid after the confirmation in 60 monthly installments the amount of

15 $3,000,000, conditioned upon the assumption of their contract and confirmation of Caribbean’s
16

Plan. (Docket No. 2124) The contract with Confederacion has been assumed, thus if Caritbbean’s
17
18 Plan is confirmed Confederacion will be paid as agreed. (Docket No. 1869} Wells Fargo argues

19 || that if Caribbean is not granted a license Confederacion’s claim will have to be paid on the

20 || effective date, however this statement is not substantiated. Even though it is a possibility that

21 Caribbean not be granted a license, if that is the case, according to the agreement with
22
Confederacion, their claim will still be paid in 60 monthly installments.
23
oA Mr. Monge admitted in his testimony that if all claims pending court determination are

25 || allowed, Caribbean would need an additional $2 million to fund the plan as proposed. See,
26 | Transcript of hearing held on November 16, 2006, Docket No. 2193, p. 143. Mr. Sutton’s

27 testimony shows that the shortfall is of about $5,000,000. Mr. Monge maintains that it is highly
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improbable that all disputed or contingent claims be allowed. Scientific Games alone has two
claims for the total amount of $5,171,689.42 contingent upon the assumption of their contract by
Caribbean. The contract with Scientific Games has been assumed, thus, if it is later rejected the
penalty will become a post confirmation claim. (Docket No. 1869).

In view of the above, the court finds that the plan proponent did not meet its burden to
show that the plan is feasible, because as of this date the evidence submitted to the court does not
show that all the conditions precedent to the loan have been met.

12. The requirements of section 1129(a)(12) regarding the payment of fees is not
questioned or opposed. Therefore, the court finds that the requirements are met.

13. Section 1129{a}(13) requires that the plan provides for the continuation of retiree
benefits as the term is defined in section 1114 of the Bankruptcy Code. Section 1114(a) defines
retiree benefits as “payments to any entity or person for the purpose of providing or reimbursing
payments for retired employees and their spouses and dependents, for medical, surgical, or
hospital care benefits, or benefits in the event of sickness, accident, disability, or death under any
plan, fund or program (through the purchase of insurance or otherwise) maintained or established
in whole or in part by the debtor prior to filing a petition commencing a case under this title.”
The debtors did not establish an employee retirement plan. Also, 401k plans and Individual
Retirement Accounts (IRAs) are not the health and life retirement benefits envisioned by Section
1114. Therefore, section 1129(a)(13) is not applicable to Caribbean’s Plan.

Section 1129(b)

Pursuant to Section 1129(b) a pian may be confirmed if all the requirements of 1129(a)
are met, except 1129(a)(8), “if the plan does not discriminate unfairly, and is fair and equitable,

with respect to each class of claims or interests that is impaired under, and has not accepted, the

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plan.” As discussed above, Caribbean failed to meet the requirements of 1129 USC
§§1129(a)(1), (8), (10) and (11), thus 1129(b) is inapplicable.
Conclusion
The court concludes that Caribbean’s Plan fails to meet the requirements of 11 U.S.C. §§
1129(a)(1), (8), (10) and (11). Therefore, the confirmation of Caribbean’s Plan is hereby denied.
SO ORDERED.

In San Juan, Puerto Rico, this aA / day of December, 2006.

QUE 8. LAMOUTTE
U.S. Bankruptcy Judge

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