Canyon Bridge Fund I, LP v. Wave Computing, Inc.

• Court: District Court, N.D. California
• Decided: March 21, 2022
• Docket: 3:21-cv-01512
• Status: Unknown

Opinion

1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE NORTHERN DISTRICT OF CALIFORNIA 7 8 CANYON BRIDGE FUND I, LP, Case No. 21-cv-01512-CRB

9 Plaintiff,

ORDER RE BANKRUPTCY APPEAL 10 v.

11 WAVE COMPUTING, INC., 12 Defendant.

13 Appellant Canyon Bridge Fund I, LLC (“Canyon Bridge”) appeals the Bankruptcy 14 Court’s confirmation of Appellee Wave Computing, Inc.’s (“Wave”) Chapter 11 Plan of 15 Reorganization (“Plan”). At an auction, Tallwood Technology Partners, LLC 16 (“Tallwood”), which held debt and equity in Wave, successfully bid $61.3 million on the 17 company’s assets. Under the Plan, Classes 1, 2, and 4 were unimpaired and Class 5 was 18 likely satisfied to about 80%. If Class 5 was fully satisfied, Tallwood could then collect on 19 its allowed Class 3 claims. The “disputed” Class 6 Intercompany claim came last. Classes 20 7 through 16 were extinguished and released. 21 Canyon Bridge, whose most senior claims were in Class 7, filed a late objection 22 arguing that the Plan was not “fair and equitable” under 11 U.S.C. § 1129(b). Canyon 23 Bridge contended that the unasserted Windtree causes of action, which were assigned to 24 the Liquidating Trust, might satisfy the rest of Class 5 claims and then provide a windfall 25 to Class 3. The Bankruptcy Court overruled the objection, finding that the record showed 26 no evidence that the effective-date funds would exceed the full distribution. Canyon 27 Bridge appealed. Concluding that this finding was not clearly erroneous and that the I. BACKGROUND 1 Wave was a privately-held startup company specializing in dataflow processor 2 technology. ER-A0093.1 Its largest shareholder was Tallwood. Id. Canyon Bridge was a 3 creditor and interest holder in Wave, and its most senior claims in the Plan were in Class 7. 4 See Gribble decl. (dkt. 16-1) ¶ 3 & Ex. B). 5 On April 27, 2020, Wave and its six direct and indirect subsidiaries filed for 6 bankruptcy under chapter 11. ER-A0002-19. In September 2020, Wave began marketing 7 its assets through a months-long sale process by Armory Securities LLC. ER-A0591. 8 Wave also pushed forward a plan of reorganization supported by Tallwood, which held 9 pre- and post-petition debt in Wave as well as equity. See SER-SA00308-86 (Joint 10 Chapter 11 Plan); ER-A0595-687 (Sixth Amended Plan). If its assets received bids in 11 excess of $52.5 million, Wave would proceed to an auction to market test the value of the 12 estate. ER-A0458-59, 592. The auction began on December 21, 2020, and a third-party 13 stalking horse bidder bid $57.5 million and Tallwood bid $61.3 million. SER-SA1019-22, 14 1067-68. Tallwood’s winning $61.3 million bid included several modifications as a 15 compromise with the Official Committee of Unsecured Creditors (“Committee”). See 16 SER-SA00504-05. Tallwood agreed to subordinate its Class 3 claims to Class 5 (general 17 unsecured) claims. ER-A0629 n.1, 636-37. Class 6, the intercompany claims, would 18 come next in line, and would be either “canceled, released, and extinguished” or 19 “[r]einstated” “[o]n the Effective Date, or as soon thereafter as is reasonably practicable.” 20 ER-A0630. The Plan would extinguish all claims in Classes 7-15, see ER-A0630-36, 21 including those of Canyon Bridge. If all non-extinguished claims were satisfied and all 22 costs and expenses paid, any additional assets would be distributed to 501(c)(3) 23 organizations selected by the Liquidating Trust manager after consultation with the 24 advisory board. See ER-A0878-79. 25 The Plan assigned to the Liquidating Trust “any rights of the Estates to seek 26 27 1 recovery . . . against Windtree, Oakmont Corporation, and any of their direct or indirect 2 members . . . with respect to the Windtree Redemption.” ER-A0603, 612. These putative 3 rights stem from Wave’s July 2019 settlement with Windtree, pursuant to which Wave 4 paid Windtree $40 million in cash. ER-A1145. Windtree had alleged that Wave had made 5 fraudulent representations to induce its $40 million purchase of preferred stock the prior 6 year. See id.; ER-A0477, 621. Wave and the Committee spent time and money 7 “exploring whether there exist Causes of Action to recover the funds paid to Windtree.” 8 ER-A0477. Lawyers billed over $1 million investigating these claims. See ER-A1124, 9 1144, 1176-80. 10 The voting deadline and the deadline to object to Plan confirmation were January 11 25, 2021. SER-SA01473. Although Canyon Bridge had expressed concern to Wave that 12 the Windtree claims would be assigned to the Liquidating Trust while its own rights were 13 extinguished, see ER-A1335, it did not object. Canyon Bridge objected only on February 14 9, one day before the confirmation hearing, arguing that the “residual value to Tallwood” 15 section of the Plan violated the “fair and equitable” standard of 11 U.S.C. § 1129(b). It 16 argued that, if the Liquidating Trust collected a significant amount from the Windtree 17 claims, the available assets might exceed the maximum distribution. ER-A1334-38. 18 At the confirmation hearing, the Bankruptcy Court noted that all the documents and 19 declarations supporting the Plan were in the record. ER-A0780. The Bankruptcy Court 20 stated that it had read and considered Canyon Bridge’s objection:

21 [T]he heart of their objection – and I recognize it’s late filed, but it goes to a key confirmation issue, so I’m going to have to 22 address it one way or the other – is that[,] . . . although there’s not clear information, this is a case that potentially could have 23 funds sufficient to pay a hundred percent to general unsecured creditors with additional funds, that they assert those additional 24 funds would then go to Tallwood and not to junior classes of creditors. 25 ER-A0782. The Bankruptcy Court noted that Wave was “the party with the burden of 26 proof.” ER-A0796. The Bankruptcy Court permitted Canyon Bridge to flesh out its 27 argument that Wave had not met its burden. See ER-A0796-800. 1 Counsel for Wave then walked through the evidence and argued that it met its 2 burden to satisfy the “fair and equitable” requirement:

3 [T]he appropriate standard for evaluating the valuation issues with respect to cramdown is full value of the claims on the 4 effective date or full present value. . . . We’re saying there is no hundred percent claim that is being paid more than full. . . . 5 In addition to my comments earlier indicating there is a 6 minimum of a fourteen million dollar gap between the value of the assets being distributed as determined through the 7 marketing process and the total amount of the claims immediately prior to the confirmation of the plan[,] I will note 8 a few items of fact that have already been provided in the record. First, there has been a robust marketing process laying 9 support for the Court’s conclusion with respect to the fair market value of the distributed assets, that's referenced in 10 docket number 884. . . .

11 [R]epeatedly in every disclosure statement and liquidation analysis, including that filed on December 1st, 2020 at docket 12 number 848-3, the liquidation analysis has indicated no material value allocated to the litigation claims that are subject 13 of Canyon Bridge’s objection. 14 ER-A0826-27, 827, 828. Counsel also stated that “the debtor has indicated that it ascribes 15 no present value to the litigation claims above and beyond the business aspect.” ER- 16 A0785. 17 After a recess, the Bankruptcy Court issued findings of fact and conclusions of law. 18 The Bankruptcy Judge noted that the “fair and equitable” requirement in Section 19 1129(b)(2)(C) “requires that the plan provide, as of the effective date of the plan, the value 20 of such interest or the holder of any interest that is junior to the interest of such class will 21 not receive or retain property on account of its junior interest.” ER-A0834. The 22 Bankruptcy Judge went on to explain:

23 The evidence in the record is that the effective date funds are approximately fourteen million dollars less than required to 24 provide a full distribution. This evidence includes the 61.3 million dollar valuation of Tallwood’s successful bid, the 25 amount of claims asserted or allowed in the case, and the disclosures provided in the disclosure statement, along with its 26 attachments. While the plan has improved over the course of the confirmation process, there’s no evidence to support a 27 finding that the full present value of the general unsecured claims will be provided to the liquidating trust on the effective Section 1129(b) is satisfied. 1 ER-A0834-35. The Bankruptcy Court followed up on its oral findings of fact and 2 conclusions of law with an order confirming the plan, which went effective on February 3 26, 2021. See SER-SA001562. 4 Canyon Bridge appealed the Confirmation Order but did not seek a stay. 5 II. LEGAL STANDARD 6 To establish Article III standing, a party must show: “(1) it has suffered an ‘injury 7 in fact’ that is (a) concrete and particularized and (b) actual or imminent, not conjectural or 8 hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; 4 9 and (3) it is likely, as opposed to merely speculative, that the injury will be redressed by a 10 favorable decision.” In re Palmdale Hills Prop., LLC, 654 F.3d 868, 873 (9th Cir. 2011) 11 (quotation and citation omitted). Further, a bankruptcy appellant must establish prudential 12 standing by showing that it is a “person aggrieved”—that is, “directly and adversely 13 affected pecuniarily” by the bankruptcy court’s order. Matter of Point Ctr. Fin., Inc., 890 14 F.3d 1188, 1191 (9th Cir. 2018) (quotation and citation omitted). An order that 15 “diminishes one’s property, increases one’s burdens, or detrimentally affects one’s rights 16 has a direct and adverse pecuniary effect for bankruptcy standing purposes.” Id. (citing In 17 re P.R.T.C., Inc., 177 F.3d 774, 777 (9th Cir. 1999)). 18 When reviewing a bankruptcy court’s decision, a district court applies the standard 19 of review applied in federal appeals. See In re Crystal Properties, Ltd., L.P., 268 F.3d 743, 20 755 (9th Cir. 2001). The decision to confirm a chapter 11 plan is reviewed for abuse of 21 discretion. In re Marshall, 721 F.3d 1032, 1045 (9th Cir. 2013). “Whether a plan is fair 22 and equitable [under 11 U.S.C. § 1129(b)] is a factual determination reviewed for clear 23 error.” In re Sunnyslope Hous. Ltd. P’ship, 859 F.3d 637, 646 (9th Cir. 2017) (en banc) 24 (citation omitted). “Clear error exists only when the reviewing court is left with a definite 25 and firm conviction that a mistake has been committed.” In re Marshall, 721 F.3d at 1039. 26 The court may affirm on any ground supported by the record. In re Siriani, 967 F.2d 302, 27 304 (9th Cir. 1992). III. DISCUSSION 1 The Court concludes that the Bankruptcy Court did not abuse its discretion in 2 confirming the Plan. 3 A. Standing 4 A preliminary issue is whether Canyon Bridge has standing. No distribution can be 5 made to Canyon Bridge (at Class 7) until the following are fully satisfied: (1) general 6 unsecured claims in Class 5; (2) allowed Tallwood claims in Class 3; and (3) the 7 intercompany interest in Class 6. The Bankruptcy Court found that “the effective date 8 funds are approximately fourteen million dollars less than required to provide a full 9 distribution.” ER-A0835. Any funds after that first $14 million would go to satisfying the 10 “disputed” $97 million Class 6 claim labeled “Intercompany Payable.” See SER-SA085. 11 Only then would Canyon Bridge recover. Wave argues that Canyon Bridge cannot benefit 12 from any hypothetical payout from the Windtree causes of action and is therefore not 13 injured by the Plan. 14 In December 2021, the Court ordered supplemental briefing to clarify various 15 details, particularly the nature of the “disputed” Intercompany claim. The parties stated 16 that, as of December 2021, at least $11.6 million was still required to provide a full 17 distribution to Classes 5 and 3. See Wave Supp. Br. (dkt. 14) at 2 (citing Kors decl. (dkt. 18 14-1) & Angeles decl. (dkt. 14-2)). Wave also stated that the Intercompany claim in Class 19 6 had increased to $151 million and that it was “reinstated” as permitted by the plan. See 20 id. at 3. Canyon Bridge argued that this Intercompany claim was not validly reinstated 21 because Wave did not provide any evidence as to when the purported reinstatement had 22 occurred and whether it occurred as of the “Effective Date, or as soon thereafter as is 23 reasonably practicable.” Canyon Supp. Br. (dkt. 16) at 1 (citing ER-A0630). 24 The Court remains skeptical as to whether Canyon Bridge has standing. But the 25 supplemental briefing did not sufficiently clarify the disputed nature of the Intercompany 26 claim. Although interests of at least $11.6 million and as much as $160 million are ahead 27 of Canyon Bridge, the Court finds that it is possible that Canyon Bridge is “directly and 1 adversely affected pecuniarily” by the order. See Matter of Point Ctr., 890 F.3d at 1191. 2 Thus, Canyon Bridge has standing.2 3 B. Fair and Equitable 4 The Bankruptcy Court did not abuse its discretion in confirming the Plan because it 5 did not clearly err in finding the Plan “fair and equitable” under 11 U.S.C. § 1129(b). 6 A bankruptcy court may confirm a non-consensual plan of reorganization if, among 7 other requirements, the plan “does not discriminate unfairly, and is fair and equitable, with 8 respect to each class of claims or interests that is impaired under, and has not accepted, the 9 plan.” 11 U.S.C. § 1129(b)(1). With respect to a class of interests, a plan is “fair and 10 equitable” if it does not violate the absolute priority rule, meaning that “the holder of any 11 interest that is junior to the interests of such class will not receive or retain under the plan 12 on account of such junior interest any property.” Id. § 1129(b)(2)(C). A corollary to this 13 rule is the principle that no creditor can receive property in excess of the full amount of its 14 claim. In re Exide Techs., 303 B.R. 48, 61 (Bankr. D. Del. 2003). The value a creditor or 15 interest holder receives is assessed “as of the effective date of the plan.” 11 U.S.C. 16 § 1129(b)(2); see In re Perez, 30 F.3d 1209, 1214–15 (9th Cir. 1994) (collecting cases). 17 The Bankruptcy Court did not clearly err in finding the Plan “fair and equitable.” 18 After considering Canyon Bridge’s late-filed argument and the evidence in the record, the 19 Bankruptcy Court found that, as of the effective date, the available funds were $14 million 20 short of satisfying the full distribution. See ER-A0835 (“The evidence in the record is that 21 the effective date funds are approximately fourteen million dollars less than required to 22 provide a full distribution.”). Because there was a $14 million gap in effective-date funds, 23 there was no basis to conclude that the Windtree claims—which were speculative and 24

25 2 Wave also argues that the appeal is equitably moot because a “comprehensive change of circumstances has occurred so as to render it inequitable for this court to consider the 26 merits of the appeal.” In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir. 2012) (cleaned up). Canyon Bridge argues that a remand would require relatively little 27 intervention in the Plan. Although Canyon Bridge did not seek a stay, and although there 1 unasserted—would offer any class a windfall. Thus, Wave had met its burden to show that 2 the Plan was fair and equitable. 3 Canyon Bridge disputes this characterization, pointing to the Bankruptcy Judge’s 4 statement that “[t]here is no evidence to support a finding that the funds to be distributed to 5 the liquidating trust for Class 5 claims shall exceed the allowed amount of such claims.” 6 Canyon Br. 16 n.16 (emphasis added) (quoting ER-A0834-35). Canyon Bridge argues that 7 the Bankruptcy Court never made any factual finding regarding its argument that Tallwood 8 (at Class 3) would receive more than 100% of its allowed claims. Id.; see Reply (dkt. 9) at 9 9-10. Yet the Bankruptcy Judge clearly understood Canyon Bridge’s argument, referring 10 to the $14 million shortfall with respect to the “full distribution.” See ER-A0835; see also 11 ER-A0782. And Canyon Bridge acknowledges that the record indicates the shortfall was 12 in fact $14 million. See Reply at 13 (stating that “any recovery from the causes of action 13 in excess of approximately $14.5 million would provide a windfall to Tallwood in excess 14 of its allowed claims”). 15 Canyon Bridge also argues that, because Wave had the burden to show that the Plan 16 was “fair and equitable,” it also had a burden to determine the present value of the 17 Windtree claims to demonstrate that their present value did not exceed the $14 million 18 shortfall. Although the claims still remain unasserted, the Court agrees with Canyon 19 Bridge that their present-day value was more than $0, and some effort probably should 20 have been made to evaluate it. But that is insufficient to show clear error. Canyon Bridge 21 must point to some indication that the present-day value of a hypothetical future recovery 22 from the Windtree claims exceeded the $14 million shortfall as of the effective date. 23 Canyon Bridge repeatedly refers to the face value of the claims ($40 million) and the fact 24 that lawyers billed over $1 million investigating them. See Canyon Br. at 21 (citing ER- 25 A1124, 1144, 1176-80). But the claims remain speculative, and nothing suggests that it 26 was clear error to find that the claims were not worth more than $14 million as of the 27 effective date. See Marshall, 721 F.3d at 1039 (clear error requires a “definite and firm C. Other Arguments 1 Canyon Bridge’s other arguments against the confirmation also fail. First, Canyon 2 Bridge argues that the Bankruptcy Court improperly required Canyon Bridge to prove that 3 the Plan was not “fair and equitable.” See Canyon Br. 16-18. In a cramdown, the debtor 4 has the burden of proof. Perez, 30 F.3d at 1214 & n.5. The Bankruptcy Judge stated 5 exactly that. See ER-A0796 (noting that Wave was the “party with the burden of proof.”). 6 Nothing in the transcript indicates that the Bankruptcy Judge misallocated the burden of 7 proof. The Bankruptcy Court recognized both (1) Wave had the burden to show that the 8 Plan was “fair and equitable”; and (2) the Court itself had to be satisfied that the Plan was 9 “fair and equitable.” See Perez, 30 F.3d at 1214 & n.5. 10 Next, Canyon Bridge insists that the Bankruptcy Court abused its discretion because 11 its confirmation decision was based on inadmissible evidence by Wave’s counsel— 12 namely, statements as to the $14 million shortfall and assertions about the tax 13 consequences of the Plan. See Canyon Br. at 22-24. Yet Canyon Bridge failed to raise 14 evidentiary objections in the hearing, and such arguments are waived if not raised below. 15 See In re James, 829 F. App’x 768, 769 (9th Cir. 2020) (“We do not consider appellants’ 16 arguments regarding hearsay and unverified exhibits not raised before the bankruptcy 17 court.”). In any event, Wave’s counsel cited his sources in the record, see, e.g., ER- 18 A0827-28 (citing Bankruptcy Ct. dkts. 884, 1142-11, 537, 848-3), and the Bankruptcy 19 Court made its findings after considering the whole record. 20 Finally, Canyon Bridge argues that it was denied due process because the 21 Bankruptcy Court (1) only “reluctantly” provided an opportunity to be heard, and (2) 22 interrupted Canyon Bridge before it had concluded its argument. See Canyon Br. at 25. 23 Reviewing de novo, see U.S. Dist. Ct. for E. Dist. of Washington v. Sandlin, 12 F.3d 861, 24 865 (9th Cir. 1993), the Court rejects this claim. The Bankruptcy Judge permitted Canyon 25 Bridge to speak for several minutes, and there is no indication that counsel was interrupted 26 at the end of his remarks or that he had anything further to say. See ER-A0796-800. 27 IV. CONCLUSION For the foregoing reasons, the Court concludes that the Bankruptcy Court did not 2 clearly err in finding that Wave’s Chapter 11 Plan of Reorganization was fair and 3 equitable. The Court finds that the Bankruptcy Court did not abuse its discretion in 4 confirming the Plan and AFFIRMS. 5 IT IS SO ORDERED. 6 Dated: March 21, 2022 EA 7 CHARLES R. BREYER 8 United States District Judge 9 10 11 12 E 13

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