Emerald Equities LLC v. Sonoran Desert Land Investors LLC

• Court: District Court, D. Arizona
• Decided: July 26, 2019
• Docket: 2:18-cv-04467
• Status: Unknown

Opinion

1 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8

Emeral d Equities LLC, et al., ) No. CV-18-04467-PHX-SPL ) 9 ) 10 Appellants, ) ORDER vs. ) ) 11 ) Sonoran Desert Land Investors LLC, et ) 12 al., ) 13 ) ) 14 Appellees. )

15 Appellant Emerald Equities, LLC (“Emerald”) initiated this appeal of several orders 16 issued by the U.S. Bankruptcy Court for the District of Arizona (the “Bankruptcy Court”). 17 (Doc. 1) Appellant CPF Vaseo Associates, LLC (together with Emerald, the “Appellants”) 18 initiated a separate appeal of the same Bankruptcy Court orders, and the two appeals were 19 consolidated into one case before the Court. (Doc. 12) Sonoran Desert Land Investors, 20 LLC, Gray Phoenix Desert Ridge II, LLC, East of Epicenter, LLC, Gray Phoenix Desert 21 Ridge I, LLC, R.O.I. Properties, LLC, and Bruce Gray (collectively, the “Appellees”) have 22 moved to dismiss this appeal (the “Motion”). (Docs. 15, 22) The Court’s ruling is as 23 follows. 24 I. Background 25 In May 2016, Epicenter Partners LLC and Gray Meyer Fannin LLC filed voluntary 26 petitions for bankruptcy protection under Chapter 11 of the Bankruptcy Code. (Doc. 15 at 27 6) In July 2016, Sonoran Desert Land Investors, LLC, East of Epicenter, LLC, and Gray 28 1 Phoenix Desert Ridge II, LLC filed voluntary petitions for bankruptcy protection under 2 Chapter 11 of the Bankruptcy Code. (Doc. 15 at 7) The Bankruptcy Court jointly 3 administered the cases. (Doc. 15 at 7) 4 CPF Vaseo Associates, LLC (“CPF”) proposed a joint plan of reorganization (the 5 “Plan”) which would create separate liquidating trusts for each group of debtors. (Doc. 15 6 at 7) The debtors would then sell their real estate assets and deposit the proceeds of those 7 sales into the liquidating trusts in order to pay their creditors. (Doc. 15 at 7) Furthermore, 8 Section 6.7 of the Plan contemplated that a certain piece of property (the “GBSRP I 9 Property”) would be transferred to Emerald and that Emerald would have the opportunity 10 to negotiate the price of the GBSRP I Property with the entity in charge of the liquidating 11 trusts. (Doc. 21 at 4–5) On May 1, 2018, the Bankruptcy Court entered an order (the 12 “Confirmation Order”) confirming the Plan, and the effective date of the Plan was May 7, 13 2018. (Doc. 20 at 3) The Appellants did not contest confirmation of the Plan or 14 Confirmation Order. (Doc. 15 at 8) 15 On the effective date, the liquidating trusts were created, the debtors’ property was 16 transferred to the liquidating trusts, and a trustee (the “Trustee”) was appointed to 17 administer the trusts.1 (Doc. 20 at 3; Doc. 15 at 8) On May 7, 2018, CPF funded $8.2 18 million of exit financing as contemplated under the Plan. (Doc. 20 at 4) Section 8.9 of the 19 Plan allowed the debtors to redeem the real property claimed by the liquidating trusts if 20 certain conditions were satisfied. (Doc. 15 at 7) One of the conditions required that the 21 debtors “satisfy all claims against either or both the May and July Debtor estates and the 22 expenses of the [Trustee],” meaning that the claims of all creditors would have to be paid 23 in full before the debtors could redeem their property (Doc. 15 at 8; Doc. 20 at 3) 24 Pursuant to the terms of the Plan, the Trustee informed the debtors of the deadline 25 by which the debtors needed to satisfy all claims in order to redeem their property under 26 Section 8.9 of the Plan. (Doc. 20 at 4) According to the Appellants, the Trustee informed 27 1R.O.I. Properties LLC was appointed as the Trustee for both liquidating trusts on May 7, 28 2018. (Doc. 15 at 8) 1 the debtors that the payoff amount was approximately $61,012,635.73, and payment was 2 due on August 17, 2018. (Doc. 20 4–5) According to the Appellants, the debtors then tried 3 to negotiate a reduction in the amount due through deferring payments of secured claims 4 and deferring other payments to creditors with the consent of those creditors. (Doc. 20 at 5 4) While the debtors were negotiating various deferred payments, the Trustee informed 6 the debtors that any settlement would be required to include a payment of approximately 7 $6,380,345.00 in undisputed claims. (Doc. 20 at 5) Through a series of negotiations 8 between the Trustee and the debtors, the Trustee accepted a settlement payment of $1.8 9 million for the $6,380,345.00 of claims. (Doc. 20 at 5; Doc. 15 at 10) 10 On August 17, 2018, the Trustee filed a motion with the Bankruptcy Court seeking 11 approval of the $1.8 million settlement. (Doc. 15 at 9) The settlement motion did not 12 address the GBSRP I Property. (Doc. 21 at 6) CPF objected to the settlement motion, and 13 the Bankruptcy Court held a hearing on the motion on August 20, 2018. (Doc. 15 at 9; Doc. 14 20 at 6) Emerald filed its opposition to the settlement motion after the hearing, on August 15 21, 2018. (Doc. 20 at 6) On August 22, 2018, the Bankruptcy Court issued a signed minute 16 entry entering its ruling in favor of the settlement motion; on August 23, 2018, the 17 Bankruptcy Court issued an order (together with the signed minute entry, the “Settlement 18 Order”) granting the settlement motion. (Doc. 15 at 9; Doc. 20 at 6) 19 The transaction contemplated by the Settlement Order closed on August 24, 2018. 20 (Doc. 15 at 10) On that date, the debtors transferred approximately $50,608,857.59 to the 21 Trustee, which the Appellees argue was sufficient to pay all of the outstanding claims 22 against the debtors in full. (Doc. 15 at 10) As a result of the settlement payment, the debtors 23 were able to retain all of the property held in their respective liquidating trust. (Doc. 15 at 24 10) The Trustee also transferred the GBSRP I Property to the debtors, with the intention 25 that the debtors negotiate with Emerald for the transfer of the property pursuant to Section 26 6.7 of the Plan. (Doc. 21 at 6–7) Also on August 24, 2018, the Trustee transferred payment 27 to various creditors of the debtors to satisfy their claims. (Doc. 15 at 10) 28 1 On that same day, CPF filed an application for a temporary restraining order and an 2 emergency motion for a stay of the Settlement Order. (Doc. 15 at 10–11) Emerald filed a 3 joinder to CPF’s motion to stay and filed a separate motion for clarification2 of the 4 Settlement Order. (Doc. 15 at 11–12) On August 27, 2018, after a telephonic hearing, the 5 Bankruptcy Court denied CPF’s request for a temporary restraining order to prevent the 6 closing of the Section 8.9 redemption transaction. (Doc. 15 at 12) The Bankruptcy Court 7 granted Emerald’s request for a temporary restraining order staying the Settlement Order’s 8 impact on the GBSRP I Property.3 (Doc. 21 at 8) 9 Emerald initiated this appeal seeking enforcement of Section 6.7 of the Plan; 10 specifically, Emerald wants the GBSRP I Property returned to the Trustee so that the 11 Trustee can transfer the property to Emerald. (Doc. 21 at 8) CPF initiated this appeal 12 seeking reversal of the Settlement Order. (Doc. 20 at 15) The Appellees filed a notice 13 seeking to have Emerald’s appeal transferred to this Court and for CPF’s appeal to be 14 consolidated with Emerald’s appeal. (Doc. 21 at 8) Emerald’s appeal was transferred to 15 the Court on December 6, 2018, and CPF’s appeal was transferred to the Court on January 16 3, 2019. (Docs. 1, 12) The Appellees filed the Motion seeking dismissal of both appeals. 17 (Doc. 15) 18 II. Analysis 19 The Appellees seek dismissal of this appeal, arguing (i) the Appellants lack standing 20 to bring this appeal; (ii) this appeal is an impermissible attack on the Plan; and (iii) the 21 appeal is equitably moot. (Doc. 15 at 2) Each issue will be addressed in turn. 22 A. Appellant Standing 23 To have standing to appeal a bankruptcy order, an “appellant must be a ‘person 24 aggrieved’ by the bankruptcy court’s order.” In re A.S. Acquisition Corp., 56 F. App’x 415, 25 416 (9th Cir. 2003) (citing In re P.R.T.C., Inc., 177 F.3d 774, 777 (9th Cir.1999)). “An

26 2 On October 18, 2018, the Bankruptcy Court held a hearing on Emerald’s motion for clarification, and the Bankruptcy Court issued an order denying Emerald’s motion for 27 clarification on November 21, 2018. (Doc. 21 at 8) 3 On November 30, 2018, the Bankruptcy Court dissolved the temporary restraining 28 order. (Doc. 21 at 8) 1 appellant is aggrieved if ‘directly and adversely affected pecuniarily by an order of the 2 bankruptcy court’; in other words, the order must diminish the appellant’s property, 3 increase its burdens, or detrimentally affect its rights.” A.S. Acquisition Corp., 56 F. App’x 4 at 416 (citing Fondiller v. Robertson, 707 F.2d 441, 442 (9th Cir.1983)). 5 The Appellees argue that the Appellants lack standing to bring this appeal because 6 the Appellants were not party to the Settlement Order and were not adversely impacted by 7 the Settlement Order. (Doc. 15 at 13) Specifically, the Appellees argue that CPF’s claims 8 were paid in full under the Plan, and Emerald’s interests were not impacted by the 9 Settlement Order. (Doc. 15 at 13) In response, Emerald argues that it was adversely 10 impacted by the Settlement Order because (i) Emerald did not received the “GBSRP I 11 Property” promised under the Plan, and (ii) the Plan contemplated that Emerald and the 12 Trustee would negotiate other terms related to an “Emerald Equities Letter Agreement,” 13 including but not limited to the dismissal of a separate lawsuit before the Maricopa County 14 Superior Court. (Doc. 17-1 at 46–47) CPF argues that its interests were adversely impacted 15 by the Settlement Order because CPF paid $8.2 million for the right to bid on the property 16 held in the liquidating trusts in the event that all claims were not satisfied, but it was not 17 given the opportunity to do so. (Doc. 20 at 13–15) 18 The Court finds that the Settlement Order did not detrimentally impact any of 19 Emerald’s pecuniary interests. While the Plan states that the Trustee should have 20 transferred the GBSRP I Property to Emerald, the Court notes that Emerald never argues 21 that the transfer of the GBSRP I Property to it is unfeasible. (Doc. 17-1 at 46–48) Instead, 22 Emerald argues that it bargained for the right to negotiate with the Trustee, and not the 23 parties that now hold the Trustee’s interests as a result of the Settlement Order. (Doc. 21 at 24 11) Emerald has failed to provide a persuasive argument for how negotiating with the 25 debtors instead of the Trustee impacts its pecuniary interests. (Doc. 21 at 9) It is the Court’s 26 understanding that Emerald will ultimately receive the same benefits under the Plan 27 regardless of the Settlement Order. (Doc. 21 at 8, stating Emerald “does not dispute the 28 Bankruptcy Court’s holdings that the Section 6.7 obligations run with the GBSRP I 1 Property.”) Accordingly, the Court finds that Emerald lacks appellate standing to bring 2 this appeal, as its pecuniary interests were not directly or adversely impacted by the 3 Settlement Order. The Court will dismiss Emerald from this case for lack of standing and 4 only address CPF’s arguments moving forward. 5 The Court notes that CPF never challenges the argument that its claims were paid 6 in full. (Doc. 26 at 2) CPF’s injury was that it was not provided with the opportunity to 7 credit bid for certain property that technically should have been auctioned under the terms 8 of the Plan due to the Appellees’ failure to pay off all claims as required by Section 8.9 of 9 the Plan. (Doc. 20 at 13–14; Doc. 17-1 at 6) CPF argues, and the Appellees do not 10 vigorously dispute,4 that the Settlement Order delayed certain payments to third-party 11 creditors that may have otherwise resulted in those claims not being paid, thus failing to 12 trigger the auction and bidding procedure bargained for by CPF in Section 8.9 of the Plan. 13 (Doc. 20 at 3) Thus, under the Plan, the Court must find that CPF suffered an injury when 14 its right to bid on the real properties held by the liquidating trusts was stripped by the 15 Settlement Order. (Doc. 26 at 7, stating “It is true that the Settlement Order prevented CPF 16 from obtaining a massive windfall in the form of a credit bid on the property of the July 17 Estate.”) Therefore, the Court must find that CPF has standing to bring this appeal because 18 its rights were detrimentally impacted by the Settlement Order. 19 B. Collateral Attack on Confirmed Plan 20 “Once a bankruptcy plan is confirmed, it is binding on all parties and all questions 21 that could have been raised pertaining to the plan are entitled to res judicata effect.” Smith 22 v. Charter Commc’ns, Inc. (St. Louis), 467 F. App’x 742, 743 (9th Cir. 2012) (citing Trulis 23 v. Barton, 107 F.3d 685, 691 (9th Cir. 1995)). Where a “creditor fails to protect its interests 24 by timely objecting to a plan or appealing the confirmation order, it cannot later complain 25 about a certain provision contained in a confirmed plan” by bringing a collateral attack in 26 another court. Smith, 467 F. App’x at 743 (citing In re Pardee, 193 F.3d 1083, 1086 (9th

27 4 The Appellees’ reply states that CPF’s claim is “baseless” without providing any further explanation for whether all claims originally considered under the Plan were paid 28 in full without the help of the Settlement Order. (Doc. 26 at 7) 1 Cir.1999)). Furthermore, when a stay of an order confirming a reorganization plan has not 2 been obtained and the plan has been consummated, appeals seeking to attack the confirmed 3 plan may be precluded. In re Clarke, 98 B.R. 979, 980 (B.A.P. 9th Cir. 1989). 4 The Appellees argue that this appeal is an impermissible attack on the Plan. (Doc. 5 15 at 14) Specifically, the Appellees argue that the Settlement Order only set in motion 6 the terms of Section 8.9 of the Plan by allowing the debtors to exercise their redemption 7 option. (Doc. 15 at 14) The Appellees also argue that the Appellants did not object to or 8 appeal the Confirmation Order; thus, this appeal is moot. (Doc. 15 at 14) In response, CPF 9 argues that this appeal challenges the terms of the Settlement Order that are inconsistent 10 with and independent of the Plan. (Doc. 20 at 8) 11 The Court finds that the terms of the Settlement Order clearly changed some of the 12 terms present in the Plan that impact CPF’s pecuniary interests, even if the Settlement 13 Order was not intended to change the relief granted under the Plan. It is clear to the Court 14 that CPF is seeking to reverse the changes that the Settlement Order made to the 15 implementation of the Plan, and, without the Settlement Order’s changes, CPF would not 16 have anything to appeal under the terms of the Plan. Specifically, CPF states that it is 17 seeking relief in the form of reversing approval of the Settlement Order and remanding this 18 case back to Bankruptcy Court “for further proceedings consistent with the confirmed Plan 19 and Confirmation Order.” (Doc. 20 at 15) Accordingly, the Court finds that CPF’s appeal 20 is not an impermissible attack on the Plan. 21 C. Equitable Mootness 22 Equitable mootness is a doctrine through which a court elects not to reach the merits 23 of a bankruptcy appeal. In re Transwest Resort Properties, Inc., 801 F.3d 1161, 1167 (9th 24 Cir. 2015). “An appeal is equitably moot if the case presents transactions that are so 25 complex or difficult to unwind that debtors, creditors, and third parties are entitled to rely 26 on the final bankruptcy court order.” Id. (citing In re Mortgages Ltd., 771 F.3d 1211, 1215 27 (9th Cir. 2014)); Bank of New York Mellon v. Watt, 867 F.3d 1155, 1160 (9th Cir. 2017) 28 (stating “equitable mootness may apply when bankruptcy cases ‘present transactions that 1 are so complex or difficult to unwind.’”). To determine whether a case is equitably moot, 2 a court considers (1) whether a stay was sought; (2) if a stay was sought and not gained, 3 whether substantial consummation of the plan has occurred; (3) what effect a remedy 4 would have on third parties not before the court; and (4) whether the bankruptcy court can 5 fashion effective and equitable relief. Bank of New York Mellon, 867 F.3d at 1160 (citing 6 Transwest, 801 F.3d at 1167–68 (9th Cir. 2015)); In re Thorpe Insulation Co., 677 F.3d 7 869, 881 (9th Cir. 2012). 8 The Appellees argue that this appeal should be dismissed because the Appellants 9 failed to seek a stay of the Confirmation Order prior to the effective date of the Plan. (Doc. 10 15 at 15) Furthermore, the Appellees argue that this appeal is equitably moot because, per 11 the remaining Thorpe factors, the transactions effectuated by the implementation of the 12 Plan are too difficult to unwind given that (i) the Plan has been substantially consummated, 13 (ii) retrieving payments from third-party creditors would harm those parties, and (iii) the 14 Court would be unable to craft an effective equitable remedy in this case. (Doc. 15 at 15– 15 17) In response, CPF argues that it did not need to seek a stay of the Confirmation Order 16 to be able to appeal the Settlement Order. (Doc. 20 at 10) Instead, CPF asserts that its 17 motion to seek a stay of the Settlement Order, which was ultimately denied, is sufficient to 18 satisfy the Thorpe test. (Doc. 20 at 9–10) Additionally, CPF argues that this appeal is not 19 equitably moot because the Court could fashion some relief requiring the Bankruptcy Court 20 to administer the Plan by its terms. (Doc. 20 at 11–12) 21 It is undisputed that the Appellants sought a stay of the Settlement Order as 22 evidenced by CPF’s “Emergency Motion to Enforce Plan” and other objections filed with 23 the Bankruptcy Court. (Doc. 20 at 6) The Appellees’ argument that CPF’s appeal fails 24 because CPF did not object to confirmation is misguided because CPF isn’t objecting to 25 the terms of the Plan, only to the terms of the Settlement Order that altered the terms of the 26 Plan. Accordingly, the Court finds that the first Thorpe factor weighs against finding this 27 appeal is moot, as it is clear that CPF sought the requisite stay of the Settlement Order 28 before bringing this appeal. 1 The remaining Thorpe factors weigh in favor of finding that this appeal is equitably 2 moot. The term “substantial consummation” is defined in the Bankruptcy Code as: (i) 3 transfer of all or substantially all of the property proposed by the plan to be transferred, (ii) 4 assumption by the debtor or by the successor to the debtor under the plan of the business 5 or of the management of all or substantially all of the property dealt with by the plan; and 6 (iii) commencement of distribution under the plan. 11 U.S.C. § 1101(2); Transwest, 801 7 F.3d at 1168. The Plan was confirmed on May 1, 2018 and went effective on May 7, 2018. 8 (Doc. 15 at 7) The Settlement Order was approved by the Bankruptcy Court on August 9 23, 2018, and the transaction effectuated as a result of the Settlement Order closed on 10 August 24, 2018. (Doc. 15 at 9) The remedy requested of the Court is to reverse the 11 Settlement Order entered by the Bankruptcy Court more than one year ago. The debtors’ 12 real property was transferred to the liquidating trusts on the effective date of the Plan, and 13 the GBSRP I Property was transferred to the debtors around August 24, 2018. (Doc. 15 at 14 8) It is undisputed that distributions commenced under the Plan, as evidenced by the fact 15 that CPF’s claims were paid in full and several third-party creditors had their claims paid 16 in full in August 2018.5 (Doc. 15 at 3) Ultimately, the Court finds that the Plan has been 17 substantially consummated per the terms of the Settlement Order. 18 Next, the Court must evaluate “whether modification of the plan of reorganization 19 would bear unduly on the innocent.” Thorpe, 677 F.3d at 882. It is undisputed that 20 reversing and remanding this case would result in an unknown number of third-party 21 creditors having to return funds transferred to them nearly one year ago, which is the most 22 significant harm that must be balanced against CPF’s injury. The Court must consider the 23 interests of these third-party creditors who received payment for their claims around 24 August 24, 2018, because most, if any, of these parties are not party to this appeal. (Doc. 25 15 at 10–11); Thorpe, 677 F.3d at 882 (stating “the question is not whether it is possible to 26 alter a plan such that no third party interests are affected, but whether it is possible to do 27 5 The Motion states that all undisputed claims have been paid in full, and the Trustee 28 currently holds the funds necessary to pay all remaining disputed claims. (Doc. 15 at 3) 1 | so ina way that does not affect third party interests to such an extent that the change is 2| inequitable”). The interests of these numerous parties is significant in the Court’s finding 3| that it would be very difficult and highly inequitable to claw back the funds transferred to 4| these entities. Therefore, the Court finds that this factor weighs heavily in favor of finding that this appeal is equitably moot. 6 Finally, the Court finds it nearly impossible to conceive of a form of relief in this 7 | case that would be an efficient and equitable solution to CPF’s harm without completely 8 | unraveling the Plan as implemented and causing significantly more harm and damage in 9| its aftermath. The Appellants have not set forth any persuasive arguments for how unraveling the Settlement Order furthers any balance of the equitable interests in this case. Thus, the Court’s inability to fashion efficient equitable relief weighs in favor of finding that this appeal is equitably moot. Therefore, the Court finds that it cannot craft equitable 13 | relief in this case, and this appeal is equitably moot. 14 Accordingly, 15 IT IS ORDERED that Appellees’ Motion to Dismiss (Doc. 15) is granted; 16 IT IS FURTHER ORDERED that ROI Properties LLC’s Motion to 17 | Dismiss/Joinder in Motion to Dismiss Appeal as Moot and For Lack of Appellate Standing 18 | (Doc. 22) is granted; 19 IT IS FURTHER ORDERED that Emerald Equities, LLC shall be dismissed from 20 | this case for lack of standing; and 21 IT IS FURTHER ORDERED that the Clerk of Court should terminate this case and enter judgment accordingly. 23 Dated this 26th day of July, 2019. 24 25 Le 26 Uinited States Distriot.ine 27 28