In re: Deed and Note Traders, LLC

Opinion

FILED APR 05 2012

1 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL

2 OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. AZ-11-1091-PaDJu and ) AZ-11-1092-PaDJu 6 DEED AND NOTE TRADERS, LLC, ) (Consolidated)

)

7 Debtor. ) Bk. No. 10-03640 ______________________________)

8 )

PNC MORTGAGE; BAC HOME LOANS )

9 SERVICING, LP, fka )

Countrywide Home Loans )

10 Servicing, L.P.; U.S. BANK, )

N.A.; AMERICA’S SERVICING )

11 COMPANY; WELLS FARGO BANK, )

N.A.; FLAGSTAR BANK, FSB; )

12 CHASE HOME FINANCE, LLC; THE )

BANK OF NEW YORK MELLON, fka )

13 The Bank of New York; DEUTSCHE)

BANK NATIONAL TRUST COMPANY; )

14 LITTON LOAN SERVICES; )

CITIBANK, N.A.; ONEWEST BANK, )

15 FSB; AURORA LOAN SERVICES, )

LLC; HSB MORTGAGE SERVICES; )

16 HSBC BANK USA, N.A., )

)

17 Appellants, )

)

18 v. ) M E M O R A N D U M1 )

19 DEED AND NOTE TRADERS, LLC, )

)

20 Appellee. )

______________________________)

21 Argued and Submitted on February 24, 2012 22 at Phoenix, Arizona 23 Filed - April 5, 2012 24 Appeal from the United States Bankruptcy Court for the District of Arizona 25 Honorable Eileen W. Hollowell, Bankruptcy Judge, Presiding 26 27 1 This disposition is not appropriate for publication.

28 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.

2 Appearances: David W. Cowles of Tiffany & Bosco, P.A. argued for Appellants Wells Fargo Bank, N.A., Chase Home 3 Finance, LLC, Litton Loan Services, Deutsche Bank National Trust Company, U.S. Bank National 4 Association, BAC Home Loans Servicing, LP, America's Servicing Company, PNC Mortgage, 5 Flagstar Bank, FSB and The Bank of New York Mellon. Jessica R. Kenney of McCarthy, Holthus & 6 Levine argued for Appellant Aurora Loan Services, LLC. Scott D. Gibson of Gibson, Nakamura & Green, 7 PLLC argued for Appellee Deed and Note Traders, LLC.

8 9 Before: PAPPAS, DUNN and JURY, Bankruptcy Judges. 10 11 Appellants appeal the order of the bankruptcy court 12 confirming the chapter 112 plan of reorganization filed in this 13 case by debtor Deed & Note Traders, LLC (“DNT”). We AFFIRM. 14 FACTS 15 DNT is an Arizona limited liability company that was formed 16 in 1993. Since then, it has engaged in the real estate business 17 in Tucson, Arizona, purchasing, rehabilitating, leasing and 18 selling residential properties. DNT is wholly owned by the Kinas 19 Family Trust, and David Kinas (“Kinas”) is the principal manager. 20 DNT financed the acquisition of its properties using its own 21 operating income and through the many loans it obtained from 22 individual investors. These were generally short-term, high 23 interest loans. It was DNT’s business practice to hold a 24 25

2

Unless otherwise indicated, all chapter, section and rule 26 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 27 to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.

The Federal Rules of Civil Procedure are referred to as “Civil 28 Rules.”

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1 property for about a year, during which time it would 2 rehabilitate the property, and then refinance the loan with 3 traditional lenders at market rates. As property values 4 increased, DNT would also sell property in its inventory at a 5 profit. 6 In December 2006, the Arizona attorney general investigated 7 the business practices of DNT and, after lengthy negotiations, 8 DNT and the state entered into a Consent Agreement. Under the 9 terms of the agreement, DNT was obliged to sell a number of 10 houses back to their original owners and “agreed to pay a large 11 sum as and for attorney fees incurred by the state.” These 12 payments and transactions occurred at the beginning of a 13 declining real estate market and, according to DNT, practically 14 eliminated any operating reserves previously held by DNT. DNT’s 15 financial problems were exacerbated in August 2007 when First 16 Magnus Financial Corporation, a large provider of traditional and 17 other residential loan programs in Arizona, shut down and filed 18 for bankruptcy. 19 DNT’s First Bankruptcy Case 20 The combination of fines, the loss of funding sources for 21 buyers from DNT’s inventory, and the corresponding loss of sales 22 revenue caused DNT to file its first petition for protection 23 under chapter 11 on September 7, 2007. On September 20, 2007, 24 DNT filed its schedules in which it listed a total of 25 $40,581,976.00 in real property assets and $29,807,073.00 in 26 secured claims against those properties. The total unsecured 27 debt was $706,208.12, most of which was debt held by insiders and 28 the secured creditors.

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1 DNT filed its plan and disclosure statement on December 26, 2 2007; the plan was amended on April 24 and May 22, 2008. We 3 refer to the twice-amended plan as the “First Plan.” All claims 4 of the appellants in this appeal were classified as Class 4 5 Secured Claims in the First Plan. These claims were to be 6 treated as follows: 7 - All claimants would retain their respective security 8 interests on the properties securing their claims. 9 - The arrears on these claims, together with accrued unpaid 10 interest at the contract rate, were added to the principal 11 balance on the secured debts as of the effective date of the 12 plan. This amount (i.e., the arrears plus the unpaid principal 13 balance) was the new “outstanding balance” on the secured 14 creditors’ claims. 15 - The claimants would receive monthly deferred interest-only 16 payments on the outstanding balance. The interest accruing on 17 the outstanding balance was based on the published 30-year 18 residential mortgage rate for the Tucson area provided on the 19 internet website, bankrate.com, from and after the effective 20 date. 21 - The claims would be paid in full by DNT, either at the 22 time of sale of the secured property or upon refinancing the 23 obligation, or on or before a stated maturity date. The maturity 24 date for first-priority liens was the seventh anniversary of the 25 effective date; the maturity date for any junior liens was the 26 fifth anniversary. 27 On September 16, 2008, DNT reported to the bankruptcy court 28 that all objections to the First Plan had been resolved by

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1 stipulation. The bankruptcy court entered an order confirming 2 the First Plan on October 23, 2008. The effective date was 3 November 3, 2008. 4 In the year after the effective date, there were almost a 5 hundred motions for relief from stay, notices of default, or 6 associated pleadings filed by secured creditors alleging DNT’s 7 failure to make monthly payments under the First Plan. Many of 8 these motions were granted. However, the record contains no 9 information regarding foreclosures or other actions taken by the 10 Class 4 Secured Creditors. 11 On March 9, 2009, DNT filed a motion for entry of a Final 12 Decree and Order Closing Case in the bankruptcy case. Three 13 creditors who are not involved in this appeal (the “Cherry 14 Group”) filed objections to the entry of final decree, arguing 15 that DNT had failed to make payments under the First Plan and 16 other irregularities. On May 4, 2009, the Cherry Group filed a 17 motion asking the bankruptcy court to revoke the order confirming 18 the First Plan on generally the same grounds as their objections 19 to final decree. The bankruptcy court ordered that the motion to 20 revoke and DNT’s motion for a final decree be considered at a 21 hearing on September 2, 2009. 22 At that hearing, counsel for DNT and the Cherry Group 23 jointly informed the bankruptcy court that the Cherry Group was 24 withdrawing the motion to revoke the confirmation order and the 25 objections to entry of a final decree. DNT represented that it 26 would prepare the order for the final decree. 27 Before entry of any final decree, appellant Wells Fargo, 28 N.A., moved to convert the bankruptcy case to a chapter 7 case on

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1 November 11, 2009. Wells Fargo alleged, inter alia, that there 2 had been mismanagement of estate funds by DNT and diversion of 3 assets to insiders, and that DNT’s actions constituted a material 4 default under the First Plan. After multiple continuances, the 5 bankruptcy court held a hearing on the motion to convert on 6 January 5, 2010. Again, at the hearing, counsel for the parties 7 informed the court that the issues had been resolved. A joint 8 stipulation withdrawing the motion to convert was entered on 9 February 5, and approved by the bankruptcy court on February 8, 10 2010. As all objections and impediments to entry of a final 11 decree had been overcome, on February 8, 2010, the bankruptcy 12 court also entered the final decree and order closing the case. 13 DNT’s Second Bankruptcy Case 14 Only four days after entry of the final decree and order 15 closing the case in the first bankruptcy case, on February 12, 16 2010, DNT filed a second chapter 11 petition. DNT’s schedules, 17 filed on March 16, 2010, list $19,858,452.00 in real property 18 assets and $27,085,119.94 in secured claims on those properties. 19 Total unsecured debt was $591,935.88. 20 DNT proposed a plan of reorganization in the second 21 bankruptcy case on April 2, 2010 (the “Second Plan”). The only 22 significant difference between the First and Second Plans, as the 23 parties have acknowledged in this appeal, was DNT’s proposal to 24 reduce the Class 4 Secured Creditors’ allowed claims to the 25 “market value” of the properties securing those claims as of the 26 effective date of the plan. In other words, the Second Plan

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1 proposed to “cramdown”3 these claims. 2 The Appellants, each holding loans secured by separate 3 properties, filed ten motions to dismiss the second bankruptcy 4 case on May 21, 2010. These motions argued in identical language 5 that DNT’s Second Plan violated § 1127(b), and the principle of 6 finality of orders, and that DNT was attempting to circumvent the 7 prohibition on modification of a confirmed, substantially 8 consummated plan by a subsequent chapter 11 case. 9 In addition to the dismissal motions, over the next few 10 months, over sixty objections to confirmation of the Second Plan 11 were filed by creditors, including all of the Appellants. These 12 objections to confirmation generally parroted the arguments made 13 by the Appellants in the motions to dismiss. 14 The bankruptcy court held several hearings on the motions to 15 dismiss and confirmation of the Second Plan, beginning in 16 August, and culminating on December 22, 2010.4 Before the 17 December 22 hearing, DNT had submitted a unilateral offer to 18 amend the plan so as to not cramdown on six of the ten loans 19 involved in the motions to dismiss, and either to abandon those 20 properties or consent to relief from stay in favor of the secured 21 creditor. As to the remaining four loans and properties 22 23 3 “Cramdown” is a bankruptcy term of art referring to a 24 proposal to confirm a reorganization plan without the consent, and frequently over the objection, of the secured creditors. See 25 Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R.

25, 50 (9th Cir. BAP 2008).

26

4

27 For reasons unknown, the transcript of the December 22, 2010 hearing is the only one provided by the parties to the Panel 28 in the excerpts of record or docket.

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1 pertaining to creditors filing motions, DNT indicated its 2 position that the properties were worth more than the amount of 3 the respective debts secured by them, such that the creditors’ 4 rights were thus not impaired under the Second Plan. 5 At the hearing, after counsel were heard, the bankruptcy 6 court denied the motions to dismiss the bankruptcy case, 7 concluding that, as the result of DNT’s amendment, none of the 8 secured creditors were impaired under the Second Plan. The 9 denial of these motions to dismiss was not appealed. 10 The bankruptcy court then conducted an evidentiary hearing 11 on plan confirmation. The court heard testimony from Kinas 12 regarding his management of DNT, why DNT failed to meet its 13 obligations under the First Plan, and the requirements for 14 confirmation of the Second Plan. Kinas was then cross-examined 15 by attorneys for various creditors. After hearing the testimony 16 and closing arguments of counsel, the bankruptcy court overruled 17 the objections to confirmation and confirmed the Second Plan. 18 In its oral decision, the bankruptcy court first observed 19 that, in its earlier ruling denying the motions to dismiss, it 20 had not commented on the focus of the secured creditors’ 21 argument, that DNT was attempting to violate § 1127(b). The 22 bankruptcy court rejected this argument and found that DNT was 23 not attempting to thwart the First Plan’s treatment of over- 24 secured creditors because the Second Plan treated them no 25 differently. Simply put, as to over-secured creditors, the court 26 concluded that they were not significantly impaired under either 27 Plan, and that DNT had not violated § 1127(b) and the principle 28 of finality of confirmation orders regarding those creditors.

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1 As the court then observed, DNT’s proposed cramdown of the 2 claims of under-secured creditors was a different matter: 3 A more difficult call is for the properties and the creditors secured by those properties who were not 4 crammed down in the first case and are being crammed down in the second case, all of the arguments about 5 1127 and 1141 clearly the debtor here is seeking a modification of the terms of the first plan. The 6 question is – is it justifiable[?] Is it justifiable?

And if it's justifiable, is the treatment being offered 7 to these creditors in good faith? That it seems to me is the crux of the difficult decision here. I look at 8 this under the totality of the circumstances test, I believe, for good faith. So the plan terms are short 9 basically. This is not an extended period of time of a stretch out. The interest rate isn't being modified 10 from the first plan. Those are good things. It's the cramdown itself which is the essence of the problem.

11 But unlike the few cases I've been able to find on this, I'm not sure this is a situation where all of the 12 burden is being shifted to the secured creditors because, in fact, all they were ever going to get is 13 the value of the property because of the nature of the anti-deficiency statute in Arizona. I believe that the 14 debtor has met its burden here, but I would say it's a very, very close call.

15 16 The bankruptcy court decided that the Second Plan should be 17 confirmed, and the objections to confirmation overruled. It 18 entered an order confirming the Second Plan on February 10, 2011. 19 Appellants filed a timely appeal on February 24, 2011. 20 JURISDICTION 21 The bankruptcy court had jurisdiction under 28 U.S.C. 22 §§ 1334 and 157(b)(2)(L). We have jurisdiction under 28 U.S.C. 23 § 158. 24 ISSUE 25 Whether the bankruptcy court abused its discretion in 26 confirming the Second Plan. 27 Whether the bankruptcy court clearly erred in determining 28 that the Second Plan was filed in good faith as required under

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1 § 1129(a)(3). 2 STANDARDS OF REVIEW 3 While a bankruptcy court's decision to confirm a chapter 11 4 plan is reviewed for an abuse of discretion, its determination 5 that the plan satisfies the confirmation requirements necessarily 6 requires the bankruptcy court to make factual findings, which are 7 reviewed under a clear error standard. Acequia, Inc. v. Clinton 8 (In re Acequia, Inc.), 787 F.2d 1352, 1358 (9th Cir. 1986); 9 Computer Task Group, Inc. v. Brotby (In re Brotby), 303 B.R. 177, 10 184 (9th Cir. BAP 2003). 11 Clear error exists when the reviewing court is left with a 12 definite and firm conviction that a mistake has been committed. 13 In re Brotby, 303 B.R. at 184. 14 In applying an abuse of discretion test, we first "determine 15 de novo whether the [bankruptcy] court identified the correct 16 legal rule to apply to the relief requested." United States v. 17 Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). If the 18 bankruptcy court identified the correct legal rule, we then 19 determine whether its "application of the correct legal standard 20 [to the facts] was (1) illogical, (2)implausible, or (3) without 21 support in inferences that may be drawn from the facts in the 22 record." Id. If the bankruptcy court did not identify the 23 correct legal rule, or its application of the correct legal 24 standard to the facts was illogical, implausible, or without 25 support in inferences that may be drawn from the facts in the 26 record, then the bankruptcy court has abused its discretion. Id.

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1 DISCUSSION 2 I. Appellants have standing because at least one of the appellants, Wells Fargo, is aggrieved.

3 As a preliminary matter, DNT argues that the Appellants lack 4 standing to appeal the bankruptcy court’s order. DNT appears to 5 argue that because the Appellants filed the motions to dismiss as 6 the vehicle for arguing that §§ 1127(b) and 1129(a)(3) prohibit 7 the bankruptcy court from confirming a second plan that modifies 8 the terms of a confirmed plan, and since the bankruptcy court, in 9 denying those motions, ruled that the Appellants were not 10 impaired under the terms of the Second Plan, therefore any 11 provisions in the Second Plan modifying the rights of secured 12 creditors did not apply to the Appellants. We disagree with DNT 13 that the Second Plan did not impair the rights of any of the 14 Appellants.

15 In the Ninth Circuit, a party has standing to appeal a 16 bankruptcy court order if the party is "aggrieved" by the order.

17 In re Commercial W. Fin. Corp., 761 F.2d 441, 443 (9th Cir.

18 1985). An appellant is aggrieved if "directly and adversely 19 affected pecuniarily by an order of the bankruptcy court"; in 20 other words, the order must diminish the appellant's property, 21 increase its burdens, or detrimentally affect its rights. Duckor 22 Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.), 23 177 F.3d 774, 777 (9th Cir. 1999) (quoting Fondiller v. Robertson 24 (In re Fondiller), 707 F.2d 441, 442 (9th Cir. 1983)).

25 In this appeal, it cannot be seriously disputed that DNT is 26 attempting a cramdown of the Appellants’ secured claims. Simply 27 put, through the Second Plan, DNT is attempting to restructure

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1 the rights granted to some of the Appellants through the First 2 Plan and to reduce the amount of secured debt it will pay to some 3 of them. In this sense, DNT is unquestionably attempting to 4 “detrimentally affect the rights” of some of the secured 5 creditors. As a result, the Appellants whose claims are to be 6 restructured have standing to appeal confirmation of DNT’s Second 7 Plan. 8 Moreover, even if one or more of the individual appellants 9 arguably lack standing to appeal, there is at least one creditor 10 that did not file a motion to dismiss, yet filed an objection to 11 confirmation and that holds a claim targeted in the Second Plan 12 for cramdown. Wells Fargo holds a claim secured by a lien on the 13 DNT property located on North Orchard Street in Tucson. Wells 14 Fargo did not file a motion to dismiss, but it did object to 15 confirmation of the Second Plan on August 6, 2010. According to 16 the appendix to the declaration of Kinas submitted by DNT in 17 support of plan confirmation on December 22, 2010, the current 18 balance due on the Wells Fargo loan on the North Orchard property 19 was $82,317.88, and current market value of the property was 20 $70,000. In the Second Plan, DNT proposed to cramdown the Wells 21 Fargo secured claim to $70,000. Unlike claims secured by other 22 properties involved in the motions to dismiss, DNT did not make 23 any offer to abandon, or to consent to relief from stay, on that 24 property. Put another way, Wells Fargo’s rights were 25 detrimentally affected, or in other words, it was “aggrieved,” 26 when the bankruptcy court confirmed the Second Plan. 27 If one appellant has standing, there is no need to examine 28 the standing of the other appellants. Carey v. Population

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1 Servs., Int'l, 431 U.S. 678, 682 (1977) (holding that if one 2 party has the requisite standing to appeal, the appellate court 3 "has no occasion to decide the standing of the other 4 appellees."); W. Watersheds Project v. Kraayenbrink, 632 F.3d 5 472, 485 (9th Cir. 2011) (same). We therefore decline to 6 entertain DNT’s objection to the Appellants’ standing to appeal. 7 II. The bankruptcy court did not clearly err in determining that extraordinary and unforseen circumstances were present 8 in this case which justified DNT’s proposal to cramdown secured claims in the Second Plan.

9 10 The Code makes clear that a debtor’s right to modify a 11 confirmed chapter 11 plan is subject to conditions. The 12 appellants have maintained, both in the bankruptcy court and on 13 appeal, that § 1127(b)5 prohibits DNT’s confirmation of a 14 chapter 11 plan proposing to change the terms of the treatment of 15 their claims under the substantially consummated First Plan. 16 While case law unquestionably allows debtors to engage in serial 17 filings of chapter 11 cases, what is in dispute here is the sort 18 of justification required before a bankruptcy court should 19 20

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§ 1127. Modification of plan.

21 22 * * *

23 (b) The proponent of a plan or the reorganized debtor may modify such plan at any time after confirmation of such plan and before 24 substantial consummation of such plan, but may not modify such 25 plan so that such plan as modified fails to meet the requirements of sections 1122 and 1123 of this title. Such plan as modified 26 under this subsection becomes the plan only if circumstances 27 warrant such modification and the court, after notice and a hearing, confirms such plan as modified, under section 1129 of 28 this title.

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1 endorse a debtor’s second plan proposing to modify the terms of a 2 prior, confirmed and substantially consummated plan. 3 The only two courts of appeals to examine this question hold 4 that serial chapter 11 filings are not per se impermissible. In 5 Fruehauf Corp. v. Jartran (In re Jartran), the Seventh Circuit 6 observed that, 7 there is no prohibition of serial good faith Chapter 11 filings in the Code — indeed, there is not even a time 8 limit on successive filings parallel to that imposed on individuals or family farmers. 11 U.S.C. § 109(g). As 9 the district court noted, Congress could easily have included repeat corporate debtors in that section; its 10 failure to do so indicates that corporate debtors are exempt from even the minimal constraints on serial 11 filings imposed on other kinds of debtors. 12 886 F.2d 859, 869-70 (7th Cir. 1989). The court addressed 13 another serial chapter 11 case in In re Official Comm. of 14 Unsecured Creditors, 943 F.2d 752, 757 (7th Cir. 1991). Although 15 both of these cases painted the authority to file serial 16 chapter 11's with broad brush strokes, neither provided clear 17 guidance on whether, and to what extent, the plan proposed in the 18 second chapter 11 case could modify creditor treatment in the 19 first plan. 20 Following shortly after the Seventh Circuit decisions, the 21 Fifth Circuit decided In re Elmwood Dev. Corp., 964 F.2d 508, 511 22 (5th Cir. 1992). As described by the court, 23 This case raises for this circuit the de novo issue of the extent to which a serial filing of a Chapter 11 24 petition evidences a lack of good faith on the part of the debtor. We conclude that the mere fact that a 25 debtor has previously petitioned for bankruptcy relief does not render a subsequent Chapter 11 petition "per 26 se" invalid. This conclusion is consistent with the Supreme Court's recent teaching in Johnson v. Home 27 State Bank [111 S.Ct. 2150 (1991)]. The Johnson Court held that serial Chapter 7 and Chapter 13 petitions 28 are not categorically prohibited. The Court reasoned

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1 that because Congress has enumerated certain instances in which serial filings are per se impermissible, there 2 is no absolute prohibition in instances not so enumerated. The Court considered the good faith 3 requirement to be adequate protection from abusive serial filings.

4 5 Id. at 511. In providing guidance on when a second plan may 6 modify the terms of the first, the court states: “A second 7 petition would not necessarily contradict the original 8 proceedings because a legitimately varied and previously unknown 9 factual scenario might require a different plan to accomplish the 10 goals of bankruptcy relief." Elmwood, 964 F.2d at 511-12. In 11 short, Elmwood stands for the proposition that, in proposing yet 12 a second chapter 11 plan, the debtor must demonstrate some sort 13 of genuine need to reorganize as the result of unforeseen changes 14 in circumstance which contribute to the debtor's default under 15 its obligations under the earlier plan. Id. Indeed, in Elmwood, 16 the court cited the national credit crunch in the early 1990s as 17 an example of changed circumstances in real estate markets that 18 might have justified modification of the debtor’s earlier plan. 19 But because the credit crunch and resulting depressed real estate 20 market had existed for several years before substantial 21 consummation of the first plan, the Fifth Circuit ruled that 22 those conditions, under the facts of that case, were sufficiently 23 foreseeable that they would not justify a modification of the 24 first plan. Id. at 512. 25 Arizona bankruptcy courts have recognized that serial 26 chapter 11 filings are permissible if made in good faith. United 27 States v. Shepherd Oil, Inc. (In re Shepherd Oil, Inc.), 118 B.R. 28 741, 747 (Bankr. D. Ariz. 1990) (citing favorably to Jartran).

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1 Later case law supports both the principle that serial chapter 11 2 filings are not per se impermissible, and that a second plan may 3 modify the first plan where there are extraordinary circumstances 4 that are unforeseeable. In re Tillotson, 266 B.R. 565, 569 5 (Bankr. D. Md. 2001); In re Adams, 218 B.R. 597 (Bankr. D. Kan. 6 1998); In re Northtown Realty Co., L.P., 215 B.R. 906, 911 7 (Bankr. E.D.N.Y. 1998); In re Bouy, Hall & Howard & Assocs., 8 208 B.R. 737 (Bankr. S.D. Ga. 1995); In re Casa Loma Assocs., 9 122 B.R. 814 (Bankr. N.D. Ga. 1991). Even the Appellants appear 10 to agree that “a confirmed plan of reorganization that has been 11 substantially consummated is not subject to modification by 12 filing a second bankruptcy case unless the second filing is in 13 good faith and necessitated by unforeseeable circumstances.” 14 Appellants’ Reply Br. at 8 (emphasis added). 15 The question presented to the Panel is, did the bankruptcy 16 court clearly err in finding that there were extraordinary, 17 unforseeable circumstances present that allowed DNT to propose a 18 second chapter 11 plan that modified the secured creditors’ 19 rights under the First Plan? The bankruptcy court found that, 20 while it was a “close call,” justification for this extraordinary 21 approach to dealing with DNT’s finances existed: 22 Those cases do talk about the fact that a simple change in economic circumstances isn’t enough. . . . This 23 was, at least in this state, a depression. The level at which things fell off the cliff was not foreseeable 24 in my opinion and more importantly what was not foreseeable was the freeze in the credit markets that 25 would have made it impossible for the Debtor to get refinancing. So, I find in the circumstances of this 26 case that what happened to the economy was the equivalent of an airplane flying into a factory. So 27 that’s the finding. 28 Hr’g Tr. 18:24—19:10, December 22, 2010.

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1 The bankruptcy court indicated on the record that it had 2 invested time in reviewing real property appraisals connected 3 with this case. Tr. Hr’g 87:18-23, December 22, 2010. It is 4 axiomatic that in a busy bankruptcy court such as Arizona, a 5 bankruptcy judge is frequently exposed to facts and information 6 about how economic conditions in that district affect the parties 7 coming before the court. The bankruptcy judge need not ignore 8 its particular knowledge of such matters; the Supreme Court has 9 endorsed on multiple occasions the principle that a federal judge 10 may take judicial notice of catastrophic economic conditions. 11 Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 249 (1978) 12 (discussing “the broad and desperate emergency economic 13 conditions of the early 1930's”); Home Building & Loan Ass’n. v. 14 Blaidsdale, 290 U.S. 398, 445 (1934) (recognizing emergency 15 powers of a state in response to severe economic conditions); 16 Edwards v. Kearzey, 96 U.S. 595, 602-03 (1877) (discussing 17 economic conditions in several states of the South after the 18 Civil War). In short, the bankruptcy court had a legal and 19 evidentiary foundation for its finding of fact that extraordinary 20 circumstances were present in this bankruptcy case. 21 The Appellants have not challenged the bankruptcy court’s 22 analysis of extraordinary market conditions surrounding DNT’s 23 reorganization cases. Rather, they contend that the 24 deteriorating real estate market was foreseeable to DNT, 25 observing that immediately following confirmation of DNT’s First 26 Plan, its manager admitted that the Arizona real estate market 27 was in decline. But the Appellants confuse two distinct economic 28 conditions: the real estate market (i.e., the supply and demand

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1 for properties) and the state of the credit market (i.e., the 2 availability of loans for property acquisition and financing). 3 While the real estate market may have been in decline in 4 2007 prior to confirmation of the First Plan, the extent of the 5 problems to come in the broader credit market, on which DNT would 6 have to rely for funding of its acquisitions, refinancing, and to 7 fund purchasers of its properties, would devolve into what one 8 court described as a “seizure” following the bankruptcy filing of 9 Lehman Brothers in September 2008. Bd. of Tr. of the AFTRA Ret. 10 Fund v. JP Morgan Chase Bank, N.A., 806 F. Supp.2d 662, 677 11 (S.D.N.Y. 2011). As it turned out, there was a "crisis in the 12 subprime market that . . . spread to the rest of the real estate 13 market, collapse of the financial markets generally, [and] 14 market-wide liquidity crisis." In re Lehman Bros. Sec. & ERISA 15 Litig., 799 F. Supp.2d 258, 264 (S.D.N.Y. 2011). It was this 16 unanticipated collapse in the general availability of credit, not 17 the possibly foreseeable decline in the Arizona housing market, 18 that convinced the bankruptcy court in this appeal to find: 19 The level at which things fell off the cliff was not foreseeable in my opinion, and more importantly what 20 was not foreseeable was the freeze in the credit markets that would have made it impossible for the 21 debtor to get refinancing. 22 Hr’g Tr. 19:3-7, December 22, 2010. 23 The Appellants offered no evidence to the bankruptcy court, 24 nor have they given us a reasoned argument, to show that the 25 credit market freeze in Autumn 2008 would have been foreseeable 26 when DNT submitted its First Plan in December 2007, or its 27 amended plans in early 2008. Instead of advancing any fully- 28 developed argument why the filing of DNT’s second bankruptcy

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1 case, and the need for its Second Plan, was not under 2 extraordinary and unforseeable circumstances, the Appellants have 3 repeatedly challenged the good faith of DNT in pursuing a second 4 bankruptcy filing. In their briefs, the Appellants suggest that 5 DNT manipulated the bankruptcy system by seeking entry of a final 6 decree, waiting eleven months for entry of that decree without 7 amending its plan, and then filing a second chapter 11 case only 8 four days after entry of the final decree. The facts do not 9 support the Appellants’ bad faith argument. 10 It is true that eleven months elapsed from the time DNT 11 filed its motion and entry of the final decree. But that delay 12 was not solely caused by any lack of diligence on DNT’s part. 13 The facts instead establish that DNT submitted the motion for 14 final decree after substantially consummating the First Plan by 15 beginning the distributions to creditors, something the 16 Appellants have not disputed. But three creditors objected to 17 the motion, and in turn moved to revoke confirmation of the First 18 Plan in May. The bankruptcy court decided that it could not 19 enter a final decree while a motion to revoke was on the table, 20 so it ordered that the motions to revoke and for final decree be 21 heard together. After several continuances, the hearing was held 22 on September 2, 2009, at which DNT and the creditors announced a 23 settlement and withdrawal of the motion to revoke. DNT indicated 24 to the court that it would prepare a final decree order. 25 Shortly thereafter, Appellant Wells Fargo moved to convert 26 the case to chapter 7 on November 11. Again, entry of the final 27 decree was continued along with the conversion motion. After 28 more continuances, the bankruptcy court held a hearing on the

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1 motion to convert on January 5, 2010. Wells Fargo opted to 2 withdraw the motion to convert, and a joint stipulation doing so 3 was filed on February 5, and approved by the bankruptcy court on 4 February 8, 2010. All objections and impediments to entry of 5 final decree being withdrawn, on February 8, 2010, the court then 6 entered the final decree and order closing the case. In short, 7 the eleven-month delay between filing the motion for final decree 8 and entry of the order was not necessarily the result of delay by 9 DNT, and we find no merit in the Appellants’ suggestion that the 10 facts demonstrate a lack of good faith in this respect. Like the 11 bankruptcy court, in light of changing financial conditions, we 12 also find it unsurprising that DNT would quickly file a second 13 petition under chapter 11 within four days. Indeed, according to 14 the testimony of Kinas, DNT’s worsening cash flow problems and 15 lack of access to credit threatened the existence of the company 16 at the time of filing the second petition. 17 III. The bankruptcy court did not abuse its discretion in confirming the Second Plan and did not clearly err in ruling 18 that the plan met the good faith standard of § 1129(a)(3). 19 From the beginning of the second bankruptcy case, the 20 bankruptcy court cautioned the parties that the lynchpin for 21 confirmation of a second plan would center on the requirement 22 that DNT was proceeding in good faith as required in 23 § 1129(a)(3). It is the bankruptcy court’s decision on this 24 single confirmation element that forms the basis of the 25 Appellants’ appeal.6 26

6

27 The Appellants have not argued that DNT did not satisfy any of the other § 1129(a) confirmation requirements. While 28 (continued...)

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1 Section 1129(a)(3) provides that a bankruptcy court shall 2 confirm a plan only if the “plan has been proposed in good faith 3 and not by any means forbidden by law.” Section 1129(a)(3) does 4 not define good faith. Platinum Capital, Inc. v. Sylmar Plaza, 5 L.P. (In re Sylmar Plaza, L.P.), 314 F.3d 1070, 1074 (9th Cir. 6 2002) (citing In re Madison Hotel Assocs., 749 F.2d 410, 425 (7th 7 Cir. 1994)). However, under the decisions interpreting this Code 8 provision, a plan may be found to be proposed in good faith where 9 it achieves a result consistent with the objectives and purposes 10 of the Code. Id. (citing Ryan v. Loui (In re Corey), 892 F.2d 11 829, 835 (9th Cir. 1989)); see also Madison Hotel, 749 F.2d at 12 425 ("For purposes of determining good faith under section 13 1129(a)(3) . . . the important point of inquiry is the plan 14 itself and whether such plan will fairly achieve a result 15 consistent with the objectives and purposes of the Bankruptcy 16 Code."). The bankruptcy court’s good faith determination must be 17 based on the totality of the circumstances. Smyrnos v. Padilla 18 (In re Padilla), 213 B.R. 349, 352 n.2 (9th Cir. BAP 1997). The 19 debtor, as plan proponent, has the burden of showing, by a 20 preponderance of the evidence, that its chapter 11 plan is 21 proposed in good faith. Farmers Home Admin. v. Arnold & Baker 22 Farms, 177 B.R. 648, 653 (9th Cir. BAP 1994). A bankruptcy 23 court’s finding of a debtor’s good faith in proposing a 24 25

6

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26 there was some discussion by the parties in the bankruptcy court 27 hearings regarding whether the Second Plan was feasible for purposes of § 1129(a)(11), the feasibility question has not been 28 raised in this appeal.

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1 chapter 11 plan is a finding of fact and reviewed for clear 2 error. In re Brotby, 303 B.R. at 184. 3 In this case, while there are facts supporting the 4 bankruptcy court’s view that it was a “very, very close call,” 5 the court did not clearly err in determining that the plan was 6 proposed in good faith. The court’s analysis on this issue 7 conformed with that dictated by Ninth Circuit case law, in that 8 the bankruptcy court considered the totality of the 9 circumstances. The court found that the interest rate terms 10 proposed for secured creditors’ claims were unchanged between the 11 First and Second Plans. The repayment term for secured loans 12 under the Second Plan was relatively short, not an extended 13 “stretch out.” As discussed above, the court also determined 14 that § 1127(b) was not a bar to DNT’s proposed cramdown in the 15 Second Plan because, the court found, extraordinary, unforseeable 16 circumstances existed as compared to those surrounding 17 confirmation of the First Plan. And finally, the court 18 determined that, under Arizona’s anti-deficiency law, the most a 19 creditor with a lien on a house would likely receive in a 20 liquidation or relief from stay scenario would be the foreclosure 21 value of that property (“All the [creditors] were ever going to 22 get is the value of the property because of the nature of the 23 anti-deficiency statute in Arizona.” Hr’g Tr. 84:7, December 22, 24 2010.) Thus, DNT’s proposal to pay secured creditors the “market 25 value” was consistent with the value of their state law rights. 26 The bankruptcy court was correct in this last assumption. 27 In Arizona, two statutes protect borrowers from lenders seeking 28 to collect debt that remains outstanding after foreclosure on the

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1 house securing a purchase-money loan(s). See Ariz. Rev. Stat. 2 § 33-729 (2007).7 When land is secured by a deed of trust, 3 whether or not the loan was used to purchase the property, the 4 homeowner is protected from those seeking deficiency judgments by 5 Ariz. Rev. Stat. § 33-814 (2007).8 6 The bankruptcy court found, under all these circumstances, 7 that DNT had shown it acted in good faith by filing the second 8 bankruptcy petition and in proposing its Second Plan. Opposed to 9 this was the Appellants’ continuing argument that DNT made a 10 calculated and tactical decision to wait for the first bankruptcy 11 case to be closed rather than in good faith seeking to amend the 12 First Plan. But the bankruptcy court’s finding on good faith 13

7

14 § 33-729. Purchase money mortgage; limitation on liability A. . . . [I]f a mortgage is given to secure the 15 payment of the balance of the purchase price, or to secure a loan 16 to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to 17 and utilized for either a single one-family or single two-family dwelling, the lien of judgment in an action to foreclose such 18 mortgage shall not extend to any other property of the judgment 19 debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the 20 mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not 21 otherwise be satisfied out of other property of the judgment 22 debtor, notwithstanding any agreement to the contrary.

A.R.S. § 33-729 (2011).

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8

§ 33-814. Action to recover balance after sale or 24 foreclosure on property under trust deed . . . .

25 G. If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a 26 single two-family dwelling is sold pursuant to the trustee's 27 power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of 28 the indebtedness and any interest, costs and expenses.

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1 rejected this contention, resolving a disputed question of fact. 2 Even if there are facts to support the Appellants’ argument, 3 where there are “two permissible views of the evidence, the 4 factfinder’s choice between them cannot be clearly erroneous.” 5 Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 400-01 (1990). 6 Having settled the only objection to confirmation under 7 § 1129(a), and finding that all other provisions of that section 8 were satisfied, the bankruptcy court acted properly in deciding 9 to confirm the Second Plan. In doing so, it did not abuse its 10 discretion. 11 CONCLUSION 12 We AFFIRM the bankruptcy court’s order confirming the Second 13 Plan. 14 15 16 17 18 19 20 21 22 23 24 25 26