485 B.R. 393 (9th Cir. BAP 2012), AZ-11-1529-JuBrD, In re Washington Coast I, L.L.C.

Docket NºBAP AZ-11-1529-JuBrD.
Citation485 B.R. 393
Opinion JudgeJURY, Bankruptcy Judge.
Party NameIn re WASHINGTON COAST I, L.L.C.; Structural Investments & Planning IV, L.L.C., Debtors. v. Pacific Continental Bank; Sonas Capital Group, LLC, Appellees. Resource Funding, Inc., Appellant, Bankruptcy Nos. 08-18608-GBN, 09-01035-GBN. Adversary No. 09-00553-GBN.
AttorneySusan J. Williams, Esq., of Hennelly & Grossfeld LLP, Marina del Rey, CA, argued for Appellant Resource Funding, Inc.; Scott K. Brown, Esq., of Lewis and Roca LLP, Phoenix, AZ, argued for Appellee Pacific Continental Bank; Richard M. Lorenzen, Esq., of Perkins Coie LLP, Phoenix, AZ, appeared for ...
Judge PanelBefore JURY, BRAND [**], and DUNN, Bankruptcy Judges.
Case DateDecember 18, 2012
CourtUnited States Bankruptcy Courts, Ninth Circuit

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485 B.R. 393 (9th Cir. BAP 2012)

In re WASHINGTON COAST I, L.L.C.; Structural Investments & Planning IV, L.L.C., Debtors.

Resource Funding, Inc., Appellant,

v.

Pacific Continental Bank; Sonas Capital Group, LLC, Appellees.

BAP No. AZ-11-1529-JuBrD.

Bankruptcy Nos. 08-18608-GBN, 09-01035-GBN.

Adversary No. 09-00553-GBN.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

December 18, 2012

Argued and Submitted Sept. 19, 2012.

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Susan J. Williams, Esq., of Hennelly & Grossfeld LLP, Marina del Rey, CA, argued for Appellant Resource Funding, Inc.; Scott K. Brown, Esq., of Lewis and Roca LLP, Phoenix, AZ, argued for Appellee Pacific Continental Bank; Richard M. Lorenzen, Esq., of Perkins Coie LLP, Phoenix, AZ, appeared for Appellee Sonas Capital Group, LLC.

Before JURY, BRAND [**], and DUNN, Bankruptcy Judges.

OPINION

JURY, Bankruptcy Judge.

Plaintiff-appellee, Pacific Continental Bank (PCB), filed an adversary proceeding (PCB Adversary) against defendant-appellant, Resource Funding, Inc. (RF), seeking to establish its first lien priority in proceeds from the postpetition sale of real property (Lot # 173) owned by debtor, Washington Coast I, LLC (Washington Coast), and in other properties owned by Washington Coast and Structural Investments & Planning IV, LLP (SIP IV) (collectively, we refer to Washington Coast and SIP IV as Debtors). The PCB Adversary related to a series of loan transactions by and among plaintiff-in-intervention and appellee, Sonas Capital Group, LLC (Sonas), PCB, RF, and Debtors. After a trial, the bankruptcy court entered a final judgment finding in favor of PCB. This appeal followed.

On appeal, RF seeks to have us set aside the final judgment (or dismiss the PCB Adversary) on the theory that the bankruptcy court, as a non-Article III court, lacked authority to enter the judgment under the holding in Stern v. Marshall, __ U.S. __, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Alternatively, RF requests us to reverse and remand the matter to the bankruptcy court because the judgment exceeded the relief sought in PCB's first amended complaint (FAC) and the parties' joint pretrial statement.

We disagree with both contentions. We conclude that the lien priority dispute does not fall within the narrow holding of Stern. We also decide that even if Stern did apply, RF waived or forfeited its right to challenge for the first time on appeal the bankruptcy court's statutory and constitutional authority to enter a final judgment in the PCB Adversary. Finally, we decide that the final judgment did not exceed the relief sought in the FAC. Accordingly, we AFFIRM.

I. FACTS

A. The Prepetition Loan Transactions

Between December 2004 and March 2006, Sonas, a " hard money" lender, entered into a series of loan transactions with SIP IV and Pacific Crest I Development LLC (Pacific Crest) for the purpose of acquiring or developing real property. The loans were evidenced by promissory notes and secured by deeds of trust recorded against several parcels of real property located in Pacific County, Washington (Washington Property). Under a loan modification agreement dated December 19, 2006, Pacific Crest confirmed that it transferred its interest in certain parcels to Washington Coast and Washington Coast confirmed it was liable on the promissory notes and deeds of trust.

On September 28, 2005, Sonas and PCB executed a Business Loan Agreement and

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related loan documents, whereby PCB extended a revolving line of credit to Sonas with a maximum principal amount of $5,000,000. As security for the loan, Sonas entered into a Commercial Pledge Agreement dated September 28, 2005, which provided that the collateral for PCB's loan to Sonas included, among other things, the Sonas deeds of trust secured by the Washington Property. As part of the transaction, Sonas assigned the deeds of trust to PCB pursuant to five separate assignments (Assignments) which were recorded in the Pacific County records in 2005.

In December 2006, RF loaned $5,000,000 to Washington Coast, SIP IV, Structural Investments, Inc. (Structural), Donald Davis and Matthew Doney (collectively, the Doney Affiliates). The loan was evidenced by a note (RF Note) which was secured in part by development property located in Salem, Oregon (Oregon Property).1 As additional security for the loan, Debtors executed deeds of trust (RF Deeds of Trust) against the Washington Property, which RF required to be in first lien priority. The Washington Property consisted of three parcels. Washington Coast owned two of the parcels known as the Henningsgaard parcel (Lot # 173) and the Morse parcel (Lot # 187) and SIP IV owned the third parcel known as the Chelson parcel (Lot # 189). RF recorded its deeds of trust against these properties in late December 2006.

In connection with this transaction, the Doney Affiliates obtained Sonas' agreement to subordinate its deeds of trust to the RF Deeds of Trust in an attempt to satisfy RF's requirement of first lien priority. Although Sonas had assigned the deeds of trust to PCB as collateral for the PCB-Sonas loan, Sonas alone entered into the Subordination Agreement with RF which provided, among other things, that notice of default on the RF loan would be given to Sonas and that RF would proceed against the Oregon Property before seeking to foreclose upon the Washington Property. PCB was not a party to the Subordination Agreement and did not sign it.

The Subordination Agreement was recorded in late December 2006. RF obtained a title policy insuring its first lien position on the Washington Property.

RF commenced foreclosure proceedings on the Oregon Property in 2007. The foreclosure proceedings were stayed by the involuntary chapter 11 petition filed against Structural on December 7, 2007.

On July 3, 2008, Sonas filed a lawsuit against RF in the Pacific County Washington Superior Court (Wash. Sup.Ct. Case No. 08-2-00232-4), alleging, among other things, that RF violated the default notice provisions contained in the Subordination Agreement. Sonas sought a declaratory judgment that the Subordination Agreement had no effect and that its assignments of its deeds of trust to PCB were senior to any lien that RF may have or assert.

B. Bankruptcy Events

On December 22, 2008, Washington Coast filed its chapter 11 2 petition. On

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January 14, 2009, Washington Coast filed its Schedules which listed PCB as a secured creditor against " Vacant Lot # 173" in an " unknown" amount and " Sonas Capital Subordination/Resource Funding" as a separate creditor also secured by Lot # 173. On January 22, 2009, SIP IV filed its chapter 11 petition. On June 9, 2010, the bankruptcy court ordered joint administration of Debtors' bankruptcy cases.

Sale of Lot # 173 Free and Clear of Liens

Shortly after its filing, on January 13, 2009, Washington Coast filed a motion to sell Lot # 173 free and clear of liens under § 363(b) and (f)(4) to the State of Washington for $975,000.3 In the motion, Washington Coast stated that RF alleged a first mortgage lien in the approximate amount of $5,000,000 on Lot # 173, which was also secured by other property located in Oregon and Washington. Washington Coast maintained that RF agreed to accept $904,460.26 to release its lien on Lot # 173. In addition, Washington Coast acknowledged that Sonas also alleged a first mortgage lien on Lot # 173 in the approximate amount of $1,731,914.80. However, Washington Coast disputed Sonas' lien. There were also numerous judgment liens against the property.

In response to the sale motion, RF agreed that the sale of Lot # 173 should proceed, but asserted

[S]eparate and distinct from whatever claims/defenses that the Debtor alludes to in the Motion concerning the validity and enforceability of the Sonas lien, any such lien claimed by Sonas is subject to a subordination agreement in favor of Resource Funding, that was executed by Sonas and properly recorded ... As such, the subordination agreement is fully enforceable pursuant to 11 U.S.C. § 510(a).

On January 27, 2009, the bankruptcy court approved the sale with the liens of PCB and RF attaching to the proceeds pending further orders by the court.

On May 6, 2009, Washington Coast filed a report of sale showing that the sale of Lot # 173 was consummated. On June 29, 2009, the sale proceeds were transferred to the court's registry and held pursuant to a stipulated order.

The PCB Adversary

Shortly after the sale of Lot # 173 was consummated, on May 21, 2009, PCB filed an adversary complaint against RF seeking to establish its first lien priority in the sale proceeds. On May 27, 2009, PCB filed its FAC. The FAC alleged that the lien priority dispute was a core proceeding under 28 U.S.C. § 157(b)(2)(K) and that the proceeding " arises out of and is related to the Chapter 11 case." The prayer for relief sought " [a] judgment from this Court evidencing that the Subordination Agreement has no effect on PCB's interest in the Deeds of Trust and the Property and, therefore, PCB's interest in the Deeds of Trust and the Property by virtue of the Assignments [has] priority over [RF's] interest."

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On August 14, 2009, RF answered the FAC, admitting that the lien priority dispute was a core proceeding under 28 U.S.C. § 157(b)(2)(K). RF alleged defenses to PCB's first lien priority under theories of estoppel, ratification and agency. RF did not assert any counterclaims against PCB.

On February 2, 2010, RF sought to join Sonas as a plaintiff to the PCB adversary under Rule 7019 due to Sonas' pending state court lawsuit against...

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