Bonner Mall Partnership, In re

• Citation: 2 F.3d 899
• Decision Date: 04 August 1993
• Docket Number: No. 92-36754,92-36754
• Parties: , 24 Bankr.Ct.Dec. 883, Bankr. L. Rep. P 75,374 In re BONNER MALL PARTNERSHIP, Debtor. BONNER MALL PARTNERSHIP, Plaintiff-Appellee, v. U.S. BANCORP MORTGAGE CO., Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 899

2 F.3d 899

62 USLW 2082, 24 Bankr.Ct.Dec. 883, Bankr.

L. Rep. P 75,374

In re BONNER MALL PARTNERSHIP, Debtor BONNER MALL PARTNERSHIP, Plaintiff-Appellee, v. U.S. BANCORP MORTGAGE CO., Defendant-Appellant.

No. 92-36754.

United States Court of Appeals Ninth Circuit.

Argued and Submitted March 2, 1993.

Decided Aug. 4, 1993.

Bradford Anderson, Stoel, Rives, Boley, Jones & Grey, Seattle, WA (argued); Dale G. Higer, Stoel, Rives, Boley, Jones & Grey, Boise, ID (on briefs), for defendant-appellant.

Ford Elsaesser (argued), Barbara Buchanan (on briefs), Elsaesser, Jarzabek, Buchanan and Dressel, Sandpoint, ID, for plaintiff-appellee.

Appeal from the United States District Court for the District of Idaho.

Before: WRIGHT, CANBY and REINHARDT, Circuit Judges.

REINHARDT, Circuit Judge:

This case requires us to decide whether the new value "exception" to the absolute priority rule survives the enactment of the Bankruptcy Reform Act of 1978 (better known as the Bankruptcy Code), which replaced the Bankruptcy Act of 1898. ¹ The new value exception allows the shareholders of a corporation in bankruptcy to obtain an interest in the reorganized debtor in exchange for new capital contributions over the objections of a class of creditors that has not received full payment on its claims. Whether this doctrine is viable under the Bankruptcy Code has significant implications for the relative bargaining power of debtors and creditors in Chapter 11 cases. Although no circuit court has taken a definitive position on this question, dicta in several opinions demonstrate intra and inter-circuit disagreements. District and bankruptcy courts are sharply divided on the question, as are the commentators. The question will in all probability ultimately be decided by the Supreme Court. In the meantime, we conclude that the new value exception remains a vital principle of bankruptcy law.

I. BACKGROUND

In 1984-85, Northtown Investments built Bonner Mall. The project was financed by a $6.3 million loan, secured by the mall property, from First National Bank of North Idaho, which later sold the note and deed of trust to appellant U.S. Bancorp Mortgage Co. ("Bancorp"). In October 1986 the mall was purchased by appellee Bonner Mall Partnership ("Bonner"), subject to the lien acquired by Bancorp. Bonner is composed of six partners, five trusts and one individual investor and was formed for the express purpose of buying the mall. Unfortunately, the cash-flow from the mall was much smaller than Bonner expected. When Bonner failed to pay its real estate taxes to Bonner County, Idaho, Bancorp commenced a nonjudicial foreclosure action. After several unsuccessful attempts to renegotiate and restructure Bonner's debt, Bancorp set a trustee's sale for March 14, 1991.

On March 13, 1991, Bonner filed a Chapter 11 (reorganization) bankruptcy petition, which automatically stayed the foreclosure sale. 11 U.S.C. Sec. 362(a). Bancorp moved for relief from the stay under section 362(d)(2). ² As a condition to obtaining relief under that provision, Bancorp was required to show that Bonner had no equity in the mall and that Bancorp's claim against Bonner was undersecured. United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assoc., Ltd., 484 U.S. 365, 377, 108 S.Ct. 626, 633, 98 L.Ed.2d 740 (1988). Because Bancorp established these facts, the burden shifted to Bonner to prove 1) that its retention of the mall was necessary to an effective reorganization, ³ and 2) that there was a reasonable possibility of a successful reorganization within a reasonable time. ⁴ See id. After two hearings on Bancorp's motion, the bankruptcy court denied it without prejudice. In his order denying relief the bankruptcy judge assumed the continued existence of the new value exception, noted its strict requirements, and expressed doubts whether Bonner could satisfy them. Nevertheless, he allowed Bonner thirty days to propose a plan.

Bonner filed a reorganization plan relying on the new value doctrine. In response Bancorp renewed its motion to lift the stay. Bancorp argued 1) that the new value exception did not survive the enactment of the Bankruptcy Code; and 2) even if it did, Bonner's plan was still unconfirmable as a matter of law. The parties stipulated that the motion involved only legal questions, so no evidence was taken. The bankruptcy court accepted Bancorp's first argument but did not reach the second. The bankruptcy judge noted that after his original order the Fifth Circuit had concluded in its "convincing" decision in Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274 (5th Cir.1991), petition for rehearing granted in part and opinion withdrawn in part, 995 F.2d 1284 (5th Cir.) (per curiam), cert. denied, --- U.S. ----, 113 S.Ct. 72, 121 L.Ed.2d 37 (1992), that there is no longer a new value exception. On that basis, the judge granted Bancorp's motion for relief from the automatic stay. After the bankruptcy judge stayed his order at Bonner's request, Bonner appealed to the district court.

On appeal, the district judge determined that the only issue before him was whether the Bankruptcy Code had eliminated the new value exception. He found that it had not. In doing so he relied on the Supreme Court's ruling in Dewsnup v. Timm, --- U.S. ----, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), which was handed down after the bankruptcy court's decision and which emphasized the Court's reluctance to overturn pre-Code practice (see infra ). Moreover, by the time of the district court's opinion the relevant portion of the Fifth Circuit's Greystone opinion had been withdrawn. ⁵ The district court reversed the judgment of the bankruptcy court and remanded for further proceedings consistent with its opinion. 142 B.R. 911. It refused to address Bancorp's alternative argument that Bonner's plan was unconfirmable as a matter of law even if the new value exception survived. Instead, its order stated: "Confirmation of the plan proposed by the Debtor must be addressed by the bankruptcy court on remand." Bancorp filed a timely appeal to this court. Like the district court, we resolve only the question whether the new value exception survives. ⁶ The issue is one of law. Accordingly, our review is de novo. See Home Sav. Bank, F.S.B. v. Gillam, 952 F.2d 1152, 1156 (9th Cir.1991).

II. JURISDICTION

The parties agree that we have jurisdiction to hear Bancorp's appeal. Nevertheless, we have an independent duty to examine our own subject matter jurisdiction. Pizza of Hawaii, Inc. v. Shakey's Inc. (In re Pizza of Hawaii, Inc.), 761 F.2d 1374, 1377 (9th Cir.1985). Twenty Eight U.S.C. section 158(d) provides that "[t]he courts of appeal shall have jurisdiction of appeals from all final decisions, judgments, orders, and decrees entered under subsections (a) and (b) of this section." Subsection (a) states in relevant part that:

The district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees, and with leave of the court, from interlocutory orders, of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title.

28 U.S.C. Sec. 158(a). ⁷ For us to have jurisdiction, both the bankruptcy court's and district court's orders must be final. Allen v. Old Nat'l Bank of Wash (In re Allen), 896 F.2d 416, 418 (9th Cir.1990) (per curiam). Here, the bankruptcy court's order granting relief from the automatic stay was clearly final. ⁸ Packerland Packing Co. v. Griffith Brokerage Co. (In re Kemble), 776 F.2d 802, 805 (9th Cir.1985). Moreover, if Bancorp had foreclosed on the mall, Bonner's sole significant asset, for all intents and purposes the bankruptcy case would have ended; therefore, the bankruptcy court's order required immediate appellate review. See Elliot v. Four Seasons Properties (In re Frontier Properties, Inc.), 979 F.2d 1358, 1363 (9th Cir.1992); Allen, 896 F.2d at 418.

The more difficult question is whether the district court's order was final. ⁹ The unique nature of bankruptcy procedure dictates that we take a pragmatic approach to finality. Vylene Enter. Inc. v. Naugles (In re Vylene Enter. Inc.), 968 F.2d 887, 894 (9th Cir.1992); Mason v. Integrity Ins. Co. (In re Mason), 709 F.2d 1313, 1318 (9th Cir.1983). Our cases hold that 28 U.S.C. section 158(d) affords a more liberal finality standard than does 28 U.S.C. section 1291. ¹⁰ Vylene, 968 F.2d at 893-94. ¹¹

Under Ninth Circuit law, if the district court affirms or reverses a final bankruptcy court order, its order is final. King v. Stanton (In re Stanton), 766 F.2d 1283, 1287 (9th Cir.1985). However, difficult questions regarding finality sometimes arise when a district court reverses a final order of a bankruptcy court and remands. Vylene, 968 F.2d at 895. In such circumstances we balance two important policies: avoiding piecemeal appeals and enhancing judicial efficiency. Id.; Zolg v. Kelly (In re Kelly), 841 F.2d 908, 911 (9th Cir.1988). We also consider the systemic interest in preserving the bankruptcy court's role as the finder of fact. Stanton, 766 F.2d at 1287. ¹² On the basis of our analysis of these factors, we have concluded that when the district court remands for further factual findings related to a central issue raised on appeal, its order is ordinarily not final and we lack jurisdiction. Id. at 1286.

However, Stanton suggests that we should assert jurisdiction even though a district court has remanded a matter for factual findings on a central issue if that issue is legal in nature and its resolution either 1) could dispose of the case or proceeding and obviate the need for factfinding; ¹³ or 2) would materially aid the bankruptcy court in reaching its disposition on remand. 766 F.2d at 1288 n. 8; see also Farm Credit Bank of Spokane v. Fowler (In re Fowler), 903 F.2d 694, 696 (9th Cir.1990) (citing second Stanton criterion with approval)....