Gray v. CPF Assocs. LLC

Decision Date04 March 2020
Docket NumberNo. CV-19-00004-PHX-JAT,CV-19-00004-PHX-JAT
Citation614 B.R. 96
Parties Bruce W. GRAY, et al., Appellants, v. CPF ASSOCIATES LLC, et al., Appellees.
CourtU.S. District Court — District of Arizona

Daniel G. Dowd, John Neil Stuart, Cohen Dowd Quigley PC, Phoenix, AZ, David Jeffrey Hindman, Frederick Jay Petersen, Michael William McGrath, David Alexander Winkelman, Mesch Clark & Rothschild PC, Tucson, AZ, for Appellants.

John R. Clemency, Lindsi Michelle Weber, Todd Andrew Burgess, Polsinelli PC, Paul Michael Hilkert, Stuart B. Rodgers, Lane & Nach PC, Phoenix, AZ, for Appellees.


James A. Teilborg, Senior United States District Judge

Pending before the Court is Appellants' appeal of the bankruptcy court's Order Resolving Motion for Order to Show Cause. Having considered the parties' filings, the Court now rules on the appeal.


This appeal involves two Chapter 11 bankruptcy petitions, one filed in May 2016 and the other in July 2016. (Doc. 26-1 at 5–6). Epicenter Partners LLC and Grey Meyer Fannin LLC are the debtor-entities that filed in May ("May Debtors"). (Id. ). Sonoran Desert Land Investors LLC, East of Epicenter LLC, and Gray Phoenix Desert Ridge II LLC are the debtor-entities that filed in July ("July Debtors"). (Id. at 6). Before the start of these bankruptcy cases, Bruce Gray managed or controlled each of the May Debtors and July Debtors (collectively, "Gray Entities"). (Id. at 7).1

The Gray Entities hold separate leaseholds in the area of Phoenix known as Desert Ridge—a master planned community that currently plays host to various retail, industrial, and residential properties and has plans to add more in the future. (Doc. 26-1 at 6). Desert Ridge is located on land that the State of Arizona owns and holds in trust under the terms of the Arizona–New Mexico Enabling Act. (Doc. 26-9 at 10–11). In 1993, the Arizona State Land Department bundled trust land within the Desert Ridge area into two auction packages. See generally Campana v. Ariz. State Land Dep't , 176 Ariz. 288, 860 P.2d 1341, 1343 (1993). The package relevant to this case included "three leases for a total of 563 acres: (1) 332 acres of commercial core land, (2) 52 acres of resort land and (3) 179 acres of golf course land." Id. The State envisioned that the successful bidder for this package "would become the master developer in charge of development of Desert Ridge ... because this bidder would have a long[-]term commitment to the community as the holder of [a] 99-year lease." Id. An entity known as Northeast Phoenix Partners ("NPP") won this auction and duly entered into a lease agreement with the Arizona State Land Department. Id. Thus, NPP became the master developer of Desert Ridge.

As the master developer, NPP had the right to "oversee and guide the development of all the property in Desert Ridge." (Doc. 26-5 at 4). Then and now, two instruments limit the alienability of the master developer's rights: the Declaration of Covenants, Conditions, Restrictions and Easements for Desert Ridge Arizona ("Master CCRs") and Commercial Lease No. 03-52415 ("Core Lease").2 For instance, section 1.33 of the Master CCRs states:

"Master Developer" shall be [NPP ] ... who simultaneously with, and immediately following, the Recording of this Declaration, shall enter into the Core Lease to Lease the Commercial Core Parcel. Any assignment by Master Developer of all or part of the Master Developer's rights, duties or obligations as master developer of Desert Ridge must be made concurrently with and appurtenant to an assignment of all or a portion of the Core Lease. The document evidencing such an assignment shall: (a) specifically set forth the scope of the obligations assigned by Master Developer; (b) be approved by Declarant, [defined as the Arizona State Land Department,] which approval shall not be unreasonably withheld; and (c) be Recorded.

(Doc. 20-3 at 12). Section 2.1 of the Core Lease also limits the alienability of the master developer's rights:

Master Developer. Lessee shall be the master developer of Desert Ridge. Lessee may not assign its duties and responsibilities as master developer of Desert Ridge without the express written consent of Lessor, which shall not be unreasonably withheld. If portions of this Lease are assigned according to the provisions of Article 17, [which allows Lessee to make certain assignments to affiliated entities without Lessor's approval,] such Assignments shall not include any assignment of Lessee's obligations and duties as master developer of Desert Ridge unless the document evidencing the Assignment specifically sets forth the scope of the obligations assigned by Lessee and assumed by the Assignee and is approved by Lessor.

(Doc. 20-2 at 12). In sum, under these instruments, any purported assignment of the master developer's rights must be specific, must be appurtenant to an interest in the Core Lease, must usually be recorded, and must receive state approval.

Eventually, NPP found itself embroiled in litigation against the May Debtors. (Doc. 26-1 at 7). Ganymede Investments, Ltd. ("Ganymede") funded the May Debtors' litigation efforts. (Id. at 8). After a jury issued a verdict in the May Debtors' favor that exceeded $110 million, NPP and the May Debtors entered into a settlement agreement whereby NPP assigned the May Debtors a leasehold to 96.5 acres of vacant land in Desert Ridge ("the 96.5 Acre Lease") and the master developer's rights. (Docs. 26-1 at 7; 26-5 at 4). This assignment complied with the applicable terms of the Master CCRs and the Core Lease outlined above. (Doc. 26-10 at 10). At around the same time, the May Debtors executed a promissory note in Ganymede's favor for $50,713,000 with interest accruing at 35% a year. (Doc. 26-1 at 8). Before the May Debtors filed their bankruptcy petition, they assigned a 20-acre portion of their rights under the Core Lease to the July Debtors ("the 20 Acre Transfer"). (Doc. 26-12 at 17).

After the 20 Acre Transfer, the May Debtors assigned an interest in the master developer's rights to Ganymede "as additional security" on the promissory note. (Doc. 25 at 13). The May Debtors eventually fell into default on the Ganymede note. (Doc. 26-1 at 9). Separately, the July Debtors also defaulted on two notes—for $26,000,000 and $3,700,000—executed in favor of an entity known as Pacific Coach, Inc. (Id. ). Shortly before the Gray Entities filed their bankruptcy petitions, CPF acquired these promissory notes from Ganymede and Pacific Coach, Inc. (Id. at 8–9).

The bankruptcy court considered several competing reorganization plans for the Gray Entities and ultimately selected CPF's. (Doc. 26-1 at 61). It confirmed that plan, with required modifications, on May 1, 2018. (Doc. 26-2 at 2). Among other things, that plan vests the liquidating trustee—ROI—with the power to market and sell the "DR property" which specifically includes the master developer's rights. (Id. at 20–21, 50).3 The plan further requires ROI to satisfy CPF's secured claim using proceeds from the sale "of the 96.5 Acre Lease, the 96.5 Acre Personal Property, and all related real property and personal property rights, including, but not limited to" the master developer's rights. (Id. at 41). The Gray Entities initially appealed the bankruptcy court's confirmation order, but voluntarily dismissed this appeal. (Doc. 25 at 17 n.7).

On November 20, 2018, Appellees filed a Joint Emergency Motion for Order to Show Cause, seeking to hold Appellants in contempt for, among other things, "wrongfully asserting control over" the master developer's rights. (Doc. 26-10 at 3). On this score, the joint motion generally alleged that Appellants were interfering with the terms of the confirmed plan by claiming that ROI could not market the master developer's rights because the July Debtors held them as a result of the 20 Acre Transfer. (Id. at 8). The joint motion argued that the May Debtors held the master developer's rights, rendering them subject to ROI's control, asserting that the 20 Acre Transfer could not also have assigned the master developer's rights because it did not comply with the applicable provisions of the Master CCRs and the Core Lease discussed above. (Id. at 9–15). The joint motion sought an expedited hearing for these issues on November 27, 2018. (Id. at 2).

After Appellants objected to this hearing date, (Doc. 26-13), the bankruptcy court scheduled a hearing for December 13, 2018, and set deadlines for the parties to submit response and reply briefs, (Doc. 26-14 at 3). Appellants filed their response on December 4, 2018, urging the bankruptcy court to deny the joint motion's requested relief. (Doc. 26-15). Broadly, Appellants' response asked the bankruptcy court to deny Appellees' request for relief because (1) no court had ever been asked to determine the scope of the master developer's rights listed in the confirmed plan nor even whether they were assets of the bankruptcy estate; (2) the 20 Acre Transfer assigned the master developer's rights to the July Debtors and the confirmed plan contemplated such a transfer; (3) the bankruptcy court lacked jurisdiction to decide the scope of the master developer's rights; and (4) similarly, given pending litigation in the district court relating to similar issues, the bankruptcy court should refrain from deciding the scope of the master developer's rights. (Id. at 9–20).

Three days later, on December 7, the bankruptcy court issued an order to show cause to Appellants. (Doc. 26-16). The order directed them to show good cause why they should not be held in civil contempt for violating the confirmed plan in two ways:

(i) refusing to surrender exclusive possession of all Assets of the May Liquidating Trust and May Debtors' Estates to the Liquidating Trustee; and (ii) interfering with implementation of the Plan by, among other things, wrongfully asserting control over the [master developer's rights] owned by the May Debtors.

(Id. at 3) (emphasis added). The arguments at the show-cause...

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