In re Pw, LLC

• Decision Date: 30 May 2008
• Docket Number: Bankruptcy No. LA 06-16059 BB.,BAP No. CC-07-1176-MkKuPa.
• Citation: 391 B.R. 25
• Parties: In re PW, LLC, Debtor. Clear Channel Outdoor, Inc., Appellant, v. Nancy Knupfer, Chapter 11 Trustee; DB Burbank, LLC, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

391 B.R. 25

In re PW, LLC, Debtor.

Clear Channel Outdoor, Inc., Appellant, v. Nancy Knupfer, Chapter 11 Trustee; DB Burbank, LLC, Appellees.

BAP No. CC-07-1176-MkKuPa.

Bankruptcy No. LA 06-16059 BB.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted November 29, 2007.

Filed May 30, 2008.

Corrected July 18, 2008.^*

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Lewis R. Landau, Calabasas, CA, for Clear Channel Outdoor, Inc.

John N. Tedford IV, Danning, Gill, Diamond & Kollitz, Los Angeles, CA, for Nancy Knupfer, Chapter 11 Trustee.

Joel G. Samuels, Sidley Austin, LLP, Los Angeles, CA, for DB Burbank, LLC.

Before: MARKELL, KURTZ^** and PAPPAS, Bankruptcy Judges.

OPINION

MARKELL, Bankruptcy Judge.

This appeal presents a simple issue: outside a plan of reorganization, does § 363(f) of the Bankruptcy Code permit a secured creditor to credit bid its debt and purchase estate property, taking title free and clear of valid, nonconsenting junior liens? We hold that it does not.

In reaching this conclusion, we reject the contention that once the sale is consummated, the appeal from the order stripping the junior creditor's liens is moot and immune from scrutiny, and we hold that, in the circumstances of this case, the junior lienholder's rights are preserved.

The debtor in this case, PW, LLC ("PW"), owned prime real estate in Burbank, California. DB Burbank, LLC ("DB"), an affiliate of a large public hedge fund, held a claim of more than $40 million secured by PW's property. But problems large and small plagued PW's development plan. These problems ultimately led to PW's chapter 11 bankruptcy and to the appointment of Nancy Knupfer as PW's chapter 11 trustee ("Trustee").

DB, working with the Trustee, organized a campaign to consolidate all of PW's property and development rights and to sell this package, free and clear of all claims and encumbrances, at a sale supervised by the bankruptcy court.¹ At the sale, DB was the highest bidder, paying its consideration by credit-bidding the entire amount of its debt.

The only problem was the existence of a consensual lien securing a claim of approximately $2.5 million in favor of a junior creditor, Clear Channel Outdoor, Inc. ("Clear Channel"). Relying solely on § 363(f)(5), the bankruptcy court confirmed the sale to DB free and clear of Clear Channel's lien. The bankruptcy court then denied a stay of the sale pending appeal, as did our motions panel.

The first issue presented is whether the appeal is moot. We conclude that while any relief related to the transfer of title to DB is moot, stripping Clear Channel's lien and related state law rights present an issue that is discrete and separable from title transfer. That part of Clear Channel's appeal is not moot.

After reviewing applicable law, we conclude that § 363(f)(5) cannot support transfer of PW's property free and clear of Clear Channel's lien based on the existing record. We thus reverse that portion of the bankruptcy court's order authorizing the sale to DB free and clear of Clear Channel's lien, and we remand the matter to the bankruptcy court for further proceedings.

Finally, Clear Channel contends that a separate payment obligation from DB to the Trustee was subject to Clear Channel's lien, and that the bankruptcy court improperly stripped its lien rights in that payment obligation. We hold that the payment obligation was not subject to Clear Channel's lien, and we affirm on this point.

I. FACTS

Before filing for bankruptcy, PW owned and was attempting to develop real property in Burbank, California. It had a development agreement with the City of Burbank ("Development Agreement") that provided entitlements for a mixed-use complex of luxury condominiums and retail space. In order to realize the value of the entitlements, however, PW had to acquire an assemblage of eighteen parcels of real estate by February 2009. When it filed bankruptcy, PW owned only fourteen of the necessary parcels. It had, however, entered into an agreement to acquire the final four parcels, which were occupied by a church ("Church Property"). Closing this agreement and the final purchase of the Church Property was conditioned on the church's finding another suitable location for its activities.

DB held a first-priority lien on substantially all of PW's assets. It began foreclosure proceedings in July 2006 and sought the appointment of a state court receiver. After the receiver was appointed, DB lent the receiver more money to buy additional parcels.

During this time, DB and PW tried to negotiate a chapter 11 plan. They had not reached an agreement when, on November 20, 2006, on the eve of a scheduled foreclosure sale, PW filed a chapter 11 case. DB immediately moved for, and the bankruptcy court granted, the appointment of a trustee, which was done on December 27. The receiver turned over all of PW's assets to the Trustee in January 2007.

The Trustee faced several immediate problems. These included obtaining and paying the cure amounts related to the contract to acquire the Church Property, and otherwise implementing the terms of the Development Agreement. In addition, as a "single asset real estate" case, see 11 U.S.C. § 101(51B), it was likely that DB would be granted relief from stay under § 362(d)(3).²

In response, the Trustee proposed to sell PW's property and began discussions with DB to that end. With bankruptcy court authorization, the Trustee hired a real estate broker to market PW's property to others. In addition, to facilitate acquisition of the Church Property, the broker agreed to help the Trustee find a new location for the church.³

After negotiation, the Trustee and DB entered into an agreement they called a "Binding Term Sheet," which established detailed sale procedures for an auction and sale of PW's assets. Under its terms, the Trustee gained time to market and sell PW's property and to resolve disputes that had arisen regarding the Church Property.

The Binding Term Sheet also provided that DB would serve as a stalking horse bidder for a sale of PW's property. If there were no qualified overbidders, DB would buy PW's property for $41,434,465, which the parties called the "Strike Price."⁴ In addition, DB agreed to pay the Trustee a "Carve-Out Amount" of up to $800,000 for certain administrative fees and other expenses.⁵ DB also agreed not to seek relief from the automatic stay and to refrain from communicating with third parties regarding the sale of PW's assets.

On March 20, 2007, the bankruptcy court entered an order establishing a procedure for the sale of PW's property. Two days later, the Trustee moved to approve the sale free and clear of liens under § 363(f)(3) and (f)(5).

Clear Channel opposed the motion, asserting that § 363(f) was not applicable. Over Clear Channel's objection, on April 26, 2007, the bankruptcy court entered a separate order authorizing the sale free and clear of Clear Channel's lien under § 363(f)(5) ("Sale Order").

The March 20 order set May 7 as the deadline for submitting written bids, and the same order set the minimum overbid at $43,618,048, plus whatever amount was necessary to cure defaults related to acquiring the Church Property. Only three bids were timely received, and none qualified. The highest was a nonconforming contingent bid of only $25.25 million.

With no qualified overbidders, the Binding Term Sheet required the Trustee to sell PW's property to DB at the Strike Price, DB to pay the Trustee the Carve-Out Amount, and DB to pay certain administrative fees, including the receiver's fees and other expenses.

On May 31, 2007, the bankruptcy court confirmed the sale to DB and found that DB was a purchaser in good faith. The court entered an order to this effect ("Confirmation Order"), and declined to stay that order pending appeal, as did a prior motions panel of this court.

The sale closed on June 15, 2007. Clear Channel received no payment under the terms of the sale because DB's credit bid meant that there were no proceeds to which Clear Channel's lien could attach. Since closing, DB has paid out more than $1.5 million, including $250,000 in final payment to the receiver for fees and expenses, $550,000 to the estate as the remaining Carve-Out Amount, $750,000 to a senior lienholder, and other amounts necessary to pay outstanding real estate taxes and other costs of closing. For her part, the Trustee has made payments out of the Carve-Out Amount to herself and her professionals on an interim basis.

Clear Channel filed a timely appeal on May 1, 2007, and seeks reversal of both the Sale Order and the Confirmation Order. Clear Channel also asserts that its lien extends to the Carve-Out Amount and seeks reversal of the bankruptcy court's order that it does not.⁶

II. STANDARDS OF REVIEW

"We review the bankruptcy court's conclusions of law and questions of statutory interpretation de novo, and factual findings for clear error." Village Nurseries v. Gould (In re Baldwin Builders), 232 B.R. 406, 410 (9th Cir. BAP 1999) (citations omitted). See also Ritter Ranch Dev., L.L.C., v. City of Palmdale (In re Ritter Ranch Dev., L.L.C.), 255 B.R. 760, 763 (9th Cir. BAP 2000).

In addition, we review orders to sell property under 11 U.S.C. § 363(b) and (f) for an abuse of discretion. Darby v. Zimmerman (In re Popp), 323 B.R. 260, 265 (9th Cir. BAP 2005). We find an abuse of discretion if we have a definite and firm conviction that the bankruptcy court committed a clear error of judgment, Mendez v. Salven (In re Mendez), 367 B.R. 109, 113 (9th Cir. BAP 2007), or if the court incorrectly interpreted the law. In re Popp, 323 B.R. at 265; United States v Sprague, 135 F.3d 1301, 1304 (9th Cir. 1998).

III. DISCUSSION

Before reaching the merits of Clear Channel's appeal, we must first determine whether it is moot. That determination requires us to examine what it means for an appeal from a sale order to be...