In re Ritter Ranch Development, LLC

• Decision Date: 29 November 2000
• Docket Number: BAP No. CC-00-1027-MoRiP. Bankruptcy No. SV 98-25043-GM. Adversary No. SV 99-01641-GM.
• Parties: In re RITTER RANCH DEVELOPMENT, L.L.C., a Delaware limited liability company, Debtor. Ritter Ranch Development, L.L.C., a Delaware limited liability company, Appellant, v. City of Palmdale; Franklin High Yield Tax-Free Income Fund; and Franklin California High Yield Municipal Fund, Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

255 B.R. 760 (2000)

In re RITTER RANCH DEVELOPMENT, L.L.C., a Delaware limited liability company, Debtor.

Ritter Ranch Development, L.L.C., a Delaware limited liability company, Appellant, v. City of Palmdale; Franklin High Yield Tax-Free Income Fund; and Franklin California High Yield Municipal Fund, Appellees.

BAP No. CC-00-1027-MoRiP. Bankruptcy No. SV 98-25043-GM. Adversary No. SV 99-01641-GM.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted September 20, 2000.

Decided November 29, 2000.

David L. Neale, Levene, Neale & Bender, L.L.P., Los Angeles, CA, for Ritter Ranch Development, L.L.P.

Stephen R. Orr, Richards, Watson & Gershon, Los Angeles, CA, for City of Palmdale.

James O. Johnston, Hennigan, Nercer & Bennett, Los Angeles, CA, for Franklin High Yield, et al.

Before MONTALI, RIMEL,¹ and PERRIS, Bankruptcy Judges.

OPINION

MONTALI, Bankruptcy Judge.

Debtor Ritter Ranch Development, L.L.C., a Delaware limited liability company and Chapter 11 debtor in possession ("Ritter Ranch"), seeks a declaratory judgment that the holders of $40.7 million in community development bonds (the "Bondholders") are "creditors" in this case. Ritter Ranch apparently wants the Bondholders to be creditors so that it can either cure defaults and resume regular payments, or else attempt to use the Bankruptcy Code's "cram-down" provisions to modify the Bondholders' rights without their consent. The bankruptcy court entered a judgment dismissing Ritter Ranch's claim for declaratory relief with prejudice. We hold that the Bondholders are not creditors, and accordingly we AFFIRM.²

I. FACTS

Ritter Ranch is a planned-community developer. It owns a tract of approximately 7,285 acres in or around the City of Palmdale, California (the "City"). The bulk of that land (the "Property") has been annexed by the City and designated as the City of Palmdale Community Facilities District 93-1 (the "District").

The City issued $50 million of bonds, later reduced to $40.7 million (the "Bonds"), to finance development and construction of public facilities on the Property pursuant to California's Mello-Roos Community Facilities Act of 1982, California Government Code Sections 53311 et seq. (the "Mello-Roos Act"). The Bonds are payable solely from special tax revenues earned from the Property and from special accounts holding such revenues, proceeds of the Bonds themselves, and earnings on the funds held in the accounts. These special tax revenues and accounts are pledged as security for the Bonds. The City is obligated to use the special tax revenues to pay the Bonds, and does so through a fiscal agent. The City is granted a continuing lien against the Property to secure the payment of the special taxes, and it has the ability and obligation to foreclose upon the Property or portions thereof if there is a default in payment of the special taxes. However, the Bonds are "limited" obligations: the Bondholders have no rights against the City's funds other than the special tax revenues and accounts, nor can the Bondholders accelerate the indebtedness, bring an action against Ritter Ranch, or foreclose on the Property.

Ritter Ranch acquired the Property as of August 31, 1998. The development was not successful, and on October 30, 1998 Ritter Ranch filed a voluntary chapter 11 petition. Thereafter Ritter Ranch failed to make a payment due on February 15, 1999 under a pre-petition settlement agreement.

On September 27, 1999 Ritter Ranch commenced an adversary proceeding against the Bondholders and the City. In the third claim for relief of its complaint (the "Complaint") Ritter Ranch sought a determination that the Bondholders are "creditors." The Complaint alleges that the City is "just an agent" and a "mere conduit for purposes of collecting and transmitting the taxes to the Bondholders" and that the Bondholders are "akin to beneficiaries under a deed of trust. . . ." The Complaint further alleges that the City and District have claimed they "lack authority" under the relevant documents to make any arrangements to restructure "the delinquent special taxes." In its current posture the third claim for relief is directed solely against the holders of a senior class of the Bonds — Franklin High Yield Tax-Free Income Fund and Franklin California High Yield Municipal Fund (collectively, "Franklin").³

On November 12, 1999 Franklin filed its motion to dismiss the Complaint's third claim with prejudice for failure to state a claim upon which relief can be granted. As grounds for the motion Franklin asserted that the Complaint's allegations do not establish that the Bondholders have any enforceable obligation against Ritter Ranch.

At a hearing on another matter on December 8, 1999 the bankruptcy court apprized the parties of its tentative decision to grant Franklin's motion to dismiss, and on December 10, 1999 Ritter Ranch filed a supplemental memorandum.⁴ Franklin's motion came on for hearing on December 14, 1999.

At the start of that hearing the bankruptcy court stated that its tentative decision still was to grant the motion to dismiss because "there is no direct relationship between the debtor and the bondholders," there "is no contract to be assumed or in which there could be an action for breach," the Bondholders "couldn't foreclose on the property or tell the developer to build anything" and "even if as Ritter Ranch alleged the bondholders gave instructions to the City or the District and participated in drafting the City's plan . . . this would not be enough to make them creditors in this case."⁵ After hearing oral argument the bankruptcy court adopted its tentative ruling and on January 3 and 4, 2000 the bankruptcy court entered a written order and a judgment granting Franklin's motion and dismissing the Complaint's third claim for relief with prejudice. Ritter Ranch timely appealed. Ordinarily an order dismissing one of three claims in a complaint would not be an appealable final order. However, the bankruptcy court specifically entered a final judgment on the third claim for relief pursuant to Rule 54(b), Fed.R.Civ.P., applicable pursuant to Rule 7054(a). The judgment is thus final and appealable.⁶

II. ISSUES

A. Whether Ritter Ranch's third claim for relief, for a declaration that the Bondholders are "creditors," fails to state a claim upon which relief can be granted.

B. Whether the bankruptcy court properly denied Ritter Ranch leave to amend the Complaint.

III. STANDARD OF REVIEW

Questions of statutory interpretation are reviewed de novo. ECPG (Peoria) Associates Limited Partnership v. Building Block Child Care Centers, Inc. (In re Building Block Child Care Centers, Inc.), 234 B.R. 762, 765 (9th Cir. BAP 1999).

A dismissal without leave to amend is reviewed de novo. Naert v. Daff (In re Washington Trust Deed Service Corp.), 224 B.R. 109, 112 (9th Cir. BAP 1998).

IV. DISCUSSION

Ritter Ranch argues that the Bondholders are creditors under Sections 101(5) and 101(10) and 102(2). Section 101(5) provides, in full:

(5) "claim" means —

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

Section 101(10) provides in relevant part:

(10) "creditor" means —

(A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.

Section 102(2) provides, in full:

In this title —

(2) "claim against the debtor" includes claim against property of the debtor.

The bankruptcy court specifically acknowledged the broad definition of "creditor" at the December 8, 1999 hearing, citing its own decision in In re Aslan, 65 B.R. 826, 829-831 (Bankr.C.D.Cal.1986) (Mund, J.), aff'd in relevant part sub nom Aslan v. Sycamore Investment Co. (In re Aslan), 909 F.2d 367 (9th Cir.1990). As the Ninth Circuit has held, the Bankruptcy Code adopts a "`broadest possible definition' of `claim' that is designed to ensure that `all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case.'" California Dept. of Health Services v. Jensen (In re Jensen), 995 F.2d 925, 929 (9th Cir.1993) (quoting legislative history).

State law generally determines such "legal obligations." Hassanally v. Republic Bank (In re Hassanally), 208 B.R. 46, 49 (9th Cir. BAP 1997) (existence of claim is generally determined by state law), citing Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).

Ritter Ranch argued to the bankruptcy court that under state law the Bondholders have a "right to payment" and a right to initiate a foreclosure action against the Property. This is not accurate. The Bondholders themselves cannot demand payment from any owner of the Property and cannot foreclose. They can insist that the City collect the special taxes and foreclose but they cannot do so themselves. The City's lien is for the special taxes but not for indebtedness under the Bonds. When the City forecloses title goes to the City not to the Bondholders.⁷

Nevertheless, Ritter Ranch argues that it has legal obligations to the Bondholders. Ritter Ranch cites California cases stating that bonds issued under the Mello-Roos Act create a contract, or at least a relationship analogous to a contract, between the property owners and the holders of the bonds. See San Diego County v. Childs, 217 Cal. 109, 120-121, 17 P.2d 734, 738-739 (1932); Sutter Basin Corp. v. Brown, 40 Cal.2d 235, 241-243, 253 P.2d 649, 652-653 (1953), cert. denied sub nom. Brown v. Sutter Basin Corp., Ltd., 346 U.S. 855, 74 S.Ct. 71, 98 L.Ed. 369 (19...