JPMCC 2007-Cibc 19 E. Greenway, LLC v. Bataa/Kierland LLC (In re Bataa/Kierland LLC)

• Decision Date: 22 July 2013
• Docket Number: No. 2:12–cv–01783 JWS.,2:12–cv–01783 JWS.
• Citation: 496 B.R. 183
• Parties: In re BATAA/KIERLAND LLC, Debtor. JPMCC 2007–CIBC 19 East Greenway, LLC, Appellant, v. Bataa/Kierland LLC, Appellee.
• Court: U.S. District Court — District of Arizona

496 B.R. 183

In re BATAA/KIERLAND LLC, Debtor.

JPMCC 2007–CIBC 19 East Greenway, LLC, Appellant,

v.Bataa/Kierland LLC, Appellee.

No. 2:12–cv–01783 JWS.

United States District Court,

D. Arizona.

July 22, 2013.

Jaclyn Dale Foutz, Andrew Anthony Harnisch, Ethan Bennett Minkin, Ballard Spahr LLP, Phoenix, AZ, Dean Christian Waldt, Ballard Spahr LLP, Cherry Hill, NJ, for Appellant.

John J. Hebert, Philip R. Rudd, Polsinelli PC, Phoenix, AZ, for Appellee.

MEMORANDUM DECISION

JOHN W. SEDWICK, District Judge.

JPMCC 2007–CIBC 19 East Greenway, LLC timely appeals from the Order of the bankruptcy court confirming the Plan of Reorganization proposed by Debtor Bataa/Kierland LLC (hereinafter “Plan”). The bankruptcy court had jurisdiction under 28 U.S.C. §§ 157(a), (b)(2) (A) and 1334. This court has jurisdiction under 28 U.S.C. § 158(a) (1), (c)(1)(A).

Dean C. Waldt and Andrew A. Harnish of Ballard Spahr LLP, Phoenix, Arizona, appeared on behalf of the Appellant, JPMCC 2007–CIBC 19 East Greenway, LLC., John J. Hebert, and Philip R. Rudd of Polsinelli PC, Phoenix, Arizona, appeared on behalf the Appellee Bataa/Kierland LLC.

Oral argument was heard on May 28, 2013. The court being fully apprised in the proceeding now enters it decision.

I. BACKGROUND/ISSUES PRESENTED

Bataa/Kierland LLC (hereinafter “Debtor”) filed a petition for bankruptcy relief under Chapter 11 of the Bankruptcy Code. After holding a hearing, the bankruptcy court confirmed the plan of reorganization proposed by Debtor, over the objections of JPMCC 2007–CIBC 19 East Greenway, LLC (hereinafter “JPMCC”), the holder of a $28 million secured, pre-petition claim. JPMCC appeals the confirmation order.

Initially, the property upon which stood an office building was owned entirely by Debtor. In 2008 the property was divided into two parcels, with Debtor retaining that portion of the subdivided property that included the existing building and approximately 79 surface parking spaces. The remainder of the property, including a number of surface parking spaces, was conveyed to an affiliate, Bataa/Kierland II (hereinafter “Kierland II”).¹ As part of the subdivision process, Debtor recorded a Declaration of Covenants, Conditions, and Restrictions (“CC & Rs”), in which Debtor reserved an easement in the parking spaces on that portion of the property conveyed to Kierland II. Subsequently, Kierland II developed its property, erecting an office building and a parking garage. Although Debtor had used some of the parking spaces in the parking garage, Debtor had not paid Kierland II for use of the parking garage prior to the filing of the petition for relief.² During the course of the bankruptcy proceeding Debtor and Kierland II entered into an agreement providing for payment by Debtor for Debtor's use of the parking garage. Under the terms of that agreement, Debtor was to reimburse Kierland II for Debtor's proportionate share of the cost of constructing the parking garage ($5.16 million), plus its annual pro rata share of the operating costs. ³ Payment of the $5.16 million was deferred until after payment of JPMCC's secured claim and the unsecured creditors' subordinated debenture in the seventh year following confirmation of the plan, effectively deferring payment until the plan had been consummated. After the proposed plan was filed, but prior to the confirmation hearing, JPMCC filed an adversary action seeking a declaration of the rights of Debtor and Kierland II under the CC & Rs. The bankruptcy court included the issue raised in the adversary proceeding in the hearing on the plan of reorganization and approved the agreement.

The value of Debtor's property also was an issue in the context of determining the extent to which JPMCC's $28 million claim was secured. The bankruptcy court accepted the base appraisal by Debtor's expert of $12.5 million, but reduced it to $7.7 million to account for JPMCC's proportionate share of the cost of erecting the parking structure on the Kierland II property. This left JPMCC with a $20 million unsecured claim to be paid pro rata from a $500,000 subordinated debenture.

At some point prior to 2010, Debtor made distributions to its principal, Bataa Oil. These distributions were initially booked by both Debtor and Bataa Oil as inter-company receivables from Bataa Oil to Debtor. Sixty-eight days prior to the filing of the Chapter 11 petition, $14.9 million of the payments were re-characterized on Debtor's books as equity distributions by Debtor to Bataa Oil. ⁴ It is undisputed that the books of Bataa Oil continue to show an inter-company debt owed to Debtor of approximately $15.7 million.

As part of the approved plan, Bataa Oil, as the Debtor's principal, injected $350,000 into Debtor which the bankruptcy court deemed sufficient “new value” to satisfy the absolute priority rule.⁵ The confirmed plan also permitted Debtor to retain $729,427 in cash collateral proceeds held at the time of confirmation.

II. STANDARD OF REVIEW

A district court sitting in its bankruptcy appellate capacity reviews findings of fact for clear error and conclusions of law de novo.⁶ The bankruptcy court's findings of fact must be accepted “unless the court is left with the definite and firm conviction that a mistake has been committed.” ⁷ “Mixed questions of fact are reviewed de novo.” ⁸ The interpretation of a contract in this case is governed by Arizona law, and is reviewed de novo.⁹ A bankruptcy court's determination of whether a proposed plan of reorganization is feasible, i.e., not likely to be followed by liquidation or further reorganization, is one of fact reviewed for clear error.¹⁰

III. DISCUSSION

A. Procedural Issues

During the course of the proceedings, JPMCC initiated an adversary action challenging the post-petition parking agreement between Debtor and Kierland II. As noted above, the bankruptcy court addressed that question in the confirmation hearing and approved the parking agreement as part of the plan confirmation process. JPMCC challenges the decision of the bankruptcy court on two procedural grounds: (1) that the bankruptcy court lacked jurisdiction to enter the final order under Stern;¹¹ and (2) that under Federal Rule of Bankruptcy Procedure 7001, the controversy over the interpretation of the CC & R's and the parking agreement was required to be determined in an adversary proceeding, not as part of plan confirmation. For the reasons that follow, this court disagrees with JPMCC on both points.

In Stern, the widow brought an adversary action in her Chapter 11 proceeding to recover damages for her stepson's alleged tortious interference with her expectancy of an inheritance or gift from her deceased husband as a compulsory counterclaim to the stepson's claim against the estate. The bankruptcy court entered judgment for the widow, and the stepson appealed. The Supreme Court held that the bankruptcy court lacked authority under Article III to enter final judgment on the widow's counterclaim.

At the heart of Stern was the determination that, even though the counterclaim in Stern was a core proceeding under the Bankruptcy Code, the widow's claim arose under state common law and was between two private parties, it did not flow from the federal statutory scheme, was not a matter of public right, and it would not necessarily be resolved by the process of ruling on the stepson's proof of claim in the bankruptcy proceedings.¹²

The issue in this case is significantly different. Unlike Stern, resolution of the extent to which Debtor had access to the parking spaces located on the Kierland II property was necessarily integral to the resolution of JPMCC's claim, i.e., the extent to which the claim was allowed as a secured claim. This court agrees that, in light of Stern, the authority of bankruptcy courts over state-law issues is somewhat unsettled. However, this court finds persuasive the reasoning used by the bankruptcy court in the Southern District of Texas when it determined that the dischargeability of a creditor's claim fell outside the scope of Stern:

The Court concludes, however, that it may exercise authority over essential bankruptcy matters under the “public rights” exception. Under Thomas v. Union Carbide Agric. Prods. Co., a right closely integrated into a public regulatory scheme may be resolved by a non-Article III tribunal. 473 U.S. 568, 593, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985). The Bankruptcy Code is a public scheme for restructuring debtor-creditor relations, necessarily including “the exercise of exclusive jurisdiction over all of the debtor's property, the equitable distribution of that property among the debtor's creditors, and the ultimate discharge that gives the debtor a ‘fresh start’ by releasing him, her, or it from further liability for old debts.” Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 363–64, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006); see N. Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (plurality opinion) (noting in dicta that the restructuring of debtor-creditor relations “may well be a ‘public right’ ”). But see Stern, 131 S.Ct. at 2614 n. 7 (“We noted [in Granfinanciera ] that we did not mean to ‘suggest that the restructuring of debtor-creditor relations is in fact a public right.’ ”).¹³

The court then went on to explain: “When a bankruptcy court determines the extent of a creditor's [secured] claim, the court simply decides that a particular creditor is entitled to something more than the creditor would otherwise get out of the bankruptcy bargain. Such determinations are inextricably tied to the bankruptcy scheme and involve the adjudication of rights created by the Bankruptcy Code.” ¹⁴

The Texas bankruptcy court's decision is consistent with the recent decision by the Ninth Circuit rejecting the argument that a fraudulent conveyance claim (falling within the ambit of Stern ) was indistinguishable from the preferential transfer claim that was at issue in ...