Rev Op Grp. v. ML Manager LLC (In re Mortgages Ltd.)

• Decision Date: 12 November 2014
• Docket Number: 12–15459.,Nos. 12–15234,s. 12–15234
• Citation: 771 F.3d 1211
• Parties: In the Matter of MORTGAGES LTD., Debtor, Rev Op Group; Sternberg Enterprises Profit Sharing Plan, Appellants, v. ML Manager LLC, Appellee. Rev Op Group, Appellant, v. ML Manager LLC, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

771 F.3d 1211

In the Matter of MORTGAGES LTD., Debtor

Rev Op Group; Sternberg Enterprises Profit Sharing Plan, Appellants

v.ML Manager LLC, Appellee.

Rev Op Group, Appellant

v.ML Manager LLC, Appellee.

Nos. 12–15234

12–15459.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 16, 2014.

Filed Nov. 12, 2014.

Bryce A. Suzuki (argued), Robert J. Miller, and Justin A. Sabin, Bryan Cave LLP, Phoenix, AZ, for Appellants.

Cathy L. Reece (argued), Fennemore Craig, P.C., Phoenix, AZ; Keith L. Hendricks and Joshua T. Greer, Moyes Sellers & Hendricks, Phoenix, AZ, for Appellee.

Appeal from the United States District Court for the District of Arizona, Robert Clive Jones, District Judge, Presiding. D.C. Nos. 2:09–cv–02698–RCJ, 2:08–bk–07465–RJH, 2:11–cv–00200–RCJ.

Before: J. CLIFFORD WALLACE and JAY S. BYBEE, Circuit Judges, and ROBERT W. GETTLEMAN, Senior District Judge.^*

OPINION

WALLACE, Senior Circuit Judge:

Mortgages Ltd. was a private lender for certain real estate investments in Arizona. Mortgages Ltd. raised money from investors to extend loans to real estate purchasers, secured by the purchased real estate, and acted as servicing agent for the loans and properties. The investors received “pass-through” fractional interests in the real estate that secured the loans and the resulting loan payments. The pass-through investors acquired an actual interest in each underlying loan.

On June 24, 2008, Mortgages Ltd. filed for Chapter 11 bankruptcy. The company was restructured through a confirmed bankruptcy plan. Pursuant to that plan, the entity ML Manager LLC (ML Manager), the appellee here, manages and operates the loans left in Mortgages Ltd.'s portfolio. ML Manager took a $20 million loan in “exit financing” to pay for expenses related to the completed bankruptcy. The bankruptcy plan was confirmed by the bankruptcy court in May 2009.

After confirmation, a group of the pass-through investors (Rev Op Group) moved for an order in the bankruptcy court ruling that ML Manager could not act as agent for their interests, and that objecting investors like the Rev Op Group should not be obligated to pay any share of the exit financing loan. The bankruptcy court rejected both arguments in its “Clarification Order,” issued on October 21, 2009. Rev Op Group appealed to the district court, which affirmed on January 31, 2012.

Relying on the confirmed plan, the Clarification Order and other decisions of the bankruptcy court, ML Manager began liquidating the loan portfolio. As liquidation proceeds became available, ML Manager filed an “Allocation Model” on September 1, 2010, to allocate costs and distribute the proceeds to investors. Rev Op Group objected to the model and the proposed distributions of funds, but the bankruptcy court provisionally overruled these objections. ML Manager filed a notice of its intent to distribute proceeds according to the allocation model and a motion to approve the distributions. Rev Op Group objected to the motion. On January 20, 2011, the bankruptcy court issued its “Distribution Order” overruling the objections and granting ML Manager's motion to approve the distributions. Rev Op Group appealed to the district court, which affirmed the order on November 4, 2011.

Rev Op Group timely appealed from the district court's affirmances of the Clarification and Distribution Orders to this court.¹

We have appellate jurisdiction under 28 U.S.C. § 158(d)(1).

The bankruptcy court twice overruled Rev Op Group's objections, and the district court twice affirmed these orders. However, Rev Op Group never sought to stay the bankruptcy or district court decisions pending the appeals. As a result, ML Manager moves this court to dismiss the appeals as equitably moot. The district court denied ML Manager's motions to dismiss on this basis, but did affirm the bankruptcy court's rulings on substantive grounds.

We review factual findings about mootness for clear error. In re Thorpe Insulation Co., 677 F.3d 869, 879 (9th Cir.2012). We review legal conclusions de novo. Id. But as we explain later, ML Manager is also entitled to move to dismiss in this court based on equitable mootness, regardless of the decisions of the courts being reviewed. The “party moving for dismissal on mootness grounds bears a heavy burden.” Id. (citation omitted).

I.

The district court denied ML Manager's motions to dismiss these appeals on equitable mootness grounds. Instead of cross-appealing those denials, ML Manager requests that we dismiss the appeals. Rev Op Group argues that ML Manager waived its right to move to dismiss because of the failure to cross-appeal.

This is incorrect. A party can move to dismiss an appeal as equitably moot if “great changes in the status quo occurred after the district court rendered the orders appealed from,” even if the party never moved to dismiss the appeal as moot before the district court. Algeran, Inc. v. Advance Ross Corp., 759 F.2d 1421, 1423 (9th Cir.1985). ML Manager argues that the distributions and other actions taken in the wake of the district court orders have greatly changed the status quo. Also, no cross-appeal is required for an argument that supports the appealed judgment, “even where the argument being raised has been explicitly rejected by the district court.” Engleson v. Burlington N. R.R. Co., 972 F.2d 1038, 1041 (9th Cir.1992). We thus consider ML Manager's motions to dismiss despite its failure to cross-appeal.

II.

We therefore turn to ML Manager's requested dismissal of Rev Op Group's appeals as moot. As we explained in Thorpe, a bankruptcy appeal can be moot in two circumstances. 677 F.3d at 880. The first derives from Article III of the Constitution, the other from equity.

Federal courts can only rule on cases or controversies under Article III of the Constitution. U.S. Const. art. III, § 2, cl. 1. If an appeal is constitutionally moot under Article III, we are powerless to hear it. These appeals are not constitutionally moot because we “can give the appellant any effective relief in the event that [we] decide[ ] the matter on the merits in [its] favor.” Thorpe, 677 F.3d at 880 (citations omitted). We could entirely “reverse plan confirmation or require modification of the plan.” Id.

Even when we could entirely reverse plan confirmation or wholly modify the plan, and thus the appeals are not constitutionally moot, we can dismiss appeals of bankruptcy matters when there has been a “comprehensive change of circumstances ... so as to render it inequitable for this court to consider the merits of the appeal.” Id. (internal quotation marks and citation omitted). We call this “equitable mootness,” a “judge-made abstention doctrine” unrelated to the constitutional prohibition against hearing moot appeals. See, e.g., In re Semcrude, L.P., 728 F.3d 314, 317 & n. 2 (3d Cir.2013) ; In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir.1994) ( “[t]here is a big difference between inability to alter the outcome (real mootness) and unwillingness to alter the outcome (‘equitable mootness')”).² An appeal is equitably moot if the case presents “transactions that are so complex or difficult to unwind” that “debtors, creditors, and third parties are entitled to rely on [the] final bankruptcy court order.” Thorpe, 677 F.3d at 880 (citation omitted).

A party that disagrees with an order of a bankruptcy judge can move to stay the order before that bankruptcy judge, who has the power to suspend the order or offer other appropriate relief during the pendency of an appeal of the order, to protect the rights of all parties in interest. Fed. R. Bankr. P. 8005.³ The bankruptcy court can condition granting the stay on payment of a supersedeas bond. Id. If the bankruptcy judge does not grant the stay, the objecting party can seek a stay from the district court or bankruptcy appellate panel, which can also grant a stay and condition the stay on payment of a bond or other security. Id. The stay ensures “that the estate and the status quo may be preserved pending resolution of the appeal.” In re Chateaugay Corp., 988 F.2d 322, 326 (2d Cir.1993).

When an appellant fails to seek a stay without giving adequate cause, we have held that we dismiss the appeal as equitably moot. In re Roberts Farms, Inc., 652 F.2d 793, 798 (9th Cir.1981) (“[a]ppellants have failed and neglected diligently to pursue their available remedies to obtain a stay of the objectionable orders of the Bankruptcy Court and have permitted such a comprehensive change of circumstances to occur as to render it inequitable for this court to consider the merits of the appeal.... Appellants flunked the first step. They did not apply to the bankruptcy judge for a stay ... and have given no adequate reason on the record for not doing so”); see also Thorpe, 677 F.3d at 881 (stating that “[w]e will look first at whether a stay was sought, for absent that a party has not fully pursued its rights,” and that the “failure to seek a stay can render an appeal equitably moot”). We have not consistently followed this helpful and clear rule, though, and have held in at least two cases that, in the instances there described, an appeal is not equitably moot despite the failure to seek a stay. See, e.g., Suter v. Goedert, 504 F.3d 982, 990 (9th Cir.2007) ; In re Sylmar Plaza, L.P., 314 F.3d 1070, 1074 (9th Cir.2002).

A.

In Roberts Farms, we held that before we analyze any of the other factors regarding equitable mootness, the “first step” is whether the appellant “appl[ied] to the bankruptcy judge for a stay” or gave an “adequate reason on the record for not doing so.” 652 F.2d at 798. “[I]t is obligatory upon [the] appellant in a situation like the one with which we are faced to pursue with diligence all available remedies to obtain a stay of execution of the objectionable order ... if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from.” Id. While we recognized in Thorpe that an appeal should not be automatically dismissed for...