Wells Fargo Bank Nat'l Ass'n v. Tex. Grand Prairie Hotel Realty, L.L.C. (In re Tex. Grand Prairie Hotel Realty, L.L.C.)

• Decision Date: 01 March 2013
• Docket Number: No. 11–11109.,11–11109.
• Citation: 710 F.3d 324
• Parties: In the Matter of TEXAS GRAND PRAIRIE HOTEL REALTY, L.L.C., Debtor. Wells Fargo Bank National Association, as Trustee for the Morgan Stanley Capital I Incorporated, Commercial Mortgage Pass–Through Certificates Trust, Series 2007–XLF9, acting by and through its Special Servicer, Berkadia Commercial Mortgage, L.L.C., Appellant v. Texas Grand Prairie Hotel Realty, L.L.C.; Texas Austin Hotel Realty, L.L.C.; Texas Houston Hotel Realty, L.L.C.; Texas San Antonio Hotel Realty, L.L.C., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

710 F.3d 324

In the Matter of TEXAS GRAND PRAIRIE HOTEL REALTY, L.L.C., Debtor.Wells Fargo Bank National Association, as Trustee for the Morgan Stanley Capital I Incorporated, Commercial Mortgage Pass–Through Certificates Trust, Series 2007–XLF9, acting by and through its Special Servicer, Berkadia Commercial Mortgage, L.L.C., Appellant

v.Texas Grand Prairie Hotel Realty, L.L.C.; Texas Austin Hotel Realty, L.L.C.; Texas Houston Hotel Realty, L.L.C.; Texas San Antonio Hotel Realty, L.L.C., Appellees.

No. 11–11109.

United States Court of Appeals,Fifth Circuit.

March 1, 2013.

Brian Christopher Walsh, Bryan Cave, L.L.P., Saint Louis, MO, Keith Miles Aurzada, Bryan Cave, L.L.P., Dallas, TX, for Appellant.

Davor Rukavina, Munsch, Hardt, Kopf & Harr, P.C., Dallas, TX, for Appellees.

Appeal from the United States District Court for the Northern District of Texas.

Before HIGGINBOTHAM, ELROD, and HAYNES, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Wells Fargo Bank National Association (“Wells Fargo”) appeals from a district court decision affirming confirmation of a Chapter 11 cramdown plan. Finding no error in the bankruptcy court's judgment,¹ we affirm.

I.

In 2007, Texas Grand Prairie Hotel Realty, LLC, Texas Austin Hotel Realty, LLC, Texas Houston Hotel Realty, LLC, and Texas San Antonio Hotel Realty, LLC (collectively, “Debtors”) obtained a $49,000,000 loan from Morgan Stanley Mortgage Capital, Inc., applying the proceeds to acquire and renovate four hotel properties in Texas. Morgan Stanley—not a party to this case—took a security interest in the hotel properties and in substantially all of the Debtors' other assets. Wells Fargo eventually acquired the loan from Morgan Stanley.

In 2009, the Debtors' hotel business soured. Unable to pay Wells Fargo's loan as payment came due, the Debtors filed for Chapter 11 protection and proposed a plan of reorganization. When Wells Fargo rejected the proposed reorganization, the Debtors sought to cram down their plan under 11 U.S.C. § 1129(b). The plan valued Wells Fargo's secured claim at roughly $39,080,000, in accordance with Wells Fargo's own appraisal. Under the plan, the Debtors proposed to pay off Wells Fargo's secured claim over a term of ten years, with interest accruing at 5%—1.75% above the prime rate on the date of the confirmation hearing.²

The bankruptcy court held a two-day evidentiary hearing to assess whether it could confirm the Debtors' plan under § 1129(b) over Wells Fargo's objection. Among other things, Wells Fargo challenged the Debtors' proposed 5% interest rate on its secured claim. Both parties stipulated that the applicable rate should be determined by applying the “prime-plus” formula endorsed by a plurality of the Supreme Court in Till v. SCS Credit Corp.³ However, the parties' experts disagreed on the application of that formula: whereas the Debtors' expert—Mr. Louis Robichaux—testified that it supported a 5% rate, Wells Fargo's expert insisted that it mandated a rate of at least 8.8%.

Wells Fargo filed a Daubert motion seeking to strike Robichaux's testimony under Rule 702, insisting that “Robichaux's ... failure to correctly apply Till and its progeny show[s] that his methodology is flawed, does not comport with applicable law, and is unreliable.” The bankruptcy court denied Wells Fargo's motion to strike, adopted Robichaux's analysis as correct, and confirmed the Debtors' cramdown plan.

Wells Fargo appealed to the district court, challenging the bankruptcy court's decision to admit Robichaux's testimony as well as the court's adoption of Robichaux's § 1129(b) interest-rate analysis. The district court affirmed and this appeal followed. The Debtors have moved to dismiss the appeal as equitably moot.

II.

We begin by reviewing de novo the Debtors' equitable mootness defense.⁴ The doctrine of equitable mootness is unique to bankruptcy proceedings, responsive to the reality that “there is a point beyond which a court cannot order fundamental changes in reorganization actions.” ⁵ To establish equitable mootness, a debtor must show that (i) the plan of reorganization has not been stayed, (ii) the plan has been “substantially consummated,” and (iii) the relief requested by the appellant would “affect either the rights of parties not before the court or the success of the plan.” ⁶ Wells Fargo here stipulates that the first two elements are satisfied.

This Circuit has taken a narrow view of equitable mootness, particularly where pleaded against a secured creditor.⁷ Reasoning that “the possibility of partial recovery obviates the need for equitable mootness,” ⁸ we have permitted appeals to go forward even where granting full relief “could have imposed a very significant liability on the estate, to the great detriment of both the success of the reorganization and third parties.” ⁹ For example, in Matter of Scopac, we permitted secured creditors to appeal a bankruptcy court valuation order whose reversal had the potential to—and ultimately did—impose millions of dollars in liability on a cash-starved entity just emerging from bankruptcy.¹⁰ In Matter of Pacific Lumber Co., we allowed a secured creditor to appeal under similar circumstances.¹¹

The Debtors insist that granting relief to Wells Fargo could result in a cataclysmic unwinding of the reorganization plan. According to the Debtors, “all of the nearly $8 million in distributions made under the Plan, and all of the other actions taken in furtherance and implementation of the Plan—including transactions with third parties—will be in jeopardy of needing to be undone, clawed back, or otherwise abrogated.” Moreover, the Debtors contend, any money judgment against them would come out of the pockets of unsecured creditors, as “[t]here is just one ‘pot’ of funds to distribute.” Finally, the Debtors aver, a judgment in favor of Wells Fargo would affect the rights and expectations of the “Equity Purchaser”—that is, the Debtors themselves—who paid a substantial sum to acquire equity in the bankrupt entities pursuant to the reorganization plan.

While the Debtors' concerns might be realized, they need not be. This Court could grant partial relief to Wells Fargo without disturbing the reorganization, by, for example, awarding a slightly higher § 1129(b) cramdown interest rate or granting a small money judgment. The Debtors present no credible evidence that granting such fractional relief would require unwinding any of the transactions undertaken pursuant to the reorganization plan; indeed, by the Debtors' own account, they are not cash starved like the debtors in Pacific Lumber or Scopac, having enjoyed a substantial improvement in their revenues and cash position after filing for bankruptcy.

Nor do the Debtors present compelling evidence that granting fractional relief would unduly burden the rights of third parties not before the court. Though the reorganization plan ties the unsecured creditors' recovery to the Debtors' projected net operating income through 2015, the Debtors' actual net operating income may be higher. Moreover, in fiscal years 2016 and 2017—after the Debtors' payment obligations to unsecured creditors have ended—the Debtors' own projections show a net operating income of approximately $3,200,000. In other words, the possibility exists that the Debtors could afford a fractional payout without reducing distributions to third-party claimants.

As for the Debtors' assertion that a fractional award to Wells Fargo would affect their interest as equity holders in the reorganized bankrupt, perhaps they are correct. But equitable mootness protects only “the rights of parties not before the court.” ¹² The fact “that a judgment might have adverse consequences [to the equity holders of the reorganized bankrupt] is not only a natural result of any appeal ... but [should have been] foreseeable to them as sophisticated investors.” ¹³

Unpersuaded by the Debtors' motion to dismiss this appeal as equitably moot, we proceed to the merits, turning first to Wells Fargo's claim that the bankruptcy court erred in admitting the testimony of the Debtors' restructuring expert—Mr. Louis Robichaux—regarding the appropriate § 1129(b) cramdown rate of interest.

III.

According to Wells Fargo, Robichaux's testimony is inadmissible under Rule 702 because his “purely subjective approach to interest-rate setting” violates the Supreme Court's decision in Till, which “call[s] for an objective inquiry.”

We review a trial court's decision to admit expert testimony for abuse of discretion.¹⁴ As read by Daubert,Rule 702 requires trial courts to ensure that proffered expert testimony is “not only relevant, but reliable.” ¹⁵ To determine reliability, the trial court must make a “preliminary assessment of whether the reasoning or methodology underlying the testimony is scientifically valid and of whether that reasoning or methodology can properly be applied to the facts in issue.” ¹⁶ Two cautions signify: the trial court ought not “transform a Daubert hearing into a trial on the merits,” ¹⁷ and “most of the safeguards provided for in Daubert are not as essential in a case ... where a district judge sits as the trier of fact in place of a jury.” ¹⁸

Here, Wells Fargo does not challenge Robichaux's factual findings, calculations, or financial projections, but rather argues that Robichaux's analysis as a whole rested on a flawed understanding of Till. As we read it, Wells Fargo's Daubert motion is indistinguishable from its argument on the merits. It follows that the bankruptcy judge reasonably deferred Wells Fargo's Daubert argument to the confirmation hearing instead of deciding it before the hearing.¹⁹ We pursue the same path and proceed to the merits.

IV.

Wells Fargo claims that the bankruptcy court erred in setting a 5% cramdown rate. We turn first to the standard under which this Court reviews a Chapter 11 cramdown rate determination, then to its application.

A.

Under 11 U.S.C. § 1129(b), a debtor can “cram...