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Fr 160 LLC v. Flagstaff Ranch Golf Club

United States District Court, D. Arizona

July 18, 2014

FR 160 LLC, Appellant,
Flagstaff Ranch Golf Club, et al., Appellees.


G. MURRAY SNOW, District Judge.

Pending before this Court are the briefs in FR 160's appeal from the bankruptcy court (Docs. 37, 43) and Flagstaff Ranch Golf Club's cross appeal (Docs. 42, 44).[1] For the reasons set forth below, the appeal is denied, and the cross appeal is dismissed as moot.


FR 160, LLC, owns 50 residential lots and a tract of land in Flagstaff, Arizona. Its largest creditor is the Flagstaff Ranch Golf Club ("Golf Club"). (Docs. 38-41, 44 (collectively "AR") 21-22.) Previous litigation berween FR 160 and Golf Club produced a Settlement Agreement under which FR 160 delivered to Golf Club promissory notes totaling $5, 310, 000, secured by the real property. ( Id. ) In return, Golf Club placed certain golf club memberships in escrow. (AR 23.) FR 160 eventually ceased paying the money it owed to various entities including membership dues to Golf Club, dues to the Flagstaff Ranch Property Owners Association ("Owners Association"), and wastewater assessments to the Flagstaff Ranch Mutual Waste Water Company ("Waste Water Company" (AR 79.) Golf Club sought to foreclose on the deeds of trust, but FR 160 filed a voluntary bankruptcy petition on June 12, 2012. (AR 23, 79.)

The bankruptcy court rejected FR 160's first plan of reorganization in January 2013. FR 160 sought to amend its plan of reorganization and maintain the automatic stay under 11 U.S.C. § 362(a) that prevented Golf Club from foreclosing on the real property. The bankruptcy court agreed to extend the stay but also entered an Adequate Protection Order. (AR 286-87.)

FR 160 filed an amended plan of reorganization on April 1, 2013. (AR 337-77.) On June 18, 2013, the bankruptcy court held a one-day trial, and on June 25 the court rejected the amended plan. (AR 8-19, 434-35.) In doing so, the court made four determinations, all of which are challenged by the parties on appeal and cross appeal. (AR 8-19.) First, the court determined "that a plan can be confirmed under 1129(b)(2)(A)(i) that reinstates a lien release provision even if it terminated prepetition due to default or for that matter maturity of the debt without violating RadLAX." (AR 10.) The remaining determinations were all reasons why the plan could not be confirmed. Two of the three involved the requirement for FR 160 to have an impaired accepted class under 11 U.S.C. § 1129(a)(10).

In its second determination, the bankruptcy court found that Owners Association and Waste Water Company, Class 8, should have been included in the general unsecured creditor class, Class 12. (AR 11.) The court found that FR 160 had not met its burden to show how the claims of Owners Association and Waste Water Company are dissimilar from those other creditors. (AR 11-12.) It further concluded that the resulting combined class would not have accepted the plan. (AR 12.)

The bankruptcy court's third determination was that NWRA Ventures I, LLC constituted "an insider, at least for purposes of 1129(a)(10)." (AR 12.) NWRA is the senior secured lender of Investors Mortgage Holdings Financial Corporation ("IMH"), which is the parent company of FR 160. (AR 1003-07.) NWRA approved IMH's annual budget and the annual budget of its subsidiaries including FR 160. ( Id. ) It also approved any variances to those budgets and was therefore involved in the approval of the amended plan at issue here. ( Id. ) The court found it was an insider "based upon the relative control that NWRA has over this plan of reorganization, which I think is the relevant issue, the Debtor argued, hey, NWRA doesn't have any control over the day-to-day operation of the Debtor, and that's undoubtedly true." (AR 12.) It found that NWRA is a non-statutory insider because its dealings with FR 160 were not really arms-length. (AR 12-13.)

The bankruptcy court's fourth and final determination was that the plan did not satisfy the absolute priority rule because the new value contribution was de minimis. (AR 13-14.) IMH planned to provide $500, 000 in cash to FR 160 as part of the plan, but the court found that "[m]ost of the money will go to payment of debts owed to NWRA and IMH, and that's really not new capital in the sense of a recapitalization of the Debtor." ( Id. ) The court treated that money as a forgiveness of a debt and did not consider it as new capital. ( Id. ) The bankruptcy court held that "the balance of the funds... are de minimis and, therefore, that this plan does not satisfy the new value corollary to the absolute priority rule." ( Id. )

FR 160 filed a motion seeking permission from this Court to appeal from that ruling, and Golf Club requested that it be allowed to cross appeal if the appeal was granted. (Doc. 2, 8.) This Court granted both the request for appeal and cross appeal. (Doc. 35.) The matter is now fully briefed. (Docs. 37-45.)


I. Jurisdiction

District courts must accept appeals from final decisions of bankruptcy courts, and they have discretionary authority to accept interlocutory appeals. In re City of Desert Hot Springs , 339 F.3d 782, 787 (9th Cir. 2003). This Court explained in its order granting leave to appeal that in this matter it has either mandatory jurisdiction under 28 ...

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