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Brody v. Geared Equity, LLC

United States District Court, D. Arizona

August 6, 2014

Marvin D. Brody, Appellant,
v.
Geared Equity, LLC, et al., Appellees. Marvin D. Brody, Appellant,
v.
Geared Equity, LLC, et al., Appellees. Consolidated with No. CV-13-02591-PHX-NVW

ORDER

NEIL V. WAKE, District Judge.

These consolidated appeals arise out of Chapter 11 bankruptcy proceedings of Debtor/Appellant Marvin D. Brody. Appellee Geared Equity, LLC is a secured creditor. The amount in play in these appeals is about $200, 000 in default interest. This is a surplus estate bankruptcy.

I. The Transaction and Initial Proceedings

Brody borrowed $1.0 million, due in six months, from Geared Equity secured by a second lien behind a $2.6 million first lien on a house in Coronado, California. Two months later he borrowed another $300, 000, also due four months thereafter. The loans were for improvements to the house, to be resold to repay the loans and return Brody's investment and a hoped-for profit. The notes called for 18% annual interest and 30% default interest. Brody invested another $150, 000 in improving the house. All the loans were over-secured, whether the house's value was $8.0 million, as Brody contends, or the $6.6 million at which it later sold.

Brody did not complete the improvements or resell the house in time, and the loans went into default on September 5, 2012. Brody asked Geared Equity to delay foreclosure while he continued marketing the property, as a pending foreclosure or consequent bankruptcy proceeding would depress the market value of the house. He opened up his construction and marketing activities to Geared Equity. The lender delayed four more months before commencing a deed of trust sale on January 18, 2013. Brody filed chapter 11 bankruptcy proceedings on February 11, 2013, to stop the trustee's sale two days later.

On May 13, 2013, Brody filed and sought approval of a plan of reorganization and disclosure statement that would cure the defaults upon a sale of the house, with post-default interest at the 18% contract rate, not the 30% default rate (Bk. Doc. 65). Geared Equity moved on July 26, 2013, to lift the stay to proceed with the trustee's sale (Bk. Doc. 74), and four days later Brody moved to approve a pending $6.6 million sale by August 16, 2013, and for accelerated approval of the plan and disclosure statement (Bk. Docs. 81, 79). The motions were expedited to an August 9, 2013 hearing.

II. Agreements of the Parties at the August 9, 2013 Hearing and the Appeals

Brody sought accelerated approval of the pending sale and of the proposed plan and disclosure statement, rather than a sale under 11 U.S.C. § 363 outside the plan. He did so to take advantage of the rule that a cure of a default in the plan freed the debtor of the higher default interest rate and left the creditor unimpaired and therefore not entitled to vote on the plan. See In re Entz-White Lumber & Supply, Inc., 850 F.2d 1338, 1341-42 (9th Cir. 1988). But if the sale was under 11 U.S.C. § 363 before and outside the confirmed plan, the post-default interest would not be limited to the contract rate and the default rate would have to be paid to render Geared Equity unimpaired. See Gen. Elec. Capital Corp. v. Future Media Prods. Inc., 536 F.3d 969, 973, amended, 547 F.3d 956 (9th Cir. 2008).

Geared Equity disputed that a cure even under an approved plan would suffice without default interest. It was undisputed that Brody would have to sell under a confirmed plan to have any chance to avoid the default interest rate. But closing the proposed August 16, 2013 sale for $6.6 million would benefit both sides. Geared Equity would get its principal, contract interest, and attorney's fees without further delay or contingency. Brody would get some return, though not all he hoped for. The need for and risks from threatened foreclosure would be gone. Therefore, the parties agreed at the August 9, 2013 hearing to let the August 16, 2013 sale proceed, leaving Brody in the same position he would be if the sale were under a confirmed plan. Geared Equity so agreed in clear terms:

What I propose we do today is enter the 363 sale order with an understanding, and your Court can rule that it is without prejudice to any of these arguments, meaning that if we go down the road, you know, some ways and then we confirm the plan, that we will agree that the time delay - the temporal delay between the 363 sale and when you consider the plan down the road won't have any effect on their Entz-White arguments. We're fine with that. Because that just preserves the status quo, versus having a confirmation order entered. So that would be our sugge.
....
And I've conferred with my client. And I'm perfectly willing to represent on the record, and you can - You can reflect it in the minute entry, however you want to do it, that any plan confirmation order that may be entered down the road when we take up these issues, and in the meantime try to find a way to get it resolved, would be without prejudice to their Entz-White argument; meaning that the fact that the 363 closed and then there's this temporal gap doesn't foreclose their Entz-White arguments. I would be fine with that.

Appellant's Excerpts of Record at 319-21 (emphasis added). Geared Equity did not want delay in the sale or think it needed an extra obstacle to Brody's strategy to avoid the default interest rate. Geared Equity had the courage of its convictions.

However, when submitting a proposed form of order to the Bankruptcy Court, Geared Equity attempted to renounce its agreement and waiver previously made in open court. On August 16, 2013, the Bankruptcy Court entered an order rejecting Brody's position on the merits, relying on Congress's 1994 amendment to 11 U.S.C. § 1123(d) (Bk. Doc. 116). The Bankruptcy Court therefore denied confirmation of Brody's plan as written without default interest to cure the Geared Equity loans. ...


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