JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Prop. Inc. (In re Transwest Resort Prop. Inc.)

Ninth Circuit Court of Appeals Case No. 12-17176 (July 1, 2015)
The Ninth Circuit Court of Appeals reversed and remanded the district court's decision dismissing on equitable mootness grounds an appeal from bankruptcy court's order confirming a chapter 11 plan of reorganization. The Ninth Circuit reaffirmed that equitable mootness is a doctrine in which the court elects not to reach the merits of a bankruptcy appeal. Addressing each of the four considerations, the Ninth Circuit held that holding an appeal equitably moot after an appellant diligently sought a stay, but is equitably moot because of the passage of time while waiting for a chance to present its view is inequitable. An appeal is not presumptively moot based solely on a plan being substantially consummated, it is dependent on whether the appellate court can fashion some form of effective relief. In regards to Lender's first objection regarding the exception to the due on sale clause, if Lender prevailed the affect would be to the division between Lender and SWVP of any appreciation in value. No other party would be affected by the division. Based on SWVP's involvement in the Chapter 11 case and appeals, SWVP did not fall within the innocent third party equitable mootness was meant to protect. Lastly, the Ninth Circuit determined that the bankruptcy court could fashion some form of relief, such as reducing the exception to due on sale clause. Therefore, it would be possible to devise an equitable remedy for each objection that would not bear unduly on innocent third parties.
Procedural context:
The Debtors' Chapter 11 plan was confirmed over the objection of the Lender. Four days after the entry of the order, Lender filed a Notice of Appeal and filed a Motion to Stay the consummation of the plan because failure to grant the stay could result in the appeal being rendered moot. The Debtors and SWVP contested the Motion to Stay. The bankruptcy court denied the Lender's Motion to Stay; and, the Lender filed a similar Motion to Stay with the district court, again, the Debtors and SWVP contested Lender's motion. The District Court also denied Lender's Motion to Stay. The district court entered its decision dismissing the Lender's appeal as equitable moot, and Lender appealed to the Ninth Circuit Court of Appeals.
"In 2007, five related entities acquired the Westin Hilton Head Resort and Spa and the Westin La Paloma Resort and Country Club. The five entities (collectively “Debtors”) were: Transwest Hilton Head Property, LLC, and Transwest Tucson Property, LLC (collectively “Operating Debtors”); Transwest Hilton Head II, LLC, and Transwest Tucson II, LLC (collectively “Mezzanine Debtors”); and Transwest Resort Properties, Inc. (“Holding Company Debtor”). The Holding Company Debtor was the sole owner of each of the Mezzanine Debtors. The Mezzanine Debtors, in turn, were each the sole owners of the Operating Debtors, which owned and operated the respective hotels." The purchase of these hotels was financed through "two loans: first, a $209 million loan to the Operating Debtors secured by liens on the two hotels (the “mortgage loan”); and, second, a $21.5 million loan to the Mezzanine Debtors secured by liens on the ownership interests in the Operating Debtors (the “mezzanine loan”). JPMCC 2007-C1 Grasslawn Lodging, LLC (“Lender”) acquired the mortgage loan pre-petition, and PIM Ashford Subsidiary I, LLC ("PIM") acquired the mezzanine loan. Both loans were in default, and all of the Debtors filed Chapter 11 bankruptcy, which were later jointly administered. Debtors filed a joint plan of reorganization, that proposed to cancel Mezzanine Debtors equity interest in Operating Debtors, and dissolve Mezzanine Debtors. Additionally, Southwest Value Partners Fund XV, LP (“SWVP”) would invest $30 million and become the sole owner of the Operating Debtors. Lender timely made its 11 U.S.C. Sec. 1111(b)(2) election, but the Chapter 11 plan proposed to reinstate loan and restructure it with monthly interest payments and a balloon payment after 21 years. The proposed restructured loan also included a provision wherein any sale or refinance, Lender would get full amount of claim immediately, but between years 5 and 15, the hotels could be sold or refinanced and the buyer would be required to take on the long obligations. Thus, the full amount would not be due immediately to Lender. Both loans were separately classified, and PIM's treatment was based on whether it accepted / rejected the proposed plan. If PIM accepted it would get a small percentage of surplus cash flow; however, if it rejected it would not receive any distributions. Lender acquired the mezzanine loan and voted both positions (its original claim and PIM's) against the plan. The plan was confirmed despite the Lender's two objections: first, the "ten-year exception to the due-on-sale" should be removed as it "negated" its Sec. 1111(b) election; and, second: the bankruptcy court misapplied 11 U.S.C. Sec. 1129(a)(10) because the there was not an impaired class in each case that accepted the proposed plan.
Honorable J. Clifford Wallace, Milan D. Smith, Jr., and Michelle T. Friedland, Circuit Judges

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