Palmdale Hills Property, LLC v. Lehman Commercial Paper, Inc. (In re Palmdale Hills Property, LLC)

Summarized by T. Malpass , Law Offices of T. Edward Malpass
14 years 7 months ago

Citation:

(9th Circuit, Dec 31,1969)

Tag(s):

9th Circuit

Ruling:

9th Circuit affirms the 9th Circuit BAP holding that assertion of equitable subordination requires relief from stay.

Procedural context:

9th Circuit Opinion

Facts:

The Ninth Circuit upheld the Ninth Circuit Bankruptcy Appellate Panel’s (“BAP”) decision that a debtor must obtain relief from stay before seeking equitable subordination of another debtor’s claims. In a case arising out of the Lehman bankruptcies, the Lehman debtors had claims against another debtor, Palmdale Hills Property, LLC, which under the credit agreements were secured by properties which were property of the Palmdale Hills estate. Acting in its own case, Palmdale sought to equitably subordinate the Lehman security interest. The Bankruptcy Court held that Palmdale’s assertion of equitable subordination did not violate the automatic stay in the Lehman cases. On appeal, the BAP held, among other things, that as successful assertion of equitable subordination claims would “minimize” the claims of the Lehman debtors, Palmdale’s assertion was an affirmative action subject to the stay in the Lehman cases. On appeal from the BAP decision, the Ninth Circuit found that Palmdale had to seek relief from stay in the Lehman cases before proceeding with its equitable subordination claims. It differentiated equitable subordination from claim objections, reasoning that “equitable subordination changes the character and value of the [debtor’s] lien.” The Court of Appeals also noted the effect of Bankruptcy Code § 510(c)(2) under which subordinated liens are transferred to the estate of the debtor seeking equitable subordination and concluded that since equitable subordination affected liens, and not just claims, the automatic stay was implicated. Its conclusion was further supported by characterization of equitable subordination as being more like a counter-claim than a claim defense, having the effect of taking a valid and enforceable claim from the debtor’s estate together with the lien securing the claim.

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