SunCal Communities I LLC v. Lehman Commercial Paper, Inc.

Summarized by Robert Yan , Otterbourg P.C.
15 years 2 months ago

Citation:

(2nd Circuit, Dec 31,1969)

Tag(s):

2nd Circuit

Ruling:

The Court held that the bankruptcy court did not abuse its discretion in approving a compromise between certain Lehman entities and third-party entities. The Court found that the order approving the compromise did not require, forbid or was even certain to have any effect on the California bankruptcy cases of appellants SunCal Communities I LLC, et al. The Court did not address SunCal’s argument that the bankruptcy court’s order was in violation of the automatic stay in effect in the California bankruptcy case. The Court noted, as did the district court, that SunCal did not preserve that particular argument for appeal. The Court further held that the bankruptcy court acted within its discretion by denying SunCal’s request for relief from the automatic stay without prejudice to being reconsidered at a later time. SunCal argued that the automatic stay did not apply to an equitable subordination action. The same issue, however, was pending before the Ninth Circuit Court of Appeals. SunCal had appealed a ruling from the Ninth Circuit Bankruptcy Appellate Panel that the automatic stay arising from the Lehman Commercial Paper, Inc. (“LCPI”) bankruptcy applied to SunCal’s equitable subordination action. In light of the Ninth Circuit’s pending decision on the issue, the Court agreed with the district court that it was reasonable for the bankruptcy court to deny SunCal’s request for relief from the automatic stay and to defer the issue on the applicability of the automatic stay to the Ninth Circuit.

Procedural context:

Appeal by certain SunCal entities from a judgment of the United States District Court for the Southern District of New York affirming two orders from the United States Bankruptcy Court for the Southern District of New York (1) approving a compromise between certain Lehman entities and third-party entities and (2) denying SunCal relief from the automatic stay. Affirmed.

Facts:

In September of 2008, Lehman Brothers Holdings Inc. filed for bankruptcy relief. In October of 2008, LCPI filed for bankruptcy relief. Prior to the Lehman bankruptcy filings, these Lehman entities engaged in a complex debt transaction, which included, among other things, a repurchase agreement that effectively used two entities (Fenway Capital LLC and Fenway Funding) as mere conduits for the sale and repurchase of certain assets by LCPI. Among the assets involved were some SunCal loans. In November of 2008, the SunCal entities filed for bankruptcy in California. Sometime after the commencement of SunCal’s bankruptcy filings, SunCal moved for relief from the automatic stay in the Lehman proceeding. Lehman opposed the motion and the bankruptcy court denied SunCal’s motion. The Fenway structure was not disclosed by Lehman at the time. SunCal then asserted an action in the California proceedings to equitably subordinate the Lehman claims. The California bankruptcy court ruled that the Lehman automatic stay did not apply to the equitable subordination action. Lehman appealed and the Ninth Circuit Bankruptcy Appellate Panel reversed. SunCal appealed that ruling to the Ninth Circuit Court of Appeals. Prior to the Bankruptcy Appellate Panel’s ruling, the Fenway structure was discovered by SunCal, who then proceeded to prosecute the equitable subordination action against Fenway. In March of 2010, Lehman requested the approval of a compromise that effectively unwound the Fenway structure and provided LCPI possession over the SunCal loans. SunCal, who was not party to the compromise, filed an objection because of concern that the SunCal loans would be brought into LCPI’s bankruptcy estate and be subjected to the automatic stay, thereby impairing SunCal’s efforts in the California proceedings as to the same SunCal loans. SunCal also moved for relief from the automatic stay in order to prosecute the equitable subordination action in California. The bankruptcy court approved the compromise over SunCal’s objection and denied SunCal’s motion for relief from the automatic stay without prejudice. The district court affirmed both orders. This appeal followed.

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