JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Properties Inc.
2015 U.S. App. LEXIS 16603
9th Cir.2015Background
- Five related debtors filed chapter 11 after defaulting on a $209M mortgage loan and a $21.5M mezzanine loan; the hotels’ agreed value was $92M.
- Debtors proposed a joint plan that reinstated the mortgage loan (Lender had elected §1111(b)), restructured payments, and included a due-on-sale clause with a 10-year exception allowing sales/refinancings between years 5–15 subject to conditions.
- SWVP agreed to invest ≥ $30M and became owner of the reorganized debtors; the plan extinguished the mezzanine collateral.
- Lender acquired the mezzanine claim post-plan filing, voted both its mortgage and mezzanine claims against confirmation, and objected to: (1) the 10-year exception to the due-on-sale clause (arguing it nullified the §1111(b) election), and (2) the application of §1129(a)(10) (arguing the accepting-class requirement should apply per debtor).
- Bankruptcy and district courts denied Lender’s stay requests; the district court dismissed Lender’s appeal as equitably moot despite Lender’s diligence in seeking stays.
- Ninth Circuit (majority) reversed: held Lender’s appeal is not equitably moot because partial equitable remedies could address its objections without unfairly harming innocent third parties or unraveling the plan.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the appeal is equitably moot | Lender: sought stays promptly and thus should have its objections heard despite consummation | Reorganized Debtors/SWVP: plan substantially consummated and third-party reliance makes relief inequitable | Not equitably moot — Lender was diligent and partial equitable relief is possible |
| Validity of the 10‑year exception to the due‑on‑sale clause under §1111(b) | Lender: exception negates protection of a §1111(b) election by allowing sales subject to a restructured loan | Reorganized Debtors: exception is integral to the plan’s economics; eliminating it would unravel the plan | Court did not decide merits; held that remedies (e.g., narrow the window or award partial compensation on sale) could be fashioned, so appeal is not moot |
| Scope of §1129(a)(10) accepting‑class requirement (per‑debtor vs. per‑plan) | Lender: accepting-class requirement should apply per debtor; mezzanine debtor had no impaired accepting class, so confirmation violated §1129(a)(10) | Reorganized Debtors: applying per-plan is permissible; remedies now would disrupt reorganization | Court did not decide merits; held that remedies (e.g., compensate Lender or reinstate liens) could be fashioned without unduly harming third parties, so appeal is not moot |
| Whether SWVP (post‑confirmation investor) is an ‘innocent third party’ protected by equitable mootness | Lender: SWVP actively participated in plan formation and confirmation and thus is not an innocent third party | SWVP: invested post‑confirmation and relied on finality; altering plan harms its legitimate reliance and the reorganization | Court: SWVP is not an innocent third party given its role in crafting and litigating the plan; third‑party reliance does not foreclose equitable remedies here |
Key Cases Cited
- Rev Op Grp. v. ML Manager LLC (In re Mortgages Ltd.), 771 F.3d 1211 (9th Cir. 2014) (defining equitable mootness and factors for analysis)
- Rev Op Grp. v. ML Manager LLC (In re Mortgages Ltd.), 771 F.3d 623 (9th Cir. 2014) (diligence in seeking a stay favors review; apply equitable‑mootness factors to each claim)
- Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 677 F.3d 869 (9th Cir. 2012) (four‑part equitable‑mootness test and framing of third‑party reliance and feasible remedies)
- Bank of N.Y. Trust Co. v. Official Unsecured Creditors’ Comm. (In re Pac. Lumber Co.), 584 F.3d 229 (5th Cir. 2009) (courts may decline relief when unwinding a consummated plan would upset numerous third‑party expectations)
- In re Chateaugay Corp., 94 F.3d 772 (2d Cir. 1996) (substantial consummation often gives rise to a presumption of equitable mootness)
- In re Cont’l Airlines, 91 F.3d 553 (3d Cir. 1996) (discussing equitable mootness and investor reliance)
- In re UNR Indus., Inc., 20 F.3d 766 (7th Cir. 1994) (protecting post‑confirmation investor reliance increases estate value ex ante)