Palmdale Hills Property, LLC v. Lehman Commercial Paper, Inc., 654 F.3d 868

Lehman Commercial Paper, Inc. (Lehman) lent to Palmdale Hills Property, LLC and related entities; loans were secured by Palmdale projects, Palmdale property, and Palmdale equity interests, with a total Lehman exposure around $649 million by 2008.
The Ritter Ranch Loan, dated February 8, 2007, had a Term Loan portion (sold to Fenway Capital) and a Revolver portion (not sold); the loan secured projects and an equity interest in Palmdale Hills, LLC.
Palmdale filed Chapter 11 in November 2008; in January 2009 Palmdale began an adversary proceeding to equitably subordinate Lehman’s security interests arising from Lehman’s loans.
Lehman sought relief from Palmdale’s stay in January 2009 to foreclose on collateral; the California bankruptcy court denied the relief from stay, ruling equitable subordination could proceed without violating the stay.
During the appeal before the BAP, Palmdale learned Lehman had transferred some loans to Fenway under a Master Repurchase Agreement (MRA); Palmdale challenged Lehman’s standing to file proofs of claim on the sold loans.
The BAP held the appeal was not moot and Lehman had standing; it reasoned that Lehman had an interest in at least one loan (the Ritter Ranch Revolver Loan) and that equitable subordination would require control over Lehman’s lien, necessitating relief from stay in Lehman’s home bankruptcy court.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Standing to appeal	Lehman has Article III standing via injury to its claim interests.	Palmdale contends Lehman lacked standing because it no longer owned all relevant loans.	Lehman had Article III standing due to lien on Ritter Ranch Revolver Loan.
Prudential standing	Lehman is a moving party; prudential standing supports its appeal.	Fundamentally, Lehman’s standing should be judged under the person aggrieved test.	Lehman has prudential standing.
Mootness of the appeal	Relief could still be granted preventing subordination without harming the estate.	The appeal is moot if no relief remains to grant.	Not moot; relief could be granted by preventing equitable subordination.
Effect of automatic stay on equitable subordination	Equitable subordination is a permissible action distinct from stay violations.	Equitable subordination is an act to take control of estate property, violative of stay.	Equitable subordination requires relief from stay; barred while stay applies.

Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167 (2000) (standing requires injury that is concrete and redressable)
In re Pettit, 217 F.3d 1072 (9th Cir. 2000) (de novo review of stay scope; treating questions of law)
In re Siriani, 967 F.2d 302 (9th Cir. 1992) (standards for appellate standing and deference to BAP)
In re P.R.T.C., Inc., 177 F.3d 774 (9th Cir. 1999) (person aggrieved test applies to standing in bankruptcy appeals)
In re Sherman, 491 F.3d 948 (9th Cir. 2007) (prudential standing shown when appellant is the moving party)
In re Palmdale Hills Prop., LLC, 423 B.R. 655 (9th Cir. BAP 2009) (equitable subordination would be an affirmative stay-violating action)
In re Merrick, 175 B.R. 333 (9th Cir. BAP 1994) (defense to a claim is a defensive action; not a stay violation)
Martin-Trigona v. Champion Fed. Sav. & Loan Ass'n, 892 F.2d 575 (7th Cir. 1989) (priority of claims and defensive/offensive actions in bankruptcy context)
In re USA Commercial Mortg. Co., 377 B.R. 608 (9th Cir. BAP 2007) (disallowance vs. subordination concepts and effect on estate)