good morning your honor from your house small for appellant i'd like to reserve four minutes of my time for rebuttal we're here because a bankruptcy court erred in allowing this claim it is a penalty that's unlawful under arizona law which all parties agree appl there was clear air an abuse of discretion in not looking carefully at the circumstances of the underlying how much more specific you may get the council and the agreement it says itself that this is a full and final number of parties have agreed to it this is what we want to do or does it cross into becoming a penalty i mean when you're looking at whatever number you wish to come up with say fifty million dollars aren't you looking at people that are sophisticated having an arm's length transaction and they made an agreement that if there's no interest paid for however many years but we've agreed that if you don't make the final payment there will be this amount why isn't that arm's length transaction as opposed to what you're calling it a penalty right now the arizona supreme court and dobson they looked at the statement and it said several things one that we have to go back beyond the plain language of the contract and look at the actual loss to determine whether or not the amount that's in the contract is really compensable or is actually punitive it also said the sophistication of the parties isn't really the issue you look at the agreement itself in all of the penalty cases the contracts had that lump sum amount as a late fee or an acceleration and sometimes even agreed to stipulated judgment there in the documents the includes whether or not it's compensable of an actual loss or a penalty this is a litigation funding case the litigation funder got the vast majority of its capital injection into the law firms work before the st year was even sworn in what we're really talking about here is the forty percent contingent interest on the jury verdict as we all know there's a big difference between what you get from a jury and what you collect after a trial and this case really exemplifies that difference even though i got one hundred and ten million it really wasn't worth the paper it was written on the debtors had to go all over the country chasing down that judgment debtor and the documents show that all of the parties agree that that forty per cent contingent interest is not bouncing off the jury verdict it's bouncing more realistically off what collection will look like what do we need to look for that it's the documents themselves if you look at the restated an amended forward purchase agreement in two thousand and eleven and the supplemental agreement in paragraph seven on disposable disposal of the litigation claim they agreed they could get bought out for twenty million dollars so this fiction that they were going to get forty percent of one hundred and ten is belied by their own documents which are in the record and were before the bankruptcy court so miller and i didn't mean to interrupt this important discussion but i do want to hear your view on the trial court the bankruptcy court is going to have broad discretion to fashion appropriate relief this issue is just between the debtors and this one creditor there are no prejudiced issues were guarding rd party and if the bankruptcy court decides that  capital transfer needs to come back to the debtors that's actually going to inure to the benefit of the rd parties and other creditors so there is simply no prejudice that would warrant avoiding a merits decision here and also there are other appeals coming out of this bankruptcy so they're going to be other matters that could be brought back before this bankruptcy court henri manned and they could be addressed in fashioning appropriate really this is a potential decision we're going to make and decisions like to me if this is important as you say we wouldn't have heard from  two weeks before oral argument we have to get ready for cases and it just seems to me you're awfully late these this opinion this appeal has been sitting around for a long time waiting two weeks before you want us to change the improperly filed and should they didn't we confer they threw it on us two weeks before our argument and they were lying on facts that have been in existence for months they're saying that because the auction happened and the plan was confirmed the appeals move that happened some time ago it was an th hour hail mary i think to avoid a merits review of this dispute and there's a reason for that so they agree that they can get bought out for twenty million dollars because that forty percent contingent interest is not as big as they claim it is now more than that the contemporaneous appraisal from c b r e in december of two thousand and eleven puts the parcel when extrapolated out of value at thirty five million again they get forty percent of that and what's important in the agreement if you look at schedule two they don't even get paid until the collateral for the underlying judgment is converted into cash so this is a litigation funder who had to wait just like the de would have had to wait to sell whatever collateral they got as part of the underlying settlement and then show that you're going to be prejudiced if we deny this go ahead and hear the case i think we should hear the case i do your honor and i also think that this is an unlawful penalty that transaction reflects fifteen million was due in two hundred and one thousand two hundred and fifteen point five million is consistent with the contemporaneous appraisal it's consistent with the buyout provision in their own agreements and then it tranches over time if you look at those tranches particularly the st one you see a thirty percent internal annual interest rate it's no surprise that thirty percent interest rate wasn't scheduled to one of the underlying agreements that's what they were going to be paid if the debtors had gotten cash out of that jury verdict as opposed to dirt so you see what is a really really fancy version of a agreed principle of fifteen five subject to interest escalating over time and where the penalty really hits is december st two thousand and fifteen you're at thirty eight million dollars and literally within minutes seconds when the clock strikes suddenly it's ballooned up to fifty million dollars that's an unlawful penalty under arizona law you have to look at whether or not that's a reasonable reflection of the harm to the creditor it's it's not reasonable there's no way there's no proportional harm that you can show between december  st and january st to warrant a twelve million dollars escalation in the debt use and the point that these are the fifty million seven hundred and thirteen thousand dollars a year was referenced in  a it was referenced in the outline it was again referenced in the note and the discounts along the way why aren't there just essentially incentives for early payment as opposed to a penalty when they did bankruptcy court then a fight a basis for the fifty million which was roughly forty percent of you could call it the valuation or you could call it the judgment but it's in that general zone i think your honest question has honed in on the true this is the two thousand and eleven c b r e appraisal no there's a nd appraisal it's not in the excerpts of record but it is in the bankruptcy docket it was before the bankruptcy court c p s did its own emergency motion and it docket number seventy seven  submitted a declaration including an appraisal from their own appraiser saying is worth fifty four million dollars which are you just to be clear you're talking about an appraisal that's not in the record on appeal it's not in the excerpts of record but it was before the bankruptcy court and it belies the contention that i'm sorry go ahead and i do have a question we should not be focusing on twenty seven thousand value when we're determining what the true deal was with these parties back in two thousand and eleven we should be looking at what was that forty percent contingent interest this is not a typical lend environment right we've got someone who's capital injection as a litigation funders pretty much already made whole and what we're talking about is the contingent interest under the case if you look at tech film they talk about penalties can be disguised in many ways and the court have to look past the camouflage you can call almost anything at discount if but in reality if you are just fashioning a straight deal structure that allow you to legitimize a penalty of the court have to look past the court in equity and also under arizona law basis for the valuation that you just gave which was a surprise all that's not in the excerpts of record on appeal you say it was in the bankruptcy court record was it presented the bankruptcy court as part of the claims and is not the subject of any motion to supplement the record either no but it was properly before the bankruptcy court and into the admission that we have talked both sides of its mouth on valuation was it before the bankruptcy court in the claims objection process or it was just simply part of the overall bankruptcy proceeding it was part of the overall bankruptcy case it was in connection with an emergency motion for relief from the automatic stay but when this issue was presented to the bankruptcy court the specific issue of whether the fifty million seven hundred and thirteen thousand dollars was a penalty did your client bring in front of the bankruptcy court this other nd appraisal that you're referencing and try to make this argument that you're making today i don't believe this specific admission from p s was raised in that hearing but if it is in the record it's an admission and it's telling because we're trying to apply hindsight to justify a huge penalty in connection with the the late payment and then on top of that you've got a default interest rate of thirty five percent when you look at it annually it's over forty percent it's completely disproportionate to any harm this lender could creditor could ever demonstrate and they don't even try and it's if you look at the cases under dobson bay have to look is it proportional this twelve million dollars late fee kicks in whether they're one dollar day late or one month late whether they're two million dollars short or thirty million dollars short and then the default interest continues accrue there's nothing in this record that suggests a forty percent interest annually is reasonable compensation particularly when they've already got the right to get costs fees and other expenses associated with collection efforts  specifically borrowers remorse when the appellants who are in the middle of high stakes litigation with ne phoenix partners and desert community association in desperately needed money to continue fighting that litigation there are more than happy to take any means money gagnon's perspective it was a risky loan they were betting on the outcome of commercial litigation so the potential return had to match the risk ganymede loaned appellants six million seven hundred and seventy five thousand dollars in total in exchange for a promise to get that money back with the premium and plus forty percent of whatever was recovered in litigation ultimately the risk paid off that the appellant's received a six million dollars cash settlement from does a rich community and they received one hundred and ten million dollars judgment against ne phoenix partners they later settled that judgment for commercial property that the bankruptcy court valued at one hundred and forty eight million dollars and that the appellant's argued to the bankruptcy court was worth in the range of one hundred and forty eight billion two hundred and ninety six million dollars and that doesn't take into account the master development of client rights which the opponent's principal said were worth at least as much as the real property the the bankruptcy court ultimately concluded a value of one hundred and forty eight million dollars the inner creditor agreement all the documents were crystal clear that the parties agreement once the finance once the litigation finance deal was essentially completed they got the judgment and then and then the appellate settled the judgment and exchanged the land and the development rights they sat down with danny mays said ok let's get any d n a we didn't want to wait the parties didn't want to wait until the property was developed and sold ganymede wanted to get paid so they negotiated an agreement they said the number is going to be fifty million seven hundred and thirteen thousand that agreement is clearly reflected in the transaction documents so the bankruptcy court interpreted the bankruptcy court also properly exercised her discretion when she concluded that the thirty five percent interest rate was fair and equitable based on all the facts and circumstances of the case so i ask about the interest rate because the interest rate is high interest rate and we've seen scientists many cases that have from the bankruptcy courts that have disallowed rates that are not even that high and so what was the basis was the fact that finding that this was a fair and equitable interest rate when the bankruptcy court was determining the interest rate we had a couple different things going on we had the claim objection proceeding which was a one contested matter and then we had the valuation proceeding and at the same time they threw in an objection to the pendency interest rate so in bankruptcy the pendency interest rate is the interest that accrues from the petition date through the effective date of the plan the th circuit law says that after ron pare the supreme court's decision ron pare the bankruptcy courts to look to a presumption of allow belief or the contract rate if that rate is in forcible under a political law with that and that presumption can then be rebutted based on ethical considerations well st the arizona does have a usury law commercial parties can agree to whatever rate they want as long as it's in writing so the presumption stands the court is then deciding this interest rate and issue in the context of a valuation the debtors are proposing a proposed for debt plan they wanted to give back a portion of its collateral stripped the lien from the balance of the lateral and keep the property for themselves so the bankruptcy court said look you can't tell me on the one hand that the property is worth one hundred and ninety six million dollars and then tell me that c p s as a secured creditor shouldn't get all their post petition interest it's not a given that big of an equity cushion the claim was fifty eight one million dollars  found the property was worth at least the collateral piece on the ninety six dollars acres was worth one hundred and twenty one million dollars she said in under that circumstance i don't think it's unreasonable where ganymede in the c p s who bought the debt said we're not going to charge interest for a number of years we're going to give you two and a half years to pay off the debt it's going to be subject you can pay it off early based on these discounts but if you don't pay it off and you don't develop the property by that by a certain date you're going to have to start paying interest on it in the bankruptcy and that the thirty five percent post petition interest would would somehow compensate for that but was there any analysis done to show that that actually was roughly what the interest would have been if it had been charged at some other interest rate during the period from you know the st discount payment was due all the way up until all the maturity date where there's no there was no evidence in the record regarding the discount table as to how the parties agreed on the different amounts in the discount table you've actually had the debt in the courts looking at the principal amount of the debt in the promissory note and in the th circuit law doesn't require any type of showing that that interest rate is or is not a market rate of interest you look to a presumption of allowed billeted because the two sophisticated parties agreed to have a rate in writing and under arizona law that some forcible unless that somehow going to be an equitable to enforce the party's contract and that's what the bankruptcy courts are looking at what is so in her view i'm sorry some principle some to which the thirty five percent interest applies is that the full fifty million dollars there's or is it what's referred to is that the total sum it's the total amount in whole each of the different parts and she harmonized the provision to say what what is what is what was the true intent of the parties here was was the debt supposed to be the discounted amount was supposed to be the liquid it i think was look at it son at the end of the day the way c it calculated based on the principle balance the full principle balance could just as any payments that were made to the bankruptcy appellate panel had a footnote identifying this this discrepancy in the documents as to the principal sum to which the thirty five percent should apply under the party's own agreement did the bankruptcy court grapple with that issue i don't believe the bankruptcy court specifically addressed that i think she looked at the promissory note and all the other provisions in the document that said this  problems are you know is there some indication in the record of that bet when the bankruptcy court holding said this the true amount of the debt is the fifty million dollars reflect on the promissory note she didn't she didn't go back and say once it matures interest i  guess the answer is no she didn't do any now since of what amount does interest accrue on does it start at the fifty million dollars or less the fam with respect to the cases council was discussing cases regarding penalties and we've been cited to know the number of cases she brought up dobson bay dobson bay is a case where there was a five percent late fee statically fee charged after default of that extra charge for a breach of the obligation that's not the case we have here and if you look at all the penalty cases the camp where you look at dobson bay the california test the scavenger test cases either the courts are asked to look at situations where there's this discounted payment option and some some courts looked at and said this is disguised penalty or court said no this is legitimate discount but there's a common theme to those cases if you look at the cases in every one of the cases where the parties had either greed on the amount of the debt in their settlement agreement or there was some judicially determined a judgment or something that set the amount of the debt in all of those cases the court said the fact that if you don't take advantage of the discount and you have to pay the full amount of the debt that's not a penalty that's just that's just you having to pay what you already agreed you owe and each of the cases fall into that category the other cases you might you have a debt of say twenty eight one million dollars there's never any agreement about what the total claim was you have a disputed claim they set twenty five dollars say twenty five thousand dollars and then if they don't pay it on time it jumps up to sixty or one thousand one hundred and fifty dollars in those cases where there was never any agreement or meeting of the minds about what the amount of debt was they found it to be a penalty so the bankruptcy court i think looked at this and said ok the parties agree that the debt is fifteen million seven hundred and thirteen so if you don't take advantage of the discount and you have to ultimately play that pay the total amount of that debt is not a penalty and as bankruptcy court put it if if i owe you one hundred dollars and you tell me that i can pay you fifty dollars if i pay by december st and i don't do it that doesn't mean that you can no longer collect the other fifty dollars it just means that you have to pay what you always sewed which was one hundred dollars so that's that's i think that's the case we have here you have two sophisticated parties who negotiated this deal well represented on both sides and they came up with a number do you agree that the similar analysis applies to the interest rate then considering the question is whether it's you know fairly compensatory or actually some kind of penalty i don't think so i think that i don't think that's the standard in bankruptcy again there's a presumption presumption of allow belief or the contracted rate and the cases say you apply that rate if it's in forcible under state law which under arizona to arizona does have a user statute commercial parties can agreed at whatever rate they want as long as they do it in writing so you start with that presumption and then it's up to the appellant's to rebut that presumption based on the equities the case and this is a bankruptcy court who made that decision after ten days a valuation trial she had two years of a bankruptcy case and had she looked at the history of the parties interactions she looked at the litigation financing transactions she looked at the successful outcome of litigation she looked at the fact that the debtors were telling her that the property is worth almost two one hundred million dollars so she  a i think she put her opinion the debtors incredulously asked me to forget the fact that they just told me this property for the one hundred and six million dollars and i'm supposed to deny thirty five percent interest but at some point shouldn't the court have made more specific thirty five percent and i think we all can look and say that's a pretty high rate of interest for anything and and so doing it seems that there's a little bit of a hole as you've said the bankruptcy judge considered  should there be more specific findings or should there have been more because i know we've also arms length and sophisticated people etc etc but should there have been further funding so that we're not guessing right now as to how that was  think that i think the burden to create that type of analysis would rest with the appellants they never the the debtors and the bankruptcy case never offered any evidence on that issue they never raised that evidence they never introduced any sort of other evidence they just asked the court they said it's not fair there it's not fair you should disallow it that's not really enough to carry your burden of proof so i think the burden in the bankruptcy court was on the appellant's to rebut the presumption that the contracted rate of interest was reasonable  think that's the standard as de novo review for this court of the bankruptcy court's decision i think that decision is persuasive but i think the court refused to bankruptcy court's decision you know ok thank you appellee disagrees under arizona law the intent of the parties is a paramount when it comes to contract interpretation the best evidence of the intent of the parties is the plain language of the contracts and unless the court looks at a contract and determines that there's some ambiguity something that didn't occur here then the court should interpret the contract based on the four corners of the document long and that's what the bankruptcy court did in this case she looked at the promissory note she looked at the do trust she looked at the nd supplemental ford purchase agreement inner creditor agreement and she concluded reasonably that the parties agreed to the amount of the debt fifty million seven hundred and thirteen thousand dollars that was the bankruptcy courts conclusion it's the only reasonable conclusion supported by the record to come up with another number you essentially have to allow the debtors to retreat the deal which which now that they once they got the property they were very eager to get the financing in the beginning with then once they got the judgment they got the property they weren't so ganymede task to what extent is the interest rate issue still alive wine and light of the transfer of property rights it's already happened that was really the point and i apologize for the late filing of the motion to dismiss for moon is but that was really the point of it maybe it's not so much it was just just constitutional newness at this point the property was sold to c p s in january for fifty four million dollars so their claim was fifty eight million dollars on the petition date so the issue of whether or not post petition interest is allowed in any amount really is moot because they've already bought the property for a credit they're never going to collect that enters they've received what they're going to receive on the bankruptcy case which is essentially ironically after all these years they got the property they got their collateral back but they're never going to collect any tristen so whether the court you could reduce opposed to an interest down to zero percent and it wouldn't matter at this point because c p s has already acquired the property and that was really part of the point of the motion the same thing with the on that on the flip side if you were to take a punt arguments at their face and you start with the dead amount of fifteen million five hundred thousand dollars back in september two thousand twelve and you apply the contracted interest rate of th thirty five percent which is a contract rate by the time you get to the date of the auction the claim is still in excess of one hundred million dollars and so given the results of the auction and the fact that c p s has already purchased the  concluded and it's i think it's moot at this thank you counsel thank you i sometimes thought we should have at the end of one minute on the read but we do have a trap door was lucky if not already in effect there are so many things that need to be revisit by the bankruptcy court so some of the issues are the issue of the total amount versus the full penalty with the la amount right so there's a big difference between applying the default interest rate to thirty eight million which was what was due in december two thousand and fifteen and applying that to fifty million which is what happened when the late penalty kicked in and it is a penalty and it will the court say is that you don't look at the nomenclature you look at the effect the debtor was being punished for missing that payment deadline it's completely disproportionate to any type of harm they notice the trustee sale by april of tw sixteen and so they're getting twelve million dollars for a harm that's not even a six month time period between default and when they plan to move forward on the collateral then title meant to the default interest assumes they were over secured and this is one of the other sort of examples in this case where c p s takes both sides when it suits them right so they actually went to the bankruptcy court and said it was worth fifty four million dollars i mentioned that appraisal that actually ended up being their credit which they forecast for some time in the proceedings and yet to get the default interest rate they wanted the bankruptcy court to rely on what the debtor thought the value of the property was well when it came time for the auction they did a credit but a fifty four dollars so you know the irony in all this is that not only was the apparently fee p f appraisal more accurate than ours at the time but now they've gotten the benefit of the default interest based on the evaluation that was wrong the  other can i ask you your friend the other side said you could reduce the post petition interest zero and it wouldn't change anything because the properties already been transferred as part of the auction process what's your response to a reaction to that i disagree on several levels st so i think if the court strikes down the unlawful late penalty we're working off thirty eight million as of december th the legal rate in arizona is ten percent this t v note sets a market rate of sixty eight percent or six percent so those numbers matter more than that there is a dispute as to whether or not the developer rights were properly included in the asset for auction that is the subject of a pending appeal so the resolution of that challenge may affect what actually was properly acquired with that credit and either way even if the property has been transferred there is an ability to transfer capital back to the debtors to make them whole for the essentially the over assessment of the value of this claim that the presumption is lost when they come in the door and they want to thirty five percent default interest rate and so the burden shifted to them because we've established under arizona law that that's a penalty to substantiate it as a reflection of their actual harm their delay costs and they didn't come close to meeting that showing and as a result the bankruptcy court erred in not having a fully developed record in order to make the effort a bold decision regarding whether it was reasonable to apply that rate thank you thank you