Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-12-15234/USCOURTS-ca9-12-15234-0/pdf.json

Parties Involved:
ML Manager LLC
Appellee
Mortgages Ltd.

Rev Op Group
Appellant
Sternberg Enterprises Profit Sharing Plan
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN THE MATTER OF: MORTGAGES

LTD.,

Debtor,

REV OP GROUP; STERNBERG

ENTERPRISES PROFIT SHARING

PLAN,

Appellants,

v.

ML MANAGER LLC,

Appellee.

No. 12-15234

D.C. Nos.

2:09-cv-02698-RCJ

2:08-bk-07465-RJH

REV OP GROUP,

Appellant,

v.

ML MANAGER LLC,

Appellee.

No. 12-15459

D.C. No.

2:11-cv-00200-RCJ

OPINION

Appeal from the United States District Court

for the District of Arizona

Robert Clive Jones, District Judge, Presiding

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2 IN THE MATTER OF: MORTGAGES LTD.

Argued and Submitted

January 16, 2014—San Francisco, California

Filed November 12, 2014

Before: J. Clifford Wallace and Jay S. Bybee, Circuit

Judges, and Robert W. Gettleman, Senior District Judge.*

Opinion by Judge Wallace

SUMMARY**

Bankruptcy

The panel dismissed, as equitablymoot, appeals from two

bankruptcy court orders in a Chapter 11 case. 

Pursuant to the confirmed plan of reorganization of

Mortgages Ltd., a private lender for certain real estate

investments in Arizona, ML Manager LLC was the manager

of the loans left in Mortgages Ltd.’s portfolio. Mortgages

Ltd. raised money from investors to extend loans to real

estate purchasers, secured by the purchased real estate, and

acted as servicing agent for the loans and properties. The

investors received pass-through fractional interests in the real

* The Honorable Robert W. Gettleman, Senior District Judge for the

U.S. District Court for the Northern District of Illinois, sitting by

designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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IN THE MATTER OF: MORTGAGES LTD. 3

estate that secured the loans and the resulting loan payments. 

They acquired an actual interest in each underlying loan.

Rev Op Group, a group of pass-through investors, moved

for an order ruling that ML Manager could not act as agent

for their interests, and that objecting investors like Rev Op

Group should not be obliged to pay any share of an exit

financing loan taken by ML Manager to pay for expenses

related to the completed bankruptcy. The bankruptcy court

rejected both arguments in a “Clarification Order.” The

bankruptcy court also issued a “Distribution Order”

approving ML Manager’s distribution of the proceeds of its

liquidation of the loan portfolio.

The panel held that Rev Op Group’s appeals from the

Clarification Order and the Distribution Order were equitably

moot because the Group did not seek a stay before the

bankruptcy or district courts, as required by In re Roberts

Farms, Inc., 652 F.2d 793 (9th Cir. 1981). In addition,

substantial consummation of the Chapter 11 plan had

occurred, the remedy Rev Op Group sought would

inequitably harm third parties, and the bankruptcy court on

remand would not be able to devise an equitable remedy.

COUNSEL

Bryce A. Suzuki (argued), Robert J. Miller, and Justin A.

Sabin, Bryan Cave LLP, Phoenix, Arizona, for Appellants.

Cathy L. Reece (argued), Fennemore Craig, P.C., Phoenix,

Arizona; Keith L. Hendricks and Joshua T. Greer, Moyes

Sellers & Hendricks, Phoenix, Arizona, for Appellee.

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OPINION

WALLACE, Senior Circuit Judge:

Mortgages Ltd. was a private lender for certain real estate

investments in Arizona. Mortgages Ltd. raised money from

investors to extend loans to real estate purchasers, secured by

the purchased real estate, and acted as servicing agent for the

loans and properties. The investors received “pass-through”

fractional interests in the real estate that secured the loans and

the resulting loan payments. The pass-through investors

acquired an actual interest in each underlying loan.

On June 24, 2008, Mortgages Ltd. filed for Chapter 11

bankruptcy. The company was restructured through a

confirmed bankruptcy plan. Pursuant to that plan, the entity

ML Manager LLC (ML Manager), the appellee here,

manages and operates the loans left in Mortgages Ltd.’s

portfolio. ML Manager took a $20 million loan in “exit

financing” to pay for expenses related to the completed

bankruptcy. The bankruptcy plan was confirmed by the

bankruptcy court in May 2009.

After confirmation, a group of the pass-through investors

(Rev Op Group) moved for an order in the bankruptcy court

ruling that ML Manager could not act as agent for their

interests, and that objecting investors like the Rev Op Group

should not be obligated to pay any share of the exit financing

loan. The bankruptcy court rejected both arguments in its

“Clarification Order,” issued on October 21, 2009. Rev Op

Group appealed to the district court, which affirmed on

January 31, 2012.

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IN THE MATTER OF: MORTGAGES LTD. 5

Relying on the confirmed plan, the Clarification Order

and other decisions of the bankruptcy court, ML Manager

began liquidating the loan portfolio. As liquidation proceeds

became available, ML Manager filed an “Allocation Model”

on September 1, 2010, to allocate costs and distribute the

proceeds to investors. Rev Op Group objected to the model

and the proposed distributions of funds, but the bankruptcy

court provisionally overruled these objections. ML Manager

filed a notice of its intent to distribute proceeds according to

the allocation model and a motion to approve the

distributions. Rev Op Group objected to the motion. On

January 20, 2011, the bankruptcy court issued its

“Distribution Order” overruling the objections and granting

ML Manager’s motion to approve the distributions. Rev Op

Group appealed to the district court, which affirmed the 

order on November 4, 2011.

Rev Op Group timely appealed from the district court’s

affirmances of the Clarification and Distribution Orders to

this court.1 We have appellate jurisdiction under 28 U.S.C.

§ 158(d)(1).

The bankruptcy court twice overruled Rev Op Group’s

objections, and the district court twice affirmed these orders.

However, Rev Op Group never sought to stay the bankruptcy

or district court decisions pending the appeals. As a result,

ML Manager moves this court to dismiss the appeals as

1

In a separate opinion filed with this Opinion, we address Rev Op

Group’s appeal from the bankruptcy court’s Declaratory Judgment. Rev

Op Grp. v. ML Manager LLC, Nos. 12-15229, 12-15438, 12-16293 &

12-16725. In a concurrently filed memorandum disposition, we resolve

three other appeals frombankruptcy court sales orders. Rev Op Grp. v. ML

Manager LLC, Nos. 12-15229, 12-15438, 12-16293 & 12-16725.

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6 IN THE MATTER OF: MORTGAGES LTD.

equitably moot. The district court denied ML Manager’s

motions to dismiss on this basis, but did affirm the

bankruptcy court’s rulings on substantive grounds.

We review factual findings about mootness for clear

error. In re Thorpe Insulation Co., 677 F.3d 869, 879 (9th

Cir. 2012). We review legal conclusions de novo. Id. But as

we explain later, ML Manager is also entitled to move to

dismiss in this court based on equitable mootness, regardless

of the decisions of the courts being reviewed. The “party

moving for dismissal on mootness grounds bears a heavy

burden.” Id. (citation omitted).

I.

The district court denied ML Manager’s motions to

dismiss these appeals on equitable mootness grounds. Instead

of cross-appealing those denials, ML Manager requests that

we dismiss the appeals. Rev Op Group argues that ML

Manager waived its right to move to dismiss because of the

failure to cross-appeal.

This is incorrect. A party can move to dismiss an appeal

as equitably moot if “great changes in the status quo occurred

after the district court rendered the orders appealed from,”

even if the party never moved to dismiss the appeal as moot

before the district court. Algeran, Inc. v. Advance Ross Corp.,

759 F.2d 1421, 1423 (9th Cir. 1985). ML Manager argues

that the distributions and other actions taken in the wake of

the district court orders have greatly changed the status quo.

Also, no cross-appeal is required for an argument that

supports the appealed judgment, “even where the argument

being raised has been explicitly rejected by the district court.”

Engleson v. Burlington N. R.R. Co., 972 F.2d 1038, 1041 (9th

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IN THE MATTER OF: MORTGAGES LTD. 7

Cir. 1992). We thus consider ML Manager’s motions to

dismiss despite its failure to cross-appeal.

II.

We therefore turn to ML Manager’s requested dismissal

of Rev Op Group’s appeals as moot. As we explained in

Thorpe, a bankruptcy appeal can be moot in two

circumstances. 677 F.3d at 880. The first derives from Article

III of the Constitution, the other from equity.

Federal courts can only rule on cases or controversies

under Article III of the Constitution. U.S. Const. art. III, § 2,

cl.1. If an appeal is constitutionally moot under Article III, we

are powerless to hear it. These appeals are not constitutionally

moot because we “can give the appellant any effective relief

in the event that [we] decide[] the matter on the merits in [its]

favor.” Thorpe, 677 F.3d at 880 (citations omitted). We could

entirely “reverse plan confirmation orrequire modification of

the plan.” Id.

Even when we could entirely reverse plan confirmation or

wholly modify the plan, and thus the appeals are not

constitutionally moot, we can dismiss appeals of bankruptcy

matters when there has been a “comprehensive change of

circumstances . . . so as to render it inequitable for this court

to consider the merits of the appeal.” Id. (internal quotation

marks and citation omitted). We call this “equitable

mootness,” a “judge-made abstention doctrine” unrelated to

the constitutional prohibition against hearing moot appeals.

See, e.g., In re Semcrude, L.P., 728 F.3d 314, 317 & n.2 (3d

Cir. 2013); In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir.

1994) (“[t]here is a big difference between inability to alter

the outcome (real mootness) and unwillingness to alter the

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outcome (‘equitable mootness’)”).2 An appeal is equitably

moot if the case presents “transactions that are so complex or

difficult to unwind” that “debtors, creditors, and third parties

are entitled to rely on [the] final bankruptcy court order.”

Thorpe, 677 F.3d at 880 (citation omitted).

A party that disagrees with an order of a bankruptcy judge

can move to stay the order before that bankruptcy judge, who

has the power to suspend the order or offer other appropriate

relief during the pendency of an appeal of the order, to protect

the rights of all parties in interest. FED. R. BANKR. P. 8005.3

The bankruptcy court can condition granting the stay on

payment of a supersedeas bond. Id. If the bankruptcy judge

does not grant the stay, the objecting party can seek a stay

from the district court or bankruptcy appellate panel, which

can also grant a stay and condition the stay on payment of a

bond or other security. Id. The stay ensures “that the estate

and the status quo may be preserved pending resolution of the

appeal.” In re Chateaugay Corp., 988 F.2d 322, 326 (2d Cir.

1993).

2 We have at times referred to equitable mootness as a jurisdictional bar.

See, e.g., In re Baker & Drake, Inc., 35 F.3d 1348, 1351 (9th Cir. 1994)

(stating that equitable “[m]ootness is a jurisdictional issue”). But the

correct approach, as we recognized in Thorpe, is that equitable mootness

is a prudential doctrine whereby we elect not to entertain certain

bankruptcy appeals.

3 After argument in this case, the Chief Justice submitted to Congress

amendments to the Federal Rules of Bankruptcy Procedure that change

and renumber Rule 8005. Those rules go into effect “December 1, 2014,

and shall govern in all proceedings in bankruptcy cases thereafter

commenced.” Proposed Amendments to the Federal Rules of Bankruptcy

Procedure, available at 2014 US ORDER 0011 (Apr. 25, 2014).

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IN THE MATTER OF: MORTGAGES LTD. 9

When an appellant fails to seek a stay without giving

adequate cause, we have held that we dismiss the appeal as

equitably moot. In re Roberts Farms, Inc., 652 F.2d 793, 798

(9th Cir. 1981) (“[a]ppellants have failed and neglected

diligently to pursue their available remedies to obtain a stay

of the objectionable orders of the BankruptcyCourt and have

permitted such a comprehensive change of circumstances to

occur as to render it inequitable for this court to consider the

merits of the appeal. . . . Appellants flunked the first step.

They did not apply to the bankruptcy judge for a stay . . . and

have given no adequate reason on the record for not doing

so”); see also Thorpe, 677 F.3d at 881 (stating that “[w]e will

look first at whether a stay was sought, for absent that a party

has not fully pursued its rights,” and that the “failure to seek

a stay can render an appeal equitably moot”). We have not

consistently followed this helpful and clear rule, though, and

have held in at least two cases that, in the instances there

described, an appeal is not equitably moot despite the failure

to seek a stay. See, e.g., Suter v. Goedert, 504 F.3d 982, 990

(9th Cir. 2007); In re Sylmar Plaza, L.P., 314 F.3d 1070,

1074 (9th Cir. 2002).

A.

In Roberts Farms, we held that before we analyze any of

the other factors regarding equitable mootness, the “first step”

is whether the appellant “appl[ied] to the bankruptcy judge

for a stay” or gave an “adequate reason on the record for not

doing so.” 652 F.2d at 798. “[I]t is obligatory upon [the]

appellant in a situation like the one with which we are faced

to pursue with diligence all available remedies to obtain a

stay of execution of the objectionable order . . . if the failure

to do so creates a situation rendering it inequitable to reverse

the orders appealed from.” Id. While we recognized in

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Thorpe that an appeal should not be automatically dismissed

for failure to obtain a stay, we reiterated our warning from

Roberts Farms that an appellant must seek a stay. 677 F.3d at

881. Otherwise, we stated, the appellant has by definition

“not fully pursued its rights,” and thus the appeal is subject to

dismissal. Id.

We have not consistently followed the clear Roberts

Farms rule. On at least two occasions, we denied motions to

dismiss appeals despite appellants’ failures to seek stays of

bankruptcy orders. See, e.g., Suter, 504 F.3d at 990; Sylmar,

314 F.3d at 1074. There is tension between Roberts Farms on

the one hand and Suter and Sylmar on the other. The

bankruptcy appellate panel has recognized that tension. In re

Cmty. Bancorp, 2013 WL 4441925, at *13 (B.A.P. 9th Cir.

Aug. 20, 2013) (stating that Sylmar rejected a motion to

dismiss as equitably moot based solely on the failure to seek

a stay, but that under Thorpe, “failure to seek a stay may

alone be enough to render these appeals equitably moot,” and

thus recognizing that “[c]learly, an inconsistency exists

between Sylmar and Thorpe”).

B.

It would appear that the best way to resolve any

inconsistency would be to cabin Sylmar and Suter as narrow

exceptions to the general rule, from Roberts Farms, that

appeals from orders where the objecting party did not seek a

stay are moot. Our requirement that a party seek a stay of a

bankruptcy court order with which it disagrees before appeal

is grounded in important principles of equity. Bankruptcy

cases often implicate parties besides the debtor and its

creditors. For example, the estate may sell or dispose of its

property, or borrow money from a lender. As seen in these

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appeals, the estate usually does so pursuant to orders from the

bankruptcy court. When a party that disagrees with an order

of the bankruptcy court seeks a stay of the order, it notifies

third parties that the transactions they might enter into with

the estate may be undone on appeal. If the disagreeing party

fails to seek a stay, any third parties who purchased property

or extended a loan may later have a transaction undone

without sufficient notice. This inequitable result means that

“the appellant has a high obligation to seek a stay pending

appeal, even if the chances of success seem dim.” 13B

CHARLES ALAN WRIGHT & ARTHUR R. MILLER, et al., FED.

PRAC. & PROC. JURIS. § 3533.2.3 (3d ed.). Obviously, if the

disagreeing party succeeds in obtaining a stay, it is

impossible for third parties to enter into transactions with the

estate, which means that no inequitable results could ensue.

Under this interpretation of our case law, these

consolidated appeals are moot. Rev Op Group never moved

to stay the appealed orders before the bankruptcy or district

courts. According to Roberts Farms, we should dismiss these

appeals as equitably moot unless Rev Op Group offers

“adequate reason” for its failure to seek a stay. 652 F.2d at

798.

Rev Op Group argues that it was “financially unable to

post the extremely expensive bond that would be required,”

advising that in two related appeals from the Mortgages Ltd.

bankruptcy, ML Manager sought a prohibitively expensive

$90 million bond. But this is not an adequate reason for

failing to seek a stay of the Clarification and Distribution

Orders. First, ML Manager sought the $90 million bond for

different orders. We cannot assess whether ML Manager

would have requested a more affordable bond for stays of the

Clarification and Distribution Orders. Second, it is the

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12 IN THE MATTER OF: MORTGAGES LTD.

bankruptcy and district courts, following Federal and Local

Rules, that determine the precise amount of the bond, not the

debtor or its agent. In re Swift Aire Lines, Inc., 21 B.R. 12,

13–14 (B.A.P. 9th Cir. 1982); accord In re Tribune Co., 477

B.R. 465, 480–83 (Bankr. D. Del. 2012) (closely analyzing a

number of factors to quantify “the potential harm for the

purpose of fixing the amount of a bond”). The bankruptcy

court may have viewed stays for the Clarification and

Distribution Orders differently than the stays sought for the

other orders. Third, our precedents were quite clear at the

time of the Clarifiation and Distribution Orders that an

objecting party must at least seek a stay to ensure its appeal

will not be equitably moot. See, e.g., In re Lowenschuss, 170

F.3d 923, 933 (9th Cir. 1999).

Thus, Rev Op Group’s appeals must be dismissed for

mootness under Roberts Farms because of its failure to seek

stays of the Clarification and Distribution Orders. This is a

clear bright-line rule that all litigants can understand.

Even if we were to extend our analysis beyond Roberts

Farms to cases in “tension” with it, Suter or Sylmar, Rev Op

Group would still not prevail. Unlike in Suter, Rev Op Group

has never argued that it has a right under Arizona state law to

return to the status quo after the distributions and allocations

made pursuant to the Clarification and Distribution Orders.

See Suter, 504 F.3d at 990 (“[t]his exception to mootness

exists when the debtor had a state statutory right to redeem

real property sold to a creditor or other purchaser”). Nor is

Rev Op Group solely seeking monetary damages from a

solvent debtor. Sylmar, 314 F.3d at 1074. Any relief we grant

to Rev Op Group would require overturning previous

distributions and allocations to third parties not before this

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court. Unlike in Sylmar, then, we cannot simply award Rev

Op Group more money from a stable pool of available funds.

C.

But as a three-judge panel, we cannot resolve the tension

in our case law because doing so requires overruling prior

decisions of this court. In re Complaint of Ross Island Sand

& Gravel, 226 F.3d 1015, 1018 (9th Cir. 2000). There is no

need to resolve the tension here because Rev Op Group’s

appeals must be dismissed under the four considerations from

Thorpe, even if the failure to seek stays of the Clarification

and Distribution Orders were not fatal. Those four

considerations are: (1) “whether a stay was sought, for absent

that a party has not fully pursued its rights”; (2) “if a stay was

sought and not gained, we then will look to whether

substantial consummation of the plan has occurred”; (3) “we

will look to the effect that a remedy may have on third parties

not before the court”; (4) “[f]inally, we will look at whether

the bankruptcycourt can fashion effective and equitable relief

without completely knocking the props out from under the

plan and thereby creating an uncontrollable situation before

the bankruptcy court.” 677 F.3d at 881.

As we have previouslyexplained at length, Rev Op Group

failed to satisfy the first Thorpe consideration because it did

not seek a stay. By doing so, Rev Op Group did not “use due

diligence in seeking the stay,” and has, “by its own inaction”

“permit[ted] developments to proceed without its

participation,” namely, distributions of funds from ML

Manager to unsuspecting third parties who could not have

realized the distributions could be retaken. Id. This is a case

where Rev Op Group sat on its rights, which weighs strongly

towards equitable mootness. Thorpe, 677 F.3d at 881–82; see

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also Nordhoff Invs., Inc. v. Zenith Elec. Corp., 258 F.3d 180,

187 (3d Cir. 2001) (determining that “Appellants did not, at

any time, seek a stay . . . [which] weighs heavily in favor of

dismissing Appellants’ claims”).

Moreover, in addition to the fact that substantial

consummation of the bankruptcy plan has occurred,4

the

remedy Rev Op Group seeks “would bear unduly on the

innocent.” Thorpe, 677 F.3d at 882. That turns on whether it

is possible to alter the Clarification and Distribution Orders

“in a way that does not affect third party interests to such an

extent that the change is inequitable.” Id. Any alterations

would inequitably harm third parties not before this court.

Third parties would have to return distributions from the

estate or sell property back to ML Manager. Because the

bankruptcy proceeding is, in substance, a liquidation, any

increase in future distributions to Rev Op Group must come

from money allocated to and expected by a third party

investor. Any modification to the underlying orders would

inequitably affect those third parties.

Finally, “and most importantly, we look to whether the

bankruptcy court on remand may be able to devise an

equitable remedy.” Id. at 883. It is not possible to devise an

equitable remedy. While the bankruptcy court could withhold

proceeds from future property sales and reallocate those

proceeds based on a revised formula, because many investors

have likely already received all of the distributions owed to

them, withholding the proceeds of future sales would not

allow the bankruptcy court to reallocate the money

proportionally. Clawing back money from those investors

4 See Section I.2 of the concurrently filed Opinion in Rev Op Grp. v. ML

Manager LLC, Nos. 12-15229, 12-15438, 12-16293 & 12-16725.

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who already paid their full allocation would be either

impossible or inequitable. Even if these steps were possible,

the costs of implementing such a remedy would probably

exceed the amount of redistributed funds.

Thus, whether Rev Op Group’s failure to seek a stay is

fatal under Roberts Farms, standing alone, or whether we

must assess this appeal under Thorpe, the appeals must be

dismissed.5

APPEALS DISMISSED.

 

5

 Rev Op Group requests that we vacate the underlying orders because

these appeals are now moot, under In re Burrell, 415 F.3d 994 (9th Cir.

2005). However, “the touchstone of vacatur is equity,” and it would be

inequitable to allow Rev Op Group to relitigate the underlying issues in

these appeals. Id. at 999 (citation omitted). Indeed, unlike in Burrell, here

Rev Op Group “has by [its] own act caused the dismissal of the appeal”

by its failure to seek stays of the Clarification and Distribution Orders. Id.

(citation omitted).

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