Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-12-17176/USCOURTS-ca9-12-17176-0/pdf.json

Parties Involved:
JPMCC 2007-C1 Grasslawn Lodging, LLC
Appellant
SWVP Hilton Head LLC
Appellee
SWVP La Paloma LLC
Appellee
Southwest Value Partners Fund XV LLP
Appellee
Transwest Resort Properties Incorporated
Appellee
Transwest Resort Properties, Inc.
Debtor

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN RE TRANSWEST RESORT

PROPERTIES, INC.,

Debtor,

JPMCC 2007-C1 GRASSLAWN

LODGING, LLC,

Appellant,

v.

TRANSWEST RESORT PROPERTIES

INCORPORATED; SOUTHWEST VALUE

PARTNERS FUND XV LLP; SWVP LA

PALOMA LLC; SWVP HILTON HEAD

LLC,

Appellees.

No. 12-17176

D.C. Nos.

4:12-cv-00024-

RCC

4:12-cv-00121-

RCC

OPINION

Appeal from the United States District Court

for the District of Arizona

Raner C. Collins, Chief District Judge, Presiding

Argued and Submitted

January 13, 2015—San Francisco, California

Filed July 1, 2015

Before: J. Clifford Wallace, Milan D. Smith, Jr.,

and Michelle T. Friedland, Circuit Judges.

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2 IN RE TRANSWEST RESORT PROPERTIES

Opinion by Judge Friedland;

Dissent by Judge Milan D. Smith, Jr.

SUMMARY*

Bankruptcy

The panel reversed the district court’s decision dismissing

on equitable mootness grounds an appeal from the bankruptcy

court’s order confirming a Chapter 11 plan of reorganization.

The panel held that even though the plan had been

implemented, a lender’s colorable objections to the plan were

not equitably moot because the lender had diligently sought

a stay, and it would be possible to devise an equitable remedy

to at least partially address the lender’s objections without

unfairly impacting third parties or entirely unraveling the

plan. The panel remanded the case for further proceedings.

Dissenting, Judge M. Smith wrote that the district court’s

decision should be affirmed because the remedies the lender

proposed would be grossly inequitable to a third-party

investor and would surely jeopardize the reorganization.

* 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 RE TRANSWEST RESORT PROPERTIES 3

COUNSEL

David M. Neff (argued) and Eric E. Walker, Perkins Coie

LLP, Chicago, Illinois, for Appellant.

Susan G. Boswell (argued), Quarles & Brady LLP, Tucson,

Arizona; KaseyC. Nye, Mesch, Clark & Rothschild, Tucson,

Arizona; E. King Poor, Quarles & Brady LLP, Chicago,

Illinois, for Appellees.

OPINION

FRIEDLAND, Circuit Judge:

We consider whether a lender that made colorable

objections to a plan of reorganization in bankruptcy court and

then diligently sought a stay in order to litigate those

objections may obtain review of its objections on appeal even

though the plan has been implemented. Because it would be

possible to devise an equitable remedy to at least partially

address the lender’s objections without unfairly impacting

third parties or entirely unraveling the plan, we hold that the

lender’s objections are not equitably moot and should be

considered on appeal. We thus reverse the district court’s

decision dismissing the appeal on equitable mootness grounds

and remand for further proceedings.

I.

A. Background

In 2007, five related entities acquired the Westin Hilton

Head Resort and Spa and the Westin La Paloma Resort and

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4 IN RE TRANSWEST RESORT PROPERTIES

Country Club. The five entities (collectively “Debtors”)

were: Transwest Hilton Head Property, LLC, and Transwest

Tucson Property, LLC (collectively “Operating Debtors”);

Transwest Hilton Head II, LLC, and Transwest Tucson II,

LLC (collectively “Mezzanine Debtors”); and Transwest

Resort Properties, Inc. (“Holding Company Debtor”). The

Holding Company Debtor was the sole owner of each of the

Mezzanine Debtors. The Mezzanine Debtors, in turn, were

each the sole owners of the Operating Debtors, which owned

and operated the respective hotels.

The 2007 acquisition of the hotels was financed by two

loans: first, a $209 million loan to the Operating Debtors

secured by liens on the two hotels (the “mortgage loan”); and,

second, a $21.5 million loan to the Mezzanine Debtors

secured by liens on the ownership interests in the Operating

Debtors (the “mezzanine loan”).

The Mezzanine Debtors and the Operating Debtors

defaulted on the mezzanine and mortgage loans, respectively. 

In 2010, all five Debtors filed for Chapter 11 bankruptcy in

the United States Bankruptcy Court for the District of

Arizona. The bankruptcy cases for the five entities were

jointly administered.

JPMCC 2007-C1 Grasslawn Lodging, LLC (“Lender”),

which had acquired the mortgage loan before the Debtors

filed for bankruptcy, filed a proof of claim in the bankruptcy

proceeding for $299 million.1 PIM Ashford Subsidiary I

1 The amount of the claim consisted of the principal amount of the

mortgage loan ($209 million) plus interest, fees, and premiums. The

bankruptcy court then disallowed the premiums and reduced the amount

to approximately $247 million.

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IN RE TRANSWEST RESORT PROPERTIES 5

LLC, which had acquired the mezzanine loan in 2008, filed

two proofs of claim totaling $39 million.2 Debtors and

Lender stipulated that the value of the two hotels was $92

million.

B. Plan of Reorganization

Debtors filed a joint plan of reorganization. The plan

proposed to cancel the Mezzanine Debtors’ equity interest in

the Operating Debtors and to dissolve the Mezzanine

Debtors. Southwest Value Partners Fund XV, LP (“SWVP”)

would invest no less than $30 million and would become the

new sole owner of the Operating Debtors.

Pursuant to 11 U.S.C. § 1111(b)(2), Lender elected to

have its entire allowed claim, $247 million, treated as a

secured claim.3 The plan proposed to reinstate the loan, but

to restructure the repayment requirements to comprise

monthly interest-only payments and then a balloon payment

of the remaining loan amount after 21 years.

The proposed restructured loan terms also included a dueon-sale clause. Pursuant to the clause, any sale or refinancing

of the hotels would make the entire remainder of the $247

million loan due immediately. The clause contained an

2 The amount of the claims consisted of the principal amount of the

mezzanine loan ($21.5 million) plus interest, late fees, and $10 million the

Mezzanine Debtors were required to pay back because they failed to make

certain promised improvements.

3

If Lender had not made the § 1111(b) election, then its claim would

have been bifurcated into (1) a secured claim equal to the value of the

collateral ($92 million) and (2) an unsecured claim for the remainder. See

11 U.S.C. § 506(a)(1).

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6 IN RE TRANSWEST RESORT PROPERTIES

exception, however: between years five and fifteen of the

loan, the hotels could be sold or refinanced subject to the

restructured loan (meaning the new buyer would take on the

loan obligations), without the full amount of the loan coming

due on sale, as long as certain conditions were met.4

PIM Ashford’s treatment under the reorganization

depended on whether it voted for the plan. If it voted against

the plan, it would not receive any distributions. If it voted for

the plan, PIM Ashford would be entitled to a small

percentage of surplus cash flow in the future. The plan

extinguished the mezzanine loan’s collateral (the Mezzanine

Debtors’ equity interest in the Operating Debtors).

There were ten classes of claims under the plan.5 The

mortgage loan and the mezzanine loan were each in a class by

themselves. After the plan was proposed, Lender acquired

the mezzanine loan from PIM Ashford. Lender then voted

both its positions (its original claim and the claim it obtained

from PIM Ashford) against the plan.

4 The original loan agreement between Operating Debtors and Lender

also contained restrictions on the ability to sell the properties.

5

In bankruptcy reorganizations, claims against the debtor are grouped

into classes according to their rights vis-à-vis the debtor. See 11 U.S.C.

§ 1122; 7Collier onBankruptcy ¶ 1122.01 (16th ed. 2012) (“Section 1122

. . . provides a plan proponent with an important tool in aid of

confirmation of a plan—namely, the ability to classify substantially

similar claims in the same class for purposes of voting and treatment.”). 

A class accepts the plan when at least two-thirds in amount and more than

one-half in number of the claims in the class vote in favor. 11 U.S.C.

§ 1126(c). Generally, for a plan to be confirmed, every class must either

vote in favor of the plan or receive full payment. See id. § 1129(a)(8); but

see id. § 1129(b) (setting forth an exception to this rule, for confirmation

of nonconsensual cram down plans).

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IN RE TRANSWEST RESORT PROPERTIES 7

The plan was confirmed despite the votes of Lender’s two

dissenting classes because the plan satisfied the “cram down”

requirements of § 1129(b).6 Pursuant to the plan, the

restructured mortgage loan entitled the Lender to deferred

cash payments (1) totaling at least the amount of the allowed

claim ($247 million, or the “total loan amount”), and

(2) having a net present value equal to the value of the

collateral ($92 million). 11 U.S.C. § 1129(b)(2)(A)(i)(II). 

Lender also retained a lien on the hotels for the total loan

amount. Id. § 1129(b)(2)(A)(i)(I).

C. Lender’s Two Objections to the Plan

Lender objected to two aspects of the plan. First, Lender

contended that the ten-year exception to the due-on-sale

clause should be removed because it negated its § 1111(b)

election. According to Lender, the option to keep the entire

loan amount as a secured claim, codified in § 1111(b), was

intended by Congress to protect secured creditors against the

undervaluation of their collateral. If the collateral for a loan

were undervalued, Lender argued, the due-on-sale clause

would protect the lender’s interests by, for example,

preventing the debtor from immediately selling the collateral

subject to the restructured loan and capturing the true value

 

6 The Bankruptcy Code allows a plan proponent to confirm—or “cram

down”—a plan over the dissent of a class as long as certain requirements

for nonconsensual confirmation are met. See 11 U.S.C. § 1129(b);

RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065,

2069 (2012) (“Section 1129(b) creates an exception to that general rule,

permitting confirmation of nonconsensual plans—commonly known as

‘cramdown’ plans—if the plan does not discriminate unfairly, and is fair

and equitable, with respect to each class of claims or interests that is

impaired under, and has not accepted, the plan.”).

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8 IN RE TRANSWEST RESORT PROPERTIES

of the collateral.7 Here, Lender specifically asserted that the

exception to the due-on-sale clause between years five and

fifteen would allow SWVP to unfairly negate at least part of

the benefit of Lender’s § 1111(b) election.

Second, Lender complained that the bankruptcy court

misapplied one of the plan-confirmation requirements. 

 

7

 Lender cites to the following treatise passage to support its argument

that the sale of the hotels subject to the restructured loan would undermine

its § 1111(b) election:

Assume a debtor with a first mortgage debt of

$10,000,000. At the time of the bankruptcy petition the

court determines that the value of the mortgage real

estate is $7,500,000 . . . . Assume . . . that our creditor

makes the [§ 1111(b)] election and so is left after

confirmation with a $10,000,000 mortgage. Just as he

predicted, real estate values reverse themselves and the

debtor makes an agreement to sell the property for

$12,000,000 to a third party. When the creditor appears

at the closing to receive its $10,000,000, the debtor

says: “Not so fast. I have sold the property subject to

the mortgage. You will continue to get your payments

because my purchaser has assumed the mortgage and I

remain liable on it, but the only cash available is the

$2,000,000 above the $10,000,000 and that goes to

me.” To make section 1111(b)(2) even remotely fair,

this sort of activity should be prohibited. Surely the

policy behind section 1111(b)(2) demands that the court

infer a “due on sale” clause in any such mortgage

whether one exists or not.

David G. Epstein et al., Bankruptcy § 10-27, at 776, 778 (1993). In this

case, sale of the hotels subject to a due-on-sale clause would entitle

Lender to immediate payment of the remainder of the total loan amount. 

If the sale occurred during the exception to the due-on-sale clause,

however, Lender would continue to receive only a stream of payments

with a net present value lower than the total loan amount.

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IN RE TRANSWEST RESORT PROPERTIES 9

Section 1129(a)(10) requires that, “[i]f a class of claims is

impaired under the plan, at least one class of claims that is

impaired under the plan [must have] accepted the plan” for it

to be confirmed. 11 U.S.C. § 1129(a)(10). Lender pointed

out that in cases involving multiple debtors, courts have split

on whether § 1129(a)(10)’s requirement applies per plan or

per debtor. Compare, e.g., In re Tribune Co., 464 B.R. 126,

180–84 (Bankr. D. Del 2011) (per debtor), with JPMorgan

Chase Bank, N.A. v. Charter Commc’ns Operating, LLC (In

re Charter Commc’ns), 419 B.R. 221, 264–66 (Bankr.

S.D.N.Y 2009) (per plan). Lender argued for the per-debtor

interpretation of § 1129(a)(10). Because the Mezzanine

Debtors here did not have any impaired class of creditors

voting for the plan, Lender argued that, under this

interpretation, the plan violated § 1129(a)(10).

The bankruptcy court overruled Lender’s two objections

and confirmed the plan.

D. Post-confirmation Proceedings

Four days after the bankruptcy court confirmed the plan,

Lender filed a notice of appeal.8 On the same day, Lender

filed a motion in the bankruptcy court requesting that the

consummation of the plan be stayed pending appeal. Lender

argued that failure to grant the stay could result in the appeal

8 Appeals from bankruptcy courts in this circuit may be heard in the first

instance by either a district court or the Ninth Circuit’s bankruptcy

appellate panel (“BAP”). See 28 U.S.C. § 158(a)–(b). Lender’s appeal

was initially referred to the BAP, but Debtors and SWVP exercised their

right to object to proceeding before the BAP, so the appeal was heard by

the district court. See id. § 158(c)(1). A party seeking review of a

decision from the district court or the BAP may appeal to this court, id.

§ 158(d), as Lender did here.

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10 IN RE TRANSWEST RESORT PROPERTIES

being rendered moot. Debtors and SWVP each filed

objections to the stay request, arguing that Lender had not

shown how substantial consummation of the plan would moot

Lender’s appeal. The bankruptcy court denied Lender’s

motion for a stay and—having apparently accepted Debtor’s

and SWVP’s arguments—ruled that Lender had not shown

the likelihood of irreparable harm required for a stay because

the possibility of mootness was “speculative, at best.” Lender

then filed an identical stay motion in the district court, and

Debtor and SWVP again opposed it. Like the bankruptcy

court, the district court declined to issue a stay.

When the district court then considered the appeal—

which advanced Lender’s two objections to the plan—it held

that the appeal was equitably moot. Although the district

court acknowledged that Lender had been diligent in seeking

a stay, it stated that the plan had been consummated, third

parties had relied on the confirmation of the plan, and the

relief sought would be inequitable.

Lender filed this timely appeal from that decision.

II.

Equitable mootness is a prudential doctrine by which a

court elects not to reach the merits of a bankruptcy appeal. 

Rev Op Grp. v. ML Manager LLC (In re Mortgs. Ltd.)

(“Mortgages I”), 771 F.3d 1211, 1215 n.2 (9th Cir. 2014). 

“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.” Id. at 1215 (alteration omitted). 

Unlike Article III mootness, which causes federal courts to

lack jurisdiction and so to have an inability to provide relief,

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IN RE TRANSWEST RESORT PROPERTIES 11

equitable mootness is a judge-created doctrine that reflects an

unwillingness to provide relief. Id.9

We have set out four considerations to help determine

whether an appeal is equitably moot:

We will look first at whether a stay was

sought, for absent that a party has not fully

pursued its rights. If a stay was sought and

not gained, we then will look to whether

substantial consummation of the plan has

occurred. Next, we will look to the effect a

remedy may have on third parties not before

the court. Finally, we will look at whether the

bankruptcy court can fashion effective and

equitable relief without completely knocking

the props out from under the plan and thereby

creating an uncontrollable situation for the

bankruptcy court.

Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re

Thorpe Insulation Co.), 677 F.3d 869, 881 (9th Cir. 2012). 

Because each of Lender’s objections would require a separate

form of relief, the equitable mootness analysis must be

applied separately to each objection. See Rev Op Grp. v. ML

Manager LLC (In re Mortgs. Ltd.) (“Mortgages II”), 771 F.3d

623, 628 (9th Cir. 2014).

9 The doctrine of equitable mootness is not without its critics. See, e.g.,

In re Cont’l Airlines, 91 F.3d 553, 567–73 (3d Cir. 1996) (in banc) (Alito,

J., dissenting) (questioning the legal basis for equitable mootness).

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12 IN RE TRANSWEST RESORT PROPERTIES

In evaluating a dismissal on equitable mootness grounds,

we review factual findings for clear error and legal

conclusions de novo. See Mortgages I, 771 F.3d at 1214.

A.

Courts must be cautious in applying equitable mootness

when a party has been diligent about seeking a stay. 

Mortgages II, 771 F.3d at 628. “To say that a party’s claims,

although diligently pursued, are equitably moot because of

the passage of time, before the party had a chance to present

views on appeal, would alter the doctrine to be one of

‘inequitable mootness.’ . . . [I]t would be inequitable to

dismiss their appeal on equitable mootness grounds merely

because the reorganization has proceeded.” In re Thorpe,

677 F.3d at 881.

Mortgages I and Mortgages II together highlight the

importance of diligence in the equitable mootness analysis. 

In Mortgages I, the appellant had failed to seek a stay while

pursuing an appeal. 771 F.3d at 1214. That the appellant had

sat on its rights weighed heavily in favor of holding the

appeal equitably moot. Id. at 1217. In Mortgages II, by

contrast, the appellant had sought a stay pending the appeal. 

771 F.3d at 627. We held that the appeal was not equitably

moot and, in doing so, specificallyemphasized the request for

a stay as a factor differentiating it from Mortgages I. See

Mortgages II, 771 F.3d at 629 (“Unlike in [Mortgages I],

[appellant] diligently pursued its rights by seeking a stay of

the Declaratory Judgment Order, even though it was unable

to obtain the stay.”).

Here, Lender was diligent about seeking appellate review

of its two objections to the plan. Four days after the

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IN RE TRANSWEST RESORT PROPERTIES 13

bankruptcy court confirmed the plan, Lender filed a notice of

appeal and asked the bankruptcy court to stay the

consummation of the plan. When the bankruptcy court

denied that motion, Lender sought a stay from the district

court. That Lender was diligent here cuts strongly in favor of

appellate review of Lender’s claims. See Mortgages II,

771 F.3d at 628 (“[W]e are cautious about not giving a party

who is diligent . . . an opportunity to present its appeal.”).

B.

The next consideration in the test for equitable mootness

is “whether substantial consummation of the plan has

occurred.” In re Thorpe, 677 F.3d at 882; see also Mortgages

II, 771 F.3d at 628–29. The term “substantial consummation”

is defined in the Bankruptcy Code as:

(A) transfer of all or substantially all of the

property proposed by the plan to be

transferred;

(B) assumption by the debtor or by the

successor to the debtor under the plan of the

business or of the management of all or

substantially all of the property dealt with by

the plan; and

(C) commencement of distribution under

the plan.

11 U.S.C. § 1101(2).

As Lender does not dispute, the record indicates that the

plan has been substantially consummated. SWVP assumed

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14 IN RE TRANSWEST RESORT PROPERTIES

control over the Operating Debtors. SWVP then reorganized

the Debtors by, among other things, extinguishing Mezzanine

Debtors’ equity interests in Operating Debtors. Finally,

SWVP funded accounts necessary to make disbursements

under the plan and assumed contracts in order to run the

hotels.

SWVP andDebtors

10

argue thatsubstantial consummation

creates a presumption that the appeal is moot. To support this

proposition, they cite to a series of out-of-circuit cases. See

Appellees’ Br. 32 (citing, e.g., Aetna Cas. & Sur. Co. v. LTV

Steel Co. (In re Chateaugay Corp.), 94 F.3d 772, 776 (2d Cir.

1996)). Our circuit’s articulation of the equitable mootness

test, however, has never included such a presumption. See

Mortgages II, 771 F.3d at 629 (“Substantial consummation of

a bankruptcy plan often brings with it a comprehensive

change in circumstances that renders appellate review of the

merits of the plan impractical. But this is not always the

case. . . . We must still consider whether, despite substantial

consummation, we can fashion effective relief. To do so, we

analyze the final two factors from Thorpe.”) (citations

omitted); see also In re Thorpe, 677 F.3d at 882 n.7. 

Although substantial consummation is a factor weighing in

favor of finding the appeal moot, the law in this circuit

requires that we still look at the third and fourth prongs of the

equitable mootness test.

10 We continue to use the term “Debtors” despite the fact that the

Mezzanine Debtors had been dissolved by the time the appeal in this court

was filed.

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IN RE TRANSWEST RESORT PROPERTIES 15

C.

The third consideration in the test for equitable mootness

is whether the relief sought would bear unduly on innocent

third parties. In re Thorpe, 677 F.3d at 882; Mortgages II,

771 F.3d at 629. To evaluate this, we must ask “whether it is

possible to [alter the plan] in a way that does not affect third

party interests to such an extent that the change is

inequitable.” In re Thorpe, 677 F.3d at 882. Third parties’

reliance on the consummation of the plan is not enough to

find this prong satisfied. Rather, for this factor to weigh in

favor of holding a party’s appeal to be equitably moot, the

specific relief sought must bear unduly on innocent third

parties. See id.

We analyze each of Lender’s objections in turn.

1. The Exception to the Due-on-Sale Clause

Lender argued that the plan’s exception to the due-on-sale

clause negates its § 1111(b) election. If Lender prevailed on

the merits of this argument, Lender’s proposed relief would

be the elimination of the exception to the due-on-sale clause. 

Without the exception, the due-on-sale clause would prevent

SWVP from selling or refinancing the hotels without paying

Lender the remainder of the total loan amount.

The relief requested by Lender affects only the division

between Lender and SWVP of any appreciation in value of

the hotels (or from any inaccurately low valuation of the

hotels during the bankruptcy proceeding). No party other

than Lender and SWVP would be affected by this division.

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16 IN RE TRANSWEST RESORT PROPERTIES

The question therefore is whether SWVP is the type of

innocent third party that the equitable mootness doctrine is

meant to protect. In light of SWVP’s participation at every

stage of these proceedings, the answer is no. SWVP became

involved in the reorganization as a new investor and as the

proposed owner of the reorganized entity before the

confirmation of the plan. Although Debtors put forward the

initial version of the plan, SWVP participated in the hearings

held by the bankruptcy court regarding confirmation of the

plan, and the bankruptcy court acknowledged that it

considered SWVP’s pleadings in reaching its decision to

confirm the plan. In fact, SWVP negotiated with Lender over

the final form of the confirmation order (in other words, the

final version of the plan), including the portions that gave rise

to Lender’s objections.11

Following confirmation of the plan, SWVP participated

in further proceedings in the bankruptcy and district courts.

When Lender sought a stay pending appeal, SWVP filed

objections in both courts, arguing, among other things, that

Lender’s objections to the plan were meritless. SWVP is now

also a party to this appeal.12

11 The dissent ignores the role that SWVP had in negotiating the final

confirmation order. SWVP and Lender negotiated numerous aspects of

the plan documents. Ultimately, they were not able to agree on two

issues—the subjects of the two objections to the plan that Lender then

challenged on appeal. SWVP chose to go forward with the confirmation

process despite its awareness of Lender’s objections.

12 Appellees’ assertion that “SWVP is not a party to this appeal,”

Appellees’ Br. 37, is somewhat baffling. SWVP is one of the Appellees. 

Although Appellees Corporate Disclosure Statement in their brief

(inexplicably) fails to name SWVP itself, it does disclose SWVP LP-HH,

LLC, which is wholly owned by SWVP, as a parent company of some of

the Appellees.

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IN RE TRANSWEST RESORT PROPERTIES 17

In Thorpe, we explained that, in evaluating the third

prong of the equitable mootness test, “[a]n important

consideration is whether all the parties affected by the appeal

are before the court.” In re Thorpe, 677 F.3d at 882. Our

review of the procedural history of this case shows that

SWVP has been involved in the plan confirmation and appeal

at every level, so it is not an innocent third party. Moreover,

when a sophisticated investor such as SWVP helps craft a

reorganization plan that “press[es] the limits” of the

bankruptcy laws, appellate consequences are a foreseeable

result. Bank of N.Y. Trust Co. v. Official Unsecured

Creditors’ Comm. (In re Pac. Lumber Co.), 584 F.3d 229,

244 (5thCir. 2009).13

13 The dissent warns that, by saying that SWVP is not an innocent third

party, we risk reducing the amount investors will be willing to pay for

reorganized entities. Yet, if we allow SWVP to stick to a plan that may

violate the Bankruptcy Code and prevent Lender from arguing its

objections on appeal, we risk decreasing potential lenders’ incentives to

make loans in the first place. The Fifth Circuit in Pacific Lumber aptly

warned that “[a]pplying equitable mootness too broadly to disfavor

appeals challenging the treatment of secured debt carries a price. It may

promote the confirmation of reorganization plans, but it also destabilizes

the credit market for financially troubled companies.” 584 F.3d at 244

n.19.

Moreover, investors involved in the reorganization process have

substantial control over the risk that a plan will be revised due to an

appeal. Here, for example, SWVP could have continued negotiating a

resolution of Lender’s objections before the parties agreed to the final

confirmation order, or SWVP could have declined to participate in the

plan given that Lender’s objections remained outstanding. See supra note

11.

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2. Section 1129(a)(10)’s Accepting-Class Requirement

Lender suggests that there would be two possible

remedies if it prevailed on appeal on its argument that

§ 1129(a)(10)’s requirement should be applied to each

Debtor. First, Lender argues that it could be compensated for

the plan’s having extinguished the collateral of its mezzanine

loan. Second, Lender argues that the liens on the ownership

interest in the Operating Debtors could be reinstated.

Debtor has not shown how either of these proposed forms

of relief would affect innocent third parties. Instead, Debtor’s

arguments focus on the effect that allowing the appeal to go

forward would have on SWVP. The two forms of relief

sought—distribution of money from SWVP to Lender or

reinstatement of Lender’s liens—would alter only the

relationship between SWVP and Lender. See, e.g., Clear

Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R.

25, 34 (B.A.P. 9th Cir. 2008) (finding that reinstatement of a

lien would not affect third parties). As explained in the

previous section, SWVP’s involvement in the reorganization

process means it is not the type of innocent third party the

third prong of the equitable mootness test is meant to protect.

D.

The fourth, and most important, consideration in the

equitable mootness test is whether the bankruptcy court could

fashion equitable relief without completely undoing the plan. 

See Mortgages II, 771 F.3d at 629; In re Thorpe, 677 F.3d at

883. Even if the relief would be only partial, “[w]here

equitable relief, though incomplete, is available, the appeal is

not moot.” In re Thorpe, 677 F.3d at 883.

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1. The Exception to the Due-on-Sale Clause

Lender seeks elimination of the exception to the due-onsale clause. Lender’s argument in support is that allowing a

sale of the hotels subject to the restructured loan frustrates the

intended purpose of the § 1111(b) election. We need not and

should not consider the merits of that argument given that our

present task is only to determine whether equitable mootness

prevents the district court from considering the argument at

all. It is sufficient for now to understand that, if Lender

succeeded on the merits of this argument, eliminating the

exception to the due-on-sale clause would give Lender

complete relief.

Even if Lender were successful on the merits, however,

the potential options for relief would not necessarily be

limited to eliminating the full exception. Because even

incomplete relief can be enough to counsel against mooting

the appeal, see Mortgages II, 771 F.3d at 629, we have to ask

whether there are any forms of even partial relief that could

be provided without unravelling the plan. We can think of

two examples of potential partial relief. First, the bankruptcy

court could reduce the length of the window during which the

due-on-sale clause does not apply. Second, the court could

decide that, if a sale occurred during the window, Lender

would be entitled to some percentage of the difference

between the remainder of the total loan amount and the loan’s

present value.

SWVP and Debtors insist that any relief would be

inequitable. Their position implies that were the court to

narrow the window of the exception by one day—or, in the

case of a sale during the period of the exception, to award

Lender one percent of the difference between the remainder

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20 IN RE TRANSWEST RESORT PROPERTIES

of the total loan amount and the loan’s present value—that

would undermine the entire plan. We see no reason why this

would be true, and SWVP and Debtors have offered none.14

14 The dissent delves into the merits of Lender’s objection, arguing that

Lender is asking for more than it had pre-bankruptcy, that providing the

precise form of relief Lender has requested would be inequitable, and that

the requested relief might even cause SWVP to divest from the hotels. 

Perhaps these are arguments that could persuade the bankruptcy court on

remand from an appellate victory by Lender on the merits. But our task

at this juncture is merely to determine whether, if Lender succeeded on the

merits, an equitable remedy could be fashioned. The dissent disputes our

conclusion that a remedy could be fashioned, questioning whether the

bankruptcy court could require SWVP to pay lender anything. But SWVP

is a party to this appeal. We previously have held that a party to an appeal

of a bankruptcy plan may be required to make payments despite prior

confirmation of the plan. See Salomon v. Logan (In re Int’l Envtl.

Dynamics, Inc.), 718 F.2d 322, 326 (9th Cir. 1983) (“Because Logan is a

party to this appeal, this court could fashion effective relief by remanding

with instructions to the bankruptcy court to order the return of erroneously

disbursed funds.”); see also Spirtos v. Moreno (In re Spirtos), 992 F.2d

1004, 1007 (9th Cir. 1993) (“We can fashion effective relief by ordering

Debtor, who is a party to this appeal, to return the money to the estate.”). 

Here, a remedy that did require a transfer of funds from SWVP could be

accomplished by changing the amount eventually due on the loan rather

than requiring a separate cash-transfer event. Moreover, reducing the

length of the exception to the due on sale clause would not require a

transfer of funds at all. Again, the existence of some remedy is all that is

required for the case not to be equitably moot.

We also disagree with the dissent’ssuggestion that a nominal remedy

will always be available, preventing any case from being equitably moot. 

When true third parties have acted in reliance on a plan, there may be

instances in which any plan amendment would unfairly undermine that

reliance. See, e.g., In re Pac. Lumber, 584 F.3d at 251 (“[W]e must hold

[the lender’s] impairment and classification contentions equitably moot. 

Because the plan has been substantially consummated, the smaller

unsecured creditors—irrespective of their status vis à vis the reorganized

companies—have received payment for their claims. Third-party

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IN RE TRANSWEST RESORT PROPERTIES 21

Additionally, SWVP and Debtors’ present contention that

altering the exception to the due-on-sale clause would unravel

the economics of the plan is in tension with the positions they

took before the bankruptcy and district courts. SWVP and

Debtors both actively opposed the stay sought by Lender in

the bankruptcyand district courts, arguing that there would be

no likelihood of irreparable harm absent a stay. In doing so,

SWVP specifically stated that Lender had not demonstrated

how “substantial consummation of the Confirmed Plan

would, in fact, moot its appeal.” Debtors argued that there

would be no “immediate harm” from the plan’s exception to

the due-on-sale clause because the exception would not arise

until “approximately January 2017,” and that “[i]t [wa]s

entirely speculative whether such a sale would ever occur.” 

These prior positions severely undermine SWVP and

Debtor’s argument before this court that the exception to the

due-on-sale clause was a fundamental component of the

transaction and that it cannot now be eliminated or altered

without unraveling the plan.

2. Section 1129(a)(10)’s Accepting-Class Requirement

Section 1129(a)(10) requires that, in order to confirm a

plan, at least one impaired class of claims must vote in favor

of the plan. Lender’s second objection was that

§ 1129(a)(10)’s requirement that there be an impaired class

voting for the plan should apply to each individual debtor, not

to the plan as a whole. Because Lender, in its position as the

sole creditor of the Mezzanine Debtors, voted against the

plan, Lender argued that this requirement was not satisfied

here.

expectations cannot reasonably be undone, and no remedy for [the

lender’s] contentions is practicable other than unwinding the plan.”).

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22 IN RE TRANSWEST RESORT PROPERTIES

If Lender succeeded on the merits of this argument, it

would have shown that, under the Bankruptcy Code, it had

the right to veto the plan at the confirmation stage.15 Even if

we assume that vetoing the entire plan is no longer an

available form of relief, though, we must again ask whether

there is any other remedy that could be crafted to address

Lender’s claim.

Logically, the value of Lender’s ability to veto was worth

somewhere between nothing and $39 million—the total value

of Lender’s claims against the Mezzanine Debtors. Under

11 U.S.C. § 1126(f), a class of claims that is not impaired

(meaning the plan does not alter its rights) is deemed to

automatically accept the plan. Accordingly, if Lender’s

mezzanine claim had been paid in full, the mezzanine claim

would have been deemed to have voted for the plan. Making

that payment now (or, at least, that payment plus interest)

would thus seem to eliminate the § 1129(a)(10) objection. A

lesser payment may not eliminate the § 1129(a)(10) objection

altogether, but would at least offer a partial remedy. And we

see no reason why, if the court were to devise a remedy that

required SWVP to pay Lender one dollar, for example, the

plan would be undone. See In re Thorpe, 677 F.3d at 883

(holding that equitable remedies “vest great discretion in a

court devising a remedy”).

15 To the extent that SWVP argues that Lender was acting in bad faith

by acquiring the mezzanine loan to improve its leverage in negotiations

about the mortgage loan, that argument was already litigated before the

bankruptcy court. Debtors filed a motion arguing that Lender had

acquired the mezzanine loan in bad faith and that the court should

therefore designate Lender pursuant to 11 U.S.C. § 1126(e). (In this

context, designate means disqualify from voting.) The bankruptcy court

denied Debtors’ motion. SWVP could have filed a cross appeal in the

district court to contest that ruling but did not.

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IN RE TRANSWEST RESORT PROPERTIES 23

* * *

We conclude that Lender’s appeal is not equitably moot. 

Although the plan has been substantially consummated,

Lender was diligent about seeking a stay, and it would be

possible to devise an equitable remedy for each objection that

would not bear unduly on innocent third parties.

III.

For the foregoing reasons, we REVERSE the district

court’s dismissal for equitable mootness and REMAND for

further proceedings.

M. SMITH, Circuit Judge, dissenting:

I respectfully dissent.

The majority wrongly concludes that the interests of

Southwest Value Partners (SWVP), a third-party investor

with no pre-petition interest in this bankruptcy, should not

inform our assessment of whether it would be prudent or

equitable to disturb this reorganization plan at this late stage. 

It is only by ignoring these interests that the majority is able

to conclude that any equitable remedies would be available in

this case. In reality, the remedies the Lender proposes are

grossly inequitable to SWVP and would surely jeopardize the

reorganization. More broadly, the majority’s decision

discourages potential investors from relying on the finality of

bankruptcy court confirmation orders, or from investing in

struggling properties until all bankruptcy litigation is

concluded, which, as in this case, can take many years. This

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24 IN RE TRANSWEST RESORT PROPERTIES

impedesthe BankruptcyCode’s goal of “maximizing debtors’

estates and facilitating successful reorganization,” to the

detriment of both debtors and creditors. In re Continental

Airlines, 91 F.3d 553, 565 (3d Cir. 1996).

The majority and I agree that this plan has been

substantially consummated, and that this factor weighs in

favor of finding this appeal equitably moot. We disagree,

however, regarding just how much weight the factor should

carry. While I agree that “the fact that a plan is substantially

consummated . . . does not, by itself, render an appeal moot,”

In re Mortgages Ltd., 771 F.3d 623, 629 (9th Cir. 2014)

(internal quotationmarks omitted), substantial consummation

should be our “foremost consideration” in assessing equitable

mootness, see In re Continental Airlines, 91 F.3d at 560. 

Indeed, as the majority acknowledges, many of our sister

circuits have held that substantial consummation creates a

presumption of equitable mootness. See Aetna Cas. & Sur.

Co. v. LTV Steel Co. (In re Chateaugay Corp.), 94 F.3d 772,

776 (2d Cir. 1996); Rochman v. Ne. Utils. Serv. Grp. (In re

Pub. Serv. Co. of N.H.), 963 F.2d 469, 473 n.13 (1st Cir.

1992); In re AOV Indus., Inc., 792 F.2d 1140, 1149 (D.C. Cir.

1986). While we have not recognized such a presumption,

nothing in our precedents suggests that we should not accord

significant weight to substantial consummation in

determining whether an equitable and effective remedy is

available. Cf. In re Mortgages, 771 F.3d at 629 (recognizing

that “[s]ubstantial consummation of a bankruptcy plan often

brings with it a comprehensive change in circumstances that

renders appellate review of the merits of the plan

impractical,” but that courts must still consider whether it is

possible to “fashion effective relief”).

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IN RE TRANSWEST RESORT PROPERTIES 25

Istrongly disagree with the majority’s conclusion that the

equitable mootness doctrine is not meant to protect the

interests of a third-party investor in SWVP’s position. The

majority concludes that we should not consider how the

proposed remedies will affect SWVP’s interests because

SWVP participated in the bankruptcy proceedings, and this

appeal. But we have never held that we may ignore a thirdparty investor’s interests merely because the third party

participated in the proceedings. The majority relies in part on

the Fifth Circuit’s decision in Bank of New York Trust Co. v.

Official Unsecured Creditors’ Committee (In re Pacific

Lumber Co.), 584 F.3d 229 (5th Cir. 2009). However, that

case involved a reorganization plan that had been crafted by

a creditor and a competitor of the debtor. Id. at 238. It was

therefore at least arguably fair to discount the creditor and

competitor’s interests in deciding whether the appeal was

equitably moot, since they were responsible for the

deficiencies in the plan. Id. There is no indication that

SWVP had any connection to this case until the Debtors

approached it to fund a reorganization plan the debtors had

already crafted. In fact, a different third-party investor

initially agreed to fund the plan. It was only after the first

investor unexpectedly declined to pursue the transaction that

SWVP agreed to make an investment on terms that were

substantially similar to those the Debtors had previously

negotiated with the other third-party investor. Once SWVP

agreed to fund the plan, it was only natural that it would be

involved in the bankruptcy proceedings, since its investment

was the very reason the proposed reorganization was feasible. 

See In re GWI PCS 1 Inc., 230 F.3d 788, 801–02 (5th Cir.

2000) (rejecting argument that “insiders” “lack[ed] good faith

reliance on the reorganization plan,” and noting that “it would

be natural for many, if not a majority, of the transactions set

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forth in a reorganization plan to involve the participants of

the chapter 11 proceedings.”).

The majority suggests that SWVP was not entitled to rely

on the finality of the confirmation order because it could

reasonably foresee that the order would be appealed. This

argument unduly focuses on the reasonableness of SWVP’s

reliance, rather than on the compelling reasons why investors

should be affirmatively encouraged to rely on the finality of

confirmation orders. As the Third Circuit has observed,

[o]ur inquiry should not be about the

“reasonableness” of the Investors’ reliance or

the probability of either party succeeding on

appeal. Rather, we should ask whether

we want to encourage or discourage

reliance by investors and others on the

finality of bankruptcy confirmation orders. 

The strong public policy in favor of

maximizing debtors’ estates and facilitating

successful reorganization, reflected in the

Code itself, clearly weighs in favor of

encouraging such reliance. Indeed, the

importance of allowing approved

reorganizations to go forward in reliance on

bankruptcy court confirmation orders may be

the central animating force behind the

equitable mootness doctrine.

In re Continental Airlines, 91 F.3d at 565. This case

illustrates perfectly why encouraging reliance on bankruptcy

confirmation orders is critical to facilitating complex

reorganizations. Once a third party like SWVP invests to

improve the debtors’ capital, to the benefit of creditors and

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IN RE TRANSWEST RESORT PROPERTIES 27

debtors alike, it is much more difficult for it to walk away if

the terms of its bargain are altered on appeal. The rule the

majorityendorses ignores the realities of the marketplace, and

creates strong incentives for investors to delay funding

improvements until after the appeal is completed, which may

take years. It has already taken approximately three years

since SWVP funded the plan in this case. Had SWVP waited

to fund improvements, the Debtors’ hotels would still be

depreciating in value, and perhaps might even have been

abandoned for want of funding. This would have negatively

impacted the Lender by decreasing the value of its collateral

and impeding, or terminating, the ability of the Debtors to

generate cash flow and service their debt. Worse, the

majority approach discourages third parties from agreeing to

make these kinds of post-confirmation investments in the first

instance. This is likely to detrimentally impact both creditors

and debtors by decreasing the value of debtors’ estates ex

ante and making it more difficult to facilitate workable

reorganizations. As the Seventh Circuit has eloquently

observed:

Every incremental risk of revision on appeal

puts a cloud over the plan of reorganization,

and derivatively over the assets of the

reorganized firm. People pay less for assets

that may be snatched back or otherwise

affected bysubsequent events. Self-protection

through the adjustment of prices may affect

the viability of the reorganization, and in any

event may distort the allocation of assets away

from the persons who can make the most

valuable uses of them and toward persons

who are less sensitive to the costs of ex post

changes of plans. By protecting the interests

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of persons who acquire assets in reliance on a

plan of reorganization, a court increases the

price the estate can realize ex ante, and thus

produces benefits for creditors in the

aggregate.

In re UNR Indus., Inc., 20 F.3d 766, 770 (7th Cir. 1994), cert.

denied, 513 U.S. 999 (1994). Once this plan was confirmed,

and once the Lender’s request for a stay was denied, the very

success of the reorganization depended on SWVP promptly

funding improvements in reliance on the confirmation order. 

Reliance should be encouraged here, not discouraged.

There is another reason we absolutely must consider the

impact the proposed remedies will have on SWVP. To

determine whether this appeal is equitably moot, we must

assess whether the remedies will “completely knock[] the

props out from under the plan and thereby creat[e] an

uncontrollable situation for the bankruptcy court.” Motor

Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe

Insulation Co.), 677 F.3d 869, 881 (9th Cir. 2012). Because

the success of the entire reorganization plan hinges on

SWVP’s investment, answering this question requires us to

predict whether SWVP will still consider this transaction

attractive if the requested remedies are imposed.

There is ample reason to believe that incorporating the

proposed remedies into the reorganization plan could cause

SWVP to stop funding improvements and divest. The Lender

suggests that “the bankruptcy court could compensate Lender

for the value of its extinguished collateral by amending the

Plan to provide a distribution to Lender equal to the

approximately $30 million that SWVP paid for the new

ownership interests in the reorganized Debtors.” As the

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IN RE TRANSWEST RESORT PROPERTIES 29

majority acknowledges, for all practical purposes this would

amount to a “distribution of money from SWVP to [the]

Lender.” The majority contends that the bankruptcy court

can simply order SWVP to pay the Lender. But it is not that

simple. SWVP was not a party to this bankruptcy, and there

is no indication in the record that SWVP is obligated to invest

in the Reorganized Debtors and continue to fund

improvements if the plan is unwound. Therefore, if the

confirmation order is vacated, the only thing keeping SWVP

at the table will be its substantial sunk costs. The bankruptcy

court could attempt to achieve a transfer from SWVP to the

Lender indirectly by modifying the reorganization plan and

hoping that SWVP’s sunk costs deter it from divesting. But

it is unlikely that SWVP will accept a plan that requires it to

pay an extra $30 million, the amount of SWVP’s investment

under the original plan, to the Lender.

Nor is it likely that SWVP will view the other two

proposed remedies any more favorably. The Lender suggests

that “the bankruptcy court could replace Lender’s collateral

by providing Lender with a lien on the ownership interests in

the reorganized Debtors.” The Lender does not explain why

SWVP would wish to continue to invest in renovating the

properties of the reorganized Debtors if its ownership interest

was suddenly subject to a lien. The other remedy the Lender

proposes, full due-on-sale protections, would also

fundamentally alter the economics of the transaction. 

SWVP’s right to sell the hotels after five years was

undoubtedly an essential feature of SWVP’s bargain.

Even if the proposed remedies could be imposed on

SWVP without jeopardizing its commitment to funding the

improvements, it would not be equitable to do so. As the

majority recognizes, we must address each of the Lender’s

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30 IN RE TRANSWEST RESORT PROPERTIES

claims separately. The Lender’s first claim is that the tenyear exception to the due-on-sale clause should be removed

because it negated the Lender’s § 1111(b) election. However,

it does not appear that the original loan even contained a dueon-sale provision. Instead, the original loan permitted

transfers of the properties on substantially similar terms as the

ten-year exception to the due-on-sale clause contained in the

reorganization plan. The Lender is therefore seeking greater

protections than it had under the original loan. It would not

be equitable to upset the plan at this juncture to provide

protections that the Lender has no reasonable basis to expect.

The Lender’s second claim is that the Mezzanine Debtors

did not have any impaired class of creditors voting for the

plan. The Lender acquired the mezzanine loan after the plan

was proposed, knowing that the plan, if confirmed, would

extinguish the mezzanine loan’s collateral. That collateral

was worthless, because it consisted of the Mezzanine

Debtors’ equity interest in the deeply insolvent Operating

Debtors. Therefore, as the majority acknowledges, the

mezzanine loan only had value because, according to the

Lender’s view of the law, it allowed the Lender to veto the

plan.

The majority concludes that this issue is not equitably

moot because the bankruptcy court can compensate the

Lender for the loss of its veto right by, for instance,

“requir[ing] SWVP to pay [the] Lender one dollar . . . .” We

disagree about whether the bankruptcy court can require

SWVP to pay the Lender directly. But even if it could, the

availability of this relief would not justify upsetting the plan

at this stage. It will generally be possible to award a nominal

sum without wholly upsetting the economics of the plan. 

However, if this nominal remedy qualified as the “effective

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IN RE TRANSWEST RESORT PROPERTIES 31

and equitable relief” required by our equitable mootness

cases, see In re Thorpe, 677 F.3d at 881, a remedy would

always be available and no case would ever be equitably

moot. The proper inquiry here is not only whether some

nominal sum could be awarded, but whether it is prudent and

fair at this juncture to vacate the confirmation order and

jeopardize this reorganization.

I conclude that it is neither prudent nor fair. The majority

would have us upset this successful reorganization for the

sole purpose of vindicating the Lender’s purported right to

thwart a viable plan of reorganization, a right it strategically

acquired on the eve of confirmation. This strongly conflicts

with the BankruptcyCode’s purpose of promoting successful

reorganization. In re Continental Airlines, 91 F.3d at 565. 

The public interest in promoting reliance on the finality of

bankruptcy court confirmation orders, as well as basic

fairness to SWVP, now greatlyoutweigh the Lender’s interest

in receiving compensation for its strategically acquired veto

right.

I respectfully dissent.

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