Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-12-16725/USCOURTS-ca9-12-16725-0/pdf.json

Parties Involved:
ML Manager LLC
Appellee
Mortgages Ltd.

Queen Creek XVIII, L.L.C.
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN THE MATTER OF: MORTGAGES

LTD.,

Debtor,

REV OP GROUP,

Appellant,

v.

ML MANAGER LLC,

Appellee.

No. 12-15229

D.C. Nos.

2:11-cv-00853-RCJ

2:08-bk-07465-RJH

REV OP GROUP,

Appellant,

v.

ML MANAGER LLC, an Arizona

limited liability company,

Appellee,

MORTGAGES LTD.,

Debtor-In Re.

No. 12-15438

D.C. No.

2:10-cv-01819-RCJ

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2 IN THE MATTER OF: MORTGAGES LTD.

IN THE MATTER OF: MORTGAGES

LTD.,

Debtor,

BEAR TOOTH MOUNTAIN

HOLDINGS, L.L.P.; PUEBLO

SERENO MOBILE HOME PARK,

L.L.C.; QUEEN CREEK XVIII,

L.L.C.; MORLEY ROSENFELD,

M.D. P.C. RESTATED PROFIT

SHARING PLAN, and/or their

successsors and assigns

(collectively the Rev Op

Investors),

Appellants,

v.

ML MANAGER LLC,

Appellee.

No. 12-16293

D.C. No.

2:10-cv-01917-RCJ

IN RE: MORTGAGES LTD.,

Debtor,

QUEEN CREEK XVIII, L.L.C.,

Appellant,

v.

No. 12-16725

D.C. No.

2:12-cv-00036-RCJ

OPINION

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IN THE MATTER OF: MORTGAGES LTD. 3

ML MANAGER LLC,

Appellee.

Appeal from the United States District Court

for the District of Arizona

Robert Clive Jones, District Judge, Presiding

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

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

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

designation.

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4 IN THE MATTER OF: MORTGAGES LTD.

SUMMARY**

Bankruptcy

The panel reversed the bankruptcy court’s declaratory

judgment that ML Manager LLC had agency authority to sell

property of the bankruptcy estate of Mortgages Ltd.

Pursuant to the confirmed Chapter 11 plan of

reorganization of Mortgages Ltd., a private lender for certain

real estate investments in Arizona, ML Manager 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

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,

objected to ML Manager’s proposed sale of some of the

loans. The bankruptcy court held that these investors had

executed an agency agreement with ML Manager, which had

an agency coupled with an interest that was irrevocable under

Arizona law.

The panel held that the appeal from the declaratory

judgment was not equitably moot because Rev Op Group

sought a stay and was diligent. In addition, even though

substantial consummation of the plan had occurred, the panel

** 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. 5

could fashion effective relief because modification of the

declaratory judgment would not inequitably affect innocent

third parties, and the bankruptcy court on remand would be

able to devise an equitable remedy.

The panel held that the bankruptcy court erred in

concluding that Rev Op Group was bound to the agency

agreements because the Group denied in its answer that its

investors had signed any documents that included the agency

provisions. The panel held that under the federal pleading

rules, a court cannot disregard statements in a pleading unless

the court specifically determines that the statement was made

in bad faith under Federal Rule of Civil Procedure 11, or

should be struck under Rule 12(f). Accordingly, the

bankruptcy court erred in rejecting Rev Op Group’s denials

as implausible. The panel reversed the bankruptcy court’s

declaratory judgment and remanded the case.

COUNSEL

Bryce A. Suzuki (argued), Robert J. Miller, 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, ML Manager sought to sell some of

the loans in Mortgages Ltd.’s portfolio. In response, a group

of pass-through investors (Rev Op Group) objected to the

sales. Rev Op Group and ML Manager then moved,

essentially, for cross-declaratory judgments to resolve ML

Manager’s powers regarding Mortgages Ltd.’s portfolio.

Rev Op Group moved for partial summary judgment on

the ground that because ML Manager acted as “agent” for

each investor, it could not sell the properties if any investor,

the “principal,” objected. According to Rev Op Group, if ML

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IN THE MATTER OF: MORTGAGES LTD. 7

Manager sought to sell properties over its objection, the

investors in Rev Op Group could simply revoke the agency.

ML Manager responded that it did not have simple agency

authority, revocable at will by the principal. Instead, it

claimed that it held an interest in Mortgage Ltd.’s underlying

loan pool, which gave ML Manager an “agency coupled with

an interest,” which is not revocable under Arizona law. See

Phoenix Title & Trust Co. v. Grimes, 416 P.2d 979, 981

(Ariz. 1966) (in banc).

Simultaneously, ML Manager moved for a declaratory

judgment that all investors had executed documents

designating ML Manager as agent and that those agency

documents had been properly transferred to ML Manager.

Rev Op Group denied that it had executed the agreements.

According to Rev Op Group, while its investors had signed

“Subscription” and “RevolvingOpportunity” agreements, the

investors had not signed versions of those agreements that

included a provision binding all signers to an agency

relationship with ML Manager. Rev Op Group also argued

that even if its members had executed the agreements that

included the agency provision, the agreements were not

properly assigned to ML Manager.

At a hearing on the cross-motions, the bankruptcy court

requested and received supplemental briefs on whether the

“plausibility” standard outlined in the then recent Supreme

Court decisions of Bell Atlantic Corp. v. Twombly, 550 U.S.

544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009),

governed the denials made by Rev Op Group of the

allegations in ML Manager’s complaint.

On July 27, 2010, the bankruptcy court ruled that Rev Op

Group’s denials would only be accepted as true if the denials

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were plausible. On the same day, the court resolved, on the

pleadings alone, both Rev Op Group’s motion for partial

summary judgment and ML Manager’s motion for a

declaratory judgment. The bankruptcy court held that Rev Op

Group’s denials were implausible, because Rev Op Group

admitted the investors had signed documents with the same

name as those that included agency agreements. Because the

denials were implausible, the bankruptcy court held that the

Rev Op Group investors had executed the agency agreement

with ML Manager. The bankruptcy court also denied Rev Op

Group’s motion for partial summary judgment, ruling that

ML Manager had an agency coupled with an interest and that

ML Manager was properly assigned the agency agreements.

Thus, after this “Declaratory Judgment,” ML Manager

had irrevocable authority, subject to possible review by the

bankruptcy court under a “business judgment” standard, to

sell or liquidate the interests in property of any investors,

including objecting investors like the Rev Op Group,

foreclose on property of the estate, modify the terms of the

outstanding loan properties, and recover costs and expenses

from all investors.

Armed with this order, ML Manager moved to sell two

properties in the portfolio. On August 30, 2010, Rev Op

Group moved to stay the Declaratory Judgment. The motion

to stay was denied by the bankruptcy court on September 10,

2010, because the bankruptcy court concluded that ML

Manager needed to liquidate the properties for the benefit of

all investors, who would suffer serious harm if the orders

were stayed unless Rev Op Group paid a large bond as

security. Rev Op Group stated that it could not afford such an

expensive bond. Rev Op Group appealed the denial of the

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motion to stay to the district court, which affirmed the

bankruptcy court on October 12, 2010.

In March and November of 2011, ML Manager moved to

sell two other properties pursuant to the Declaratory

Judgment. The bankruptcy court overruled Rev Op Group’s

objections and approved the property sales.

Rev Op Group appealed from all of these orders to the

district court. On January 10, 2012, the district court affirmed

the bankruptcy court’s order approving one of the property

sales, and held that ML Manager had an agency coupled with

an interest and had properly applied its business judgment.

On February 15, 2012, having previously concluded that

ML Manager held an agency coupled with an interest, the

district court affirmed the rest of the bankruptcy court’s

Declaratory Judgment. The district court held that Rev Op

Group’s denials that investors had executed the agreements

attached to ML Manager’s declaratory judgment complaint

were a “sham” and thus should be disregarded. The district

court also affirmed that the agency agreements were properly

assigned to ML Manager.

On May 2 and July 6, 2012, the district court affirmed the

other property sales based upon its prior rulings regarding

ML Manager’s irrevocable agency authority, proper

assignment, and Rev Op Group’s sham denials of executing

the agency agreements.

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Rev Op Group filed timely notices of appeal from each

district court order.1In this opinion, we address only its

appeal of the Declaratory Judgment. We have appellate

jurisdiction under 28 U.S.C. § 158(d)(1).

I.

ML Manager moves to dismiss this appeal as equitably

moot. Although we dismiss Rev Op Group’s appeals from the

sales orders as equitably moot in a concurrently filed

memorandum disposition, we must separately examine this

appeal to determine whether to dismiss it as equitably moot.

In re Filtercorp, Inc., 163 F.3d 570, 577–78 (9th Cir. 1998)

(holding that an appeal from a sale order was moot, but the

appeal from a related order was not moot); In re AOV Indus.,

Inc., 792 F.2d 1140, 1147–48 (D.C. Cir. 1986) (holding that

to determine equitable mootness, “a court cannot avoid its

obligation to scrutinize each individual claim, testing the

feasibility of granting the relief against its potential impact on

the reorganization scheme as a whole”). We analyze whether

each appeal is equitably moot separately because awarding

relief to the appellant in one appeal may threaten the

equitable disposition of the bankruptcy estate, but awarding

relief in another may pose no harm to the estate or third

parties.

1 We resolve Rev Op Group’s appeals of the property sales in a

concurrently filed memorandumdisposition. Rev Op Grp. v. ML Manager

LLC, Nos. 12-15229, 12-15438, 12-16293 & 12-16725. We also publish

with this Opinion an Opinion in other Rev Op Group appeals from the

“Clarification Order” and “Distribution Order.” Rev Op Grp. v. ML

Manager LLC, Nos. 12-15234 & 12-15459.

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We examine four considerations to determine whether the

appeal from the Declaratory Judgment 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.

In re Thorpe Insulation Co., 677 F.3d 869, 881 (9th Cir.

2012).

1.

Unlike in Rev Op Group v. ML Manager LLC, Nos. 12-

15234 & 12-15459 and In re Roberts Farms, Inc., 652 F.2d

793, 798 (9th Cir. 1981), Rev Op Group sought a stay of the

Declaratory Judgment, but could not obtain it. Rev Op Group

thus did not sit on its rights. It diligently pursued this appeal.

Though Rev Op Group could not obtain a stay from the

bankruptcy or district court because of the high cost of the

bond necessary to secure the appeal, we are cautious about

not giving a party who is diligent – as Rev Op Group has

been in this case – an opportunity to present its appeal.

Thorpe, 677 F.3d at 881.

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2.

We next turn to whether substantial consummation of the

plan has occurred. Id. at 882. We conclude that it has.

“Substantial consummation” as defined in the Bankruptcy

Code means:

(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). We clarify that the “transfers”

referenced in subsection (A) differ from the “distributions”

referenced in subsection (C). Subsection (A)’s “transfers of

property” are those that are necessary to accomplish

reorganization and to shape the new financial structure of the

debtor. Such transfers often take place on or shortly after the

effective date of a confirmed plan and may include the

transfer of a security interest to unsecured creditors, a transfer

of stock to creditors or third parties, a transfer of promissory

notes to creditors, transfers of property to secured creditors in

satisfaction of their claims, or transfers of property by third

parties to the debtor. See Antiques of Nev., Inc. v. Bala

Cynwyd Corp. (In re Antiques of Nev., Inc.), 173 B.R. 926,

929–30 (B.A.P. 9th Cir. 1994). Subsection (C)’s

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“distributions,” on the other hand, are payments to creditors

in satisfaction of the debtor’s debts. “Substantial

consummation” requires completion or near completion of

the former, but only commencement of the latter. Id.

Here, with respect to subsection (A), the plan proposed

various reorganizational transfers of property, including

transfer of non-loan assets and stock in the reorganized debtor

to the liquidating trust. All or substantially all of the property

proposed by the plan to be transferred was transferred shortly

after the plan was confirmed. Subsection (B) was satisfied

when ML Manager undisputedly assumed management of all

or substantially all of the property dealt with by the plan.

Subsection (C) was satisfied once ML Manager commenced

distribution of property to creditors, both from exit financing

funds and from liquidated property. We therefore conclude

that the plan was “substantially consummated” under

11 U.S.C. § 1101(2).

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.

First Fed. Bank of Cal. v. Weinstein (In re Weinstein),

227 B.R. 284, 289 (B.A.P. 9th Cir. 1998). But this is not

always the case. Thus, “the fact that a plan is substantially

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

Id. We must still consider whether, despite substantial

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

we analyze the final two factors from Thorpe.

3.

Therefore, we next consider “whether modification of the

plan of reorganization would bear unduly on the innocent.”

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Thorpe, 677 F.3d at 882 (internal quotation marks omitted).

Unlike in the companion case, modification of the

Declaratory Judgment would not “affect third party interests

to such an extent that the change is inequitable.” Id.

Regardless of whether we reverse the legal basis for the sales,

Rev Op Group could not disturb past sales because we have

dismissed the appeals of the sale orders. If we were now to

reverse the Declaratory Judgment, we would alter ML

Manager’s ability to act as agent for objecting investors like

Rev Op Group, but that would only affect prospective sales

of property to third parties, and perhaps prospective

distributions. That would not unduly bear on innocent third

parties.

4.

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

bankruptcy court on remand would be able to devise an

equitable remedy. Id. at 883. If we reversed the Declaratory

Judgment on any of the bases Rev Op Group argues were

erroneous, the bankruptcy court could proceed to discovery

on whether Rev Op Group’s denials were legally sufficient,

or require ML Manager to act with Rev Op Group’s consent,

or require that ML Manager properly transfer the agency

agreements. This would be equitable, if “incomplete,” relief

that would not “totally [] upset the [bankruptcy] plan.” Id.

The appeal of the Declaratory Judgment is not equitably

moot. Unlike in the companion case, Rev Op Group

diligently pursued its rights by seeking a stay of the

Declaratory Judgment Order, even though it was unable to

obtain the stay. Although substantial consummation of the

bankruptcy plan has occurred, modification of the order

would not inequitablyaffect innocent third parties. Moreover,

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“there are many options open to the bankruptcy court other

than complete plan reversal that can remedy some of [Rev Op

Group’s] claims if proved valid.” Id.

II.

Rev Op Group challenges the Declaratory Judgment on

three grounds. First, Rev Op Group argues that the

bankruptcy court erred in subjecting its denials that its

investors had signed the agency agreements to a “plausibility

standard,” and then rejecting those denials as implausible.

Second, Rev Op Group argues that even if the denials were

implausible and the court properly determined that Rev Op

Group was subject to the agency agreements, ML Manager

does not hold an irrevocable agency power. Third, Rev Op

Group argues that the bankruptcy court erred in holding that

the agency agreements were properly transferred to ML

Manager.

We review legal decisions of the bankruptcy court de

novo, and without deference to the district court’s decisions

during the initial appeal. In re Cossu, 410 F.3d 591, 595 (9th

Cir. 2005). We also review a judgment on the pleadings de

novo, and affirm if, taking all factual allegations in Rev Op

Group’s pleadings as true, ML Manager is entitled to

judgment as a matter of law. Marshall Naify Revocable Trust

v. United States, 672 F.3d 620, 623 (9th Cir. 2012).

The bankruptcy court erred in concluding that Rev Op

Group is bound to the agency agreements, because Rev Op

Group had denied in its answer that its investors had signed

any documents that included the agency provisions. Under

the federal pleading rules, which apply to adversary

proceedings in bankruptcy court, see FED. R. BANKR. P.

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7008(a), a court cannot disregard statements in a pleading

unless the court specifically determines that the statement

was made in bad faith under Federal Rule of Civil Procedure

11, or should be struck under Rule 12(f). PAE Gov’t Servs.,

Inc. v. MPRI, Inc., 514 F.3d 856, 859–60 (9th Cir. 2007). A

court can only disregard statements in a pleading under Rule

11 if the court “invoke[s] the rule’s procedural safeguards”

and “employ[s] the rule’s substantive standard . . . that [the

party or its counsel] acted in bad faith.” Id. at 859. A court

can only strike a statement in a pleading under Rule 12(f) if

the statement is “(1) an insufficient defense; (2) redundant;

(3) immaterial; (4) impertinent; or (5) scandalous.”

Whittlestone, Inc. v. Handi-Craft Co., 618 F.3d 970, 973–74

(9th Cir. 2010), citing FED. R. CIV. P. 12(f).

The bankruptcy court here followed neither Rule 11 nor

Rule 12(f). In its Declaratory Judgment, the court did not

invoke the procedural safeguards of Rule 11, or determine

that the denials were made in bad faith. Nor can Rev Op

Group’s denials be properly struck under Rule 12(f). The

bankruptcy court never cited Rule 12(f) or its bankruptcy rule

equivalent. Additionally, Rev Op Group’s denials were a

sufficient defense to ML Manager’s complaint, because if the

denials are true, Rev Op Group would not be bound to the

agency agreement pleaded by ML Manager. Rev Op Group’s

denials were not redundant, immaterial, impertinent or

scandalous.

Though we review only the bankruptcy court’s order, not

the district court’s affirmance, Cossu, 410 F.3d at 595, we

point out that the district court’s similar disregard for the

denials was also erroneous. The district court held that Rev

Op Group’s denials were “simplyuntenable” and “obviously”

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“frivolous and a sham,” citing our decision in Harvey

Aluminum (Inc.) v. NLRB, 335 F.2d 749, 758 (9th Cir. 1964).

In Harvey Aluminum, the National Labor Relations Board

(NLRB) brought an administrative action against a company,

Harvey Aluminum, for a violation of the National Labor

Relations Act. Id. at 751. The NLRB also sued General

Engineering, a company the NLRB alleged was “affiliated”

with Harvey Aluminum, and thus could be treated as a

“single employer” with Harvey Aluminum, both subject to

the NLRB’s jurisdiction. Id. at 757. In its answer to the

complaint, General Engineering denied the information in the

complaint, but offered no factual allegations to challenge the

NLRB’s pleading. Id. The NLRBtrial examiner ruled that the

failure to respond “would be taken as a concession that the

relationship between Harvey [Aluminum] and General

[Engineering] during the relevant period was such that they

might properly be treated as a single employer.” Id. General

Engineering appealed this ruling, and we affirmed.

Under the federal regulations governing NLRB

administrative actions, an answer to a complaint had to be

signed by the respondent’s attorney, and if it is not signed or

“is signed with intent to defeat the purpose of this rule, it may

be stricken as sham and false and the action may proceed as

though the answer had not been served.” Id. at 757 n.31,

quoting 29 C.F.R. § 102.21. We compared the federal

regulation to “comparable provisions of the Federal Rules of

Civil Procedure,” including what was then the “essentially

identical” Rule 11. Id. at 758 & n.32. We stated that under the

comparable Federal Rules, “an answer asserting want of

knowledge sufficient to form a belief as to the truth of facts

alleged in a complaint does not serve as a denial if the

assertion of ignorance is obviously sham,” and that “[i]n such

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circumstances the facts alleged in the complaint stand

admitted.” Id. at 758. Thus, we held that the trial examiner

was justified under the federal regulation in refusing to accept

“clearly frivolous” statements in an answer. Id.

In 1964, Rule 11 was “essentially identical” to 29 C.F.R.

§ 102.21, stating that if a pleading “is not signed or is signed

with intent to defeat the purpose of this rule, it may be

stricken as sham and false and the action may proceed as

though the pleading had not been served.” See Ely Valley

Mines, Inc. v. Lee, 385 F.2d 188, 191 n.1 (9th Cir. 1967),

quoting FED. R. CIV. P. 11. Our sister circuits and treatises

thus correctly understood our holding in Harvey Aluminum as

authorizing both NLRB trial examiners and federal courts

applying the federal rules to disregard statements in answers

when the statements were “obviously sham.” See Am.

Photocopy Equip. Co. v. Rovico, Inc., 359 F.2d 745, 747 (7th

Cir. 1966); 5 Charles Alan Wright & Arthur R. Miller, et al.,

Fed. Prac. & Proc. Civ. § 1262 n.13 (3d ed.).

But Rule 11 is no longer “essentially identical” to

29 C.F.R. § 102.21. In 1983, the Rule 11 provision that

authorized district courts to “strike pleadings . . . as sham and

false . . . was eliminated.” PAE Gov’t, 514 F.3d at 859 n.3.

One of the purposes of eliminating that provision was to stop

decisions that “‘tended to confuse the issue of attorney

honesty with the merits of the action.’” 5A Charles Alan

Wright & Arthur R. Miller, Fed. Prac. & Proc. Civ. § 1336.3

(3d ed.), citing Advisory Committee Note to the 1983

amendments, reprinted at 97 F.R.D. 165, 199. After the 1983

amendments to Rule 11, “absent a finding of bad faith, factual

allegations in the complaint (or answer) must be tested

through the normal mechanisms for adjudicating the merits.”

PAE Gov’t, 514 F.3d at 859 n.3 (emphasis added). Thus, our

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suggestion in Harvey Aluminum that a district court has “freestanding authority to strike pleadings simply because” it

believes them to be a sham is no longer valid. See PAE Gov’t,

514 F.3d at 859.2Instead, the “district court’s powers are

generally limited to those provided by the Federal Rules of

Civil Procedure.” Id. The district court erred in holding that

Rev Op Group’s denials of the allegations in ML Manager’s

complaint were a sham without using “the mechanism for

doing so,” which is Rule 11. Id.

In sum, courts cannot examine statements in an answer or

other pleading and decide, on the basis of their own intuition

that the statements are implausible or a sham and thus can be

disregarded. Factual allegations in a pleading, as opposed to

legal conclusions, must be presumed to be true. Twombly,

550 U.S. at 555. Both the bankruptcy and district court erred

here by “effectively resolv[ing] those allegations” in Rev Op

Group’s denials “on the merits,” instead of reviewing them

for legal sufficiency. PAE Gov’t, 514 F.3d at 858.

Perhaps Rev Op Group’s denials are implausible. Perhaps

the denials should be deemed a sham under Rule 11. But the

bankruptcy court did not find that the denials were made in

bad faith, nor were the denials liable to be stricken under Rule

12(f). We reiterate that in the absence of any such findings,

“factual allegations in the complaint (or answer) must be

tested through normal mechanisms for adjudicating the

merits.” Id. at 859 n.3. We reverse the bankruptcy court’s

determination in its Declaratory Judgment that each member

2 The text of 29 C.F.R. § 102.21 has not changed since 1964, so our

holding in Harvey Aluminum is still authoritative in the context of

administrative actions brought by the NLRB.

 Case: 12-16725, 11/12/2014, ID: 9308668, DktEntry: 46-1, Page 19 of 20
20 IN THE MATTER OF: MORTGAGES LTD.

of the Rev Op Group had executed the agency agreements,

and was “to be bound to” those agreements.

REVERSED AND REMANDED.

 Case: 12-16725, 11/12/2014, ID: 9308668, DktEntry: 46-1, Page 20 of 20