UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

In Re: MCLEAN SQUARE ASSOCIATES,

G.P.,

Debtor.

LENNAR METRO D. C. PARTNERS,

LIMITED PARTNERSHIP,

Plaintiff-Appellant,

No. 95-3161

and

J. W. FORTUNE, INCORPORATED,

Plaintiff,

v.

MCLEAN SQUARE ASSOCIATES, G.P.,

Defendant-Appellee.

Appeal from the United States District Court

for the Eastern District of Virginia, at Alexandria.

Leonie M. Brinkema, District Judge.

(CA-95-1453-A, BK-93-14161)

Argued: November 1, 1996

Decided: February 24, 1997

Before NIEMEYER, MICHAEL, and MOTZ, Circuit Judges.

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Affirmed by unpublished per curiam opinion.

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COUNSEL

ARGUED: William James Perlstein, WILMER, CUTLER & PICKERING, Washington, D.C., for Appellant. Ann Elizabeth Schmitt,

REED, SMITH, SHAW & MCCLAY, Washington, D.C., for Appellee. ON BRIEF: Lewis S. Goodman, Mark T. Womack, SHAW,

PITTMAN, POTTS & TROWBRIDGE, Washington, D.C., for

Appellant.

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Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c).

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OPINION

PER CURIAM:

Lennar Metro D.C. Partners, L.P. (Lennar) appeals from the district

court's dismissal of its appeal of a bankruptcy court order confirming

the plan of reorganization of McLean Square Associates, G.P.

(McLean). Lennar argues that the district court erred by holding that

its appeal was equitably moot. We disagree with Lennar for the reasons stated below and affirm the district court.

I.

McLean, a general partnership, is the appellee in this case and the

debtor in the underlying Chapter 11 bankruptcy reorganization. In

1987 McLean bought a parcel of commercial real estate known as the

McLean Shopping Center. It financed the purchase with a $5 million

capital contribution by the general partners and a $5 million nonrecourse loan from the National Bank of Washington. In 1988 the bank

loaned McLean an additional $2 million and took a new note for $7

million (the Note). McLean used the additional money to buy another

property in the shopping center. The interest rate on the Note was the

floating prime rate published in the Wall Street Journal. The FDIC

took over the National Bank of Washington in August 1990. McLean

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continued to make monthly payments on the Note, but after McLean

did not make the balloon payment due at the end of 1992 when the

Note matured, the FDIC notified McLean that it was going to sell the

Note.

In October 1993 McLean filed a voluntary petition for Chapter 11

reorganization in the Eastern District of Virginia. Appellant Lennar

bought the Note from the FDIC in December 1993 as part of a bulk

purchase of loans. McLean has continued to make the interest payments since then, but it has not made payments on the principal

amount.

McLean and Lennar both submitted plans for McLean's reorganization to the bankruptcy court. The cornerstone tenant of the redevelopment proposed in McLean's plan was a food store called Sutton

Place Gourmet. McLean's lease agreement with Sutton Place required

McLean to make extensive renovations to the shopping center. The

agreement also gave Sutton Place the right to terminate the lease if

the bankruptcy court did not confirm McLean's plan by June 15,

1995, or if construction was not under way by October 1995.

The bankruptcy court heard experts from both McLean and Lennar

testify as to the current value of the shopping center, its projected

value after redevelopment, the costs and amount of cash needed for

redevelopment, and the rate of interest that would accurately account

for the risk of default on the Note. Lennar's expert suggested that the

interest rate on the Note be increased to floating prime plus 2.5% to

reflect what he considered to be the undersecured nature of the loan.

At the date of the confirmation hearing this rate was 11.5%.

McLean's expert testified that the appropriate rate of interest for a

loan of similar risk would be 175 basis points over a fixed rate equal

to the six and one-half year U.S. Treasury bill rate. At the date of the

confirmation hearing that rate was about 6.50%, so McLean's proposed rate was a fixed 8.25%. Both experts testified as to the projected cash flow of the shopping center and McLean's likely ability

to make the interest payments. Lennar also asserted a claim for

$357,517 in late charges.

The bankruptcy court confirmed McLean's plan at the hearing on

May 22, 1995, and entered a written order on July 17, 1995. The court

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made three modifications to the plan that are relevant to this appeal.

First, it modified the Note. It set the interest rate at floating prime (9%

at that time), which was the original rate on the Note. This rate fell

between the fixed 8.25% requested by McLean and the floating prime

plus 2.5% requested by Lennar. The court also extended the term of

the Note through the end of 2001 with principal payments starting in

1999 and a balloon payment at the end. Second, the court disallowed

Lennar's claim for late charges on the ground that Lennar suffered no

damage as a result of the delay. Third, because the plan projected an

operating deficit of $122,352, the court conditioned the plan by

requiring McLean's general partners to post a letter of credit for

$200,000 to ensure that adequate cash was on hand to finish the redevelopment once it began.

Lennar did not seek a stay of the confirmation order because it

feared that Sutton Place might terminate the lease if the redevelopment did not begin on time. Lennar nevertheless appealed the confirmation order to the district court in October 1995. Lennar objected to

the confirmation order on the following grounds: (1) the late charges

should have been included, (2) the plan left Lennar undersecured, (3)

the interest rate was too low, and (4) the plan was not feasible. Lennar

asked the district court to reverse the bankruptcy court and enter an

order denying confirmation of the plan.

The district court did not reach the merits of these objections. On

November 6, 1995, McLean filed a motion asking that the court dismiss Lennar's objections as moot. McLean argued that there was no

practical way for a court to grant the relief requested because the plan

was substantially consummated, major construction had begun, and

third parties had relied on the plan and entered into contracts with

McLean (the debtor). McLean provided an affidavit from one of its

general partners describing the various contracts entered into and

describing the construction work that was already under way.

Lennar responded by asking for less relief. In its response it asked

that the district court order the bankruptcy court to modify the plan

so that McLean would pay the late charges and a market rate of interest. Lennar described these two elements as the"key portions" of its

appeal. Lennar argued that no third parties would be adversely

affected by the more limited relief and that the additional interest

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would not jeopardize the plan because McLean's partners (as general

partners) were obligated to make additional capital contributions to

cover any shortfalls.

The district court held a hearing on Lennar's appeal on December

1, 1995. At the hearing Lennar again asked for the limited relief of

late charges and a market rate of interest. McLean pointed out that if

the court granted the relief requested, the plan would have a real cash

flow problem, with a projected operating deficit (using Lennar's numbers) of $336,750 in 1996 and $132,028 in 1997. The district court

sided with McLean and granted its motion to dismiss under the doctrine of "equitable mootness." It found that"to allow these appeals to

be heard would effectively run significant risks to seriously affecting

third parties in that there are other tenants, other businesses planning

to do business there, and that would not be fair to them." The court

also noted that Lennar had declined to seek a stay even though it

could have, that the plan had been substantially consummated, and

that there had been "reasonable reliance upon the finality of the Bankruptcy Court's decision [confirming the plan]." Lennar appeals the

decision of the district court.

II.

We turn to the only question before us -- whether the district court

erred in dismissing Lennar's appeal on the ground of"equitable mootness."

The equitable mootness doctrine allows a reviewing court, in certain circumstances, to refrain from reviewing the merits of a bankruptcy court order. The doctrine applies to cases where the court finds

that it should not grant relief on equitable and prudential grounds

even if the party seeking relief might win on the merits.

This circuit previously applied the equitable mootness doctrine in

Central States, Southeast and Southwest Areas Pension Fund v. Central Transport, Inc., 841 F.2d 92 (4th Cir. 1988). In Central States,

we stated the test for applying the doctrine as follows:

[D]ismissal of the appeal on mootness grounds is required

when implementation of the plan has created, extinguished

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or modified rights, particularly of persons not before the

court, to such an extent that effective judicial relief is no

longer practically available. The court should reach a determination upon close consideration of the relief sought in

light of the facts of the particular case.

Id. at 96 (citations omitted).*

Lennar argues on appeal that the district court misapplied the

Central States test because the relief sought would not affect the

rights of third parties. As mentioned above, in district court Lennar

requested an order increasing the interest rate on the Note and adding

late charges. Lennar argues that these changes could be made to the

plan without substantially affecting the rights of third parties.

We disagree. The relief Lennar requests would adversely affect the

cash flow and financial stability of the shopping center. The bankruptcy court heard expert testimony that McLean could not make the

payments that Lennar requested:

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*In fashioning a test for equitable mootness, other circuits have considered additional factors including (1) whether the reorganization plan

has been substantially consummated, (2) whether a stay has been

obtained, (3) whether the relief requested would affect the success of the

plan, and (4) the public policy of affording finality to bankruptcy judgments. See, e.g., In re Continental Airlines, 91 F.3d 553, 560 (3d Cir.

1996) (en banc); Manges v. Seattle-First Nat'l Bank (In re Manges), 29

F.3d 1034, 1038-39 (5th Cir. 1994); In re UNR Indus., 20 F.3d 766, 769

(7th Cir. 1994); In re Chateaugay Corp., 988 F.2d 322, 325 (2d Cir.

1993); Rochman v. Northeast Utils. Serv. Group (In re Public Serv. Co.

of N.H.), 963 F.2d 469, 471-72 (1st Cir. 1992); First Union Real Estate

Equity and Mortgage Inv. v. Club Assoc. (In re Club Assoc.), 956 F.2d

1065, 1069 (11th Cir. 1992); In re AOV Indus. , 792 F.2d 1140, 1147

(D.C. Cir. 1986); Trone v. Roberts Farms, Inc. (In re Roberts Farms

Inc.), 652 F.2d 793, 796-97 (9th Cir. 1981). Lennar argues that Central

States, which places primary focus on how the relief requested would

affect third parties, is the proper test. We note that applying the other factors listed above would not help Lennar, so we need not decide which

other factors may apply in this circuit.

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Q. In your opinion, . . . if the rate of prime plus 2 1/2% is

incorporated into the Debtor's plan, what would be the

effect on the feasibility of the plan?

A. I believe there is not sufficient cash flow to make the

payments called for in the plan.

Transcript of May 22, 1995 hearing at 94. If the plan was modified

by increasing the interest rate on the loan to prime plus 2.5% and by

reinstating the late charges, McLean would likely suffer significant

operating deficits. This could then upset the interests of the tenants

and other third parties who have relied on the confirmed plan with the

cash flow projections in that plan.

The record contains evidence indicating third party reliance. In its

brief to the district court McLean attached an affidavit of one of the

shopping center managers who described some of the commitments

made to and by third parties after confirmation. For example, Sutton

Place Gourmet paid $49,938 on behalf of McLean as partial commission due to a broker under the lease agreement. Sutton Place made

this payment and proceeded to satisfy its obligations under the lease

on the assumption that the plan had the unconditional approval of the

bankruptcy court and would be implemented as approved. McLean

entered into contracts with a construction company (Jack Bays, Inc.)

and other contractors who began demolition and redevelopment of the

center in September 1995. As of October 31, 1995, McLean had just

$90,000 cash left on hand. Increasing the interest rate on the Note and

adding late charges would upset the carefully crafted plan and would

increase the risk that third parties would not be paid or would lose

monies already expended.

Lennar counters this reasoning by noting that the plan already provides for an operating deficit. An operating deficit in a general partnership can require a new capital contribution by the partners. But the

bankruptcy court, aware that the plan projected an operating deficit

of $122,352, required that the McLean general partners post a

$200,000 letter of credit to provide for this shortfall. Thus, in the

bankruptcy court's judgment, the implied obligation of the general

partners was not enough, and it required the letter of credit to ensure

that redevelopment would be completed. The bankruptcy court con-

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firmed the plan in part on the finding that McLean"will have sufficient cash with which to complete the proposed redevelopment."

Increasing the interest payments and imposing late charges would

increase the projected operating deficit over the $200,000 secured by

the letter of credit. This would mean that capital contributions beyond

those provided for (and guaranteed) would likely be required.

We realize, as Lennar stresses, that general partners in a partnership do have a legal obligation to make any necessary capital contribution. But the ability of third parties to get paid if contributions were

called for would turn on the wherewithal of the general partners. The

third parties here entered into their contracts with McLean on the reasonable assurance that the cash projected in the plan would be available. The letter of credit posted by the partners played a significant

role in the bankruptcy court's decision to confirm:

Based on the estimates of cost . . . and the revenue sources

available to the Debtor, specifically the cash on hand, future

rental income, advances from Sutton, sale proceeds from the

sale of the residential property and the letter of credit from

the general partners, the Court finds the Plan to be feasible.

Supplemental Appendix at 50 (emphasis added). There were questions raised about the financial status of the general partners. For this

reason the bankruptcy court required a letter of credit to guarantee

additional capital contributions by the general partners. Increasing the

interest payments to Lennar and granting it late charges would significantly increase the likelihood of calls for capital contributions that

were not secured. This prospect, in turn, increases the risk to third

parties that there will not be sufficient cash to complete the redevelopment. So we agree with the district court that granting the relief

requested by Lennar would impair the rights of third parties who

relied on the confirmed plan.

Lennar argues in the alternative that even if cash flow is a problem,

the district court could have effectively fashioned relief by using a

"split accrual" interest rate. Under this approach, as we understand it,

the court would increase the interest rate and reinstate the late

charges, but the monthly interest payments to Lennar would remain

the same until the Note matures. The increased interest charges would

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be capitalized and come due, along with the late charges, when the

Note matures and the balloon payment is due. Thus, the operating

cash flow of the property would not be affected. The only change

(according to Lennar) would be a decrease in the projected profits of

the general partners. But this relief would still impair the stability of

the plan to a significant extent. Lennar's loan to McLean is a nonrecourse loan. If the value of the shopping center was to drop below the

remaining liability on the loan, the general partners would have a

strong financial incentive to walk away from the property, allow Lennar to foreclose, and leave third parties unpaid. By increasing the liability, this "split accrual" relief increases the risk that the general

partners might default, thereby impairing the rights of third parties.

We would not grant "split accrual" relief in any event because Lennar

did not request this relief in its brief to the district court or at oral

argument before that court.

In sum, because the relief requested by Lennar significantly affects

the rights of third parties, the district court was correct in dismissing

Lennar's appeal based on the equitable mootness doctrine. The order

of the district court is therefore

AFFIRMED.

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