Court Opinion

ID: 9693087
Source: CourtListenerOpinion
Date Created: 2023-08-25 16:21:54.048049+00
Date Added: 2024-06-11T12:02:39.163083
License: Public Domain

MARLAR, Bankruptcy Judge,
dissenting.
I respectfully disagree with my colleagues, and would DISMISS either for lack of standing to appeal or for mootness. Although the majority opinion is well-written and scholarly, I believe that it is distracted by a tangential issue, that of who owns the property. The crux of this appeal, in my view, is whether Darby has standing to appeal the validity of the sale on the grounds that the property was not property of the estate, which is the only issue he has raised.
Darby’s interest in the property sold by the trustee is that of a lienholder. The outcome of an ownership controversy is of no import to a lienholder; its interest is *273secured by the value of its collateral regardless of who owns the property. In this case, the value of Darby’s lien was only as great as the value of his collateral which was administered by the chapter 7 trustee. See 11 U.S.C. § 506(a).
Therefore, a lienholder has no basis to challenge a sale on grounds that someone other than the debtor's estate owns it. Because Darby has no pecuniary stake in any dispute as to who the true owner of his collateral may be, his appeal on that ground fails for lack of standing. See In re P.R.T.C., Inc., 177 F.3d 774, 777 (9th Cir.1999) (appellant’s interests must be directly affected by a bankruptcy court order).
The majority relies on P.R.T.C. to support its conclusion that a creditor has a pecuniary interest in a bankruptcy court’s order transferring assets of the estate. See id. at 778. This broad statement is a true one, as a chapter 7 estate’s ultimate beneficiaries are a debtor’s creditors. But that fact does not confer standing on all estate issues. See 11 U.S.C. § 323 (trustee is the estate’s representative).
Indeed, in P.R.T.C., the Ninth Circuit in making that statement cited a case involving competing creditor claims to a limited fund. See In re Int'l Envtl. Dynamics, Inc., 718 F.2d 322, 326 (9th Cir.1983). Such facts, and those of P.R.T.C. are distinguishable.
In P.R.T.C., there was no bankruptcy sale, no lienholder, and no lien attached to the sale proceeds. There, the estate lacked sufficient funds to pursue various avoidance actions and other lawsuits, which were the estate’s only assets. Therefore, the litigation rights were assigned to the largest creditor, and another creditor, who was a potential defendant, objected. The Ninth Circuit held that the objecting creditor had standing to object to the transfer because such transfer left the bankruptcy estate without any other significant assets. P.R.T.C., 177 F.3d at 778.
In contrast, here, the real property asset has simply been transformed into cash proceeds, to which Darby’s lien attached. Furthermore, in this case, the parties who are debating ownership are not parties to this appeal. Thus, they have waived any Rodeo Canon arguments, and § 363 applies.
It is precisely because Darby, as a lien-holder, is only entitled to challenge the sale on one of the specific grounds of § 363(f) that his arguments surrounding ownership ring hollow. Even though, in bankruptcy court, Darby objected that the sale price was inadequate to fully pay his lien (§ 363(f)(3)), he has not raised any § 363(f)(l)-(f)(5) challenges to the sale in this appeal. If he had done so, he might have fair game for an appellate argument. Instead, he has waived any § 363(f) challenges. See Laboa v. Calderon, 224 F.3d 972, 981 n. 6 (9th Cir.2000) (appellate court ordinarily will not consider arguments not raised in appellant’s opening brief). Instead, his only appellate issue concerns who owns the property, and his interest is not claimed to be that of an owner.
Turning to the value side of the coin, a secured creditor’s lien attaches to collateral only to the extent of the collateral’s value. Any debt in excess of the collateral’s value is unsecured. See 11 U.S.C. § 506(a). Thus, by waiving the § 363(f)(3) argument that the property was being undersold, Darby cannot complain that his lien on land was transformed into a lien on cash. A lienholder has no pecuniary interest in its collateral except as may be necessary to pay the debt which is secured by it. When collateral is sold, and a creditor’s lien is transferred to cash, the creditor is one step closer to what it bargained for— *274repayment — and has no complaint that it was deprived of its right to foreclose. Cf. Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) (refusing chapter 7 debtor’s attempt, prior to foreclosure, to strip down a lien on real property to the value of the collateral, pursuant to § 502(d), because a chapter 7 creditor’s lien “stays with the real property until the foreclosure”).
Eventually, the validity, priority and extent of the Darby lien, if the trustee disputes it, will be tested in the crucible of an adversary proceeding. See Fed. R. Bankr.P. 7001(2). If Darby wins, he will presumably be paid the sale proceeds.
Finally, a word addressed to the majority’s analogy to § 1111(b), as a method to protect lienholders. This section is simply not applicable to chapter 7, by analogy or otherwise. See § 103(g) (making subchap-ter I of chapter 11 applicable only in a chapter 11 case, with the exception of § 901(a)).
Section 1111(b) has a sound policy reason for appearing in the reorganization chapter that does not apply at all to liquidations. Section 1111(b) applies where a debtor seeks to retain secured real property, and at the same time prevents that debtor from valuing the collateral for a sum less than the secured debt without giving the creditor a unilateral option to elect to be treated as if it were fully secured. The purpose is to preserve the “upside” appreciation for a creditor who is deprived of its immediate right to foreclose while the debtor continues to use the property. Section 1111(b) thus shifts future appreciation to the creditor’s side of the equation. See In re Tuma, 916 F.2d 488, 491 (9th Cir.1990). Those policy reasons are simply inapplicable when the goal is liquidation in a chapter 7 proceeding. See, e.g., § 704(1) (trustee shall collect and reduce the property of the estate to money as quickly as possible).
In addition, the § 1111(b) election option explicitly excepts any nonrecourse holder whose secured property is sold pursuant to § 363 or in a reorganization plan. See 11 U.S.C. § 1111 (b)(l)(A)(ii). The reason for this is that the secured party has a right to bid the full amount of its secured claim at any bankruptcy sale of its collateral. See In re Tampa Bay Assocs., Ltd., 864 F.2d 47, 50 (5th Cir.1989) (citing 124 Cong. Rec. H11103-04 (daily ed. Sept. 28, 1978, at 32407)); 11 U.S.C. § 3630k).
In summation, Darby has no standing to appeal the sale order on the basis of ownership. He has no dog in that fight.
Alternatively, I conclude that this appeal is moot. Section 363(m) speaks to this subject loud and clear, and the majority’s efforts to slip-slide around its mandate is, in my opinion, tortured. What § 363(m) means to Darby (assuming that he had standing) is this: had he wished to stop the sale, he could have applied for a stay pending appeal, and if the court required it, posted a bond equal to the sale price, and could then have had his appeal heard on the merits. But he never asked for a stay. Therefore, § 363(m) describes the unequivocal consequence:
(m) The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.
11 U.S.C. § 363(m).
Because the sale has now closed, Darby’s appeal is moot and should be dismissed.
*275For these reasons, I respectfully dissent, and would DISMISS.