In re: Meruelo Maddux Properties, Inc, et al v. Bank of America, N.A.

Filing

FILED OPINION (DOROTHY W. NELSON, RONALD M. GOULD and SANDRA S. IKUTA) AFFIRMED. Judge: RMG Authoring, FILED AND ENTERED JUDGMENT. [8047415]

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT



In the Matter of: MERUELO
MADDUX PROPERTIES, INC.,
Debtor,
MERUELO MADDUX PROPERTIES-760
S. HILL STREET, LLC; MERCO
GROUP-SOUTHPARK, LLC,
Appellants,
v.
BANK OF AMERICA, N.A.,
Appellee.



No. 10-56128
D.C. No.
2:09-cv-05976-SVW
OPINION



Appeal from the United States District Court
for the Central District of California
Stephen V. Wilson, District Judge, Presiding
Argued and Submitted
December 7, 2011—Pasadena, California
Filed January 27, 2012
Before: Dorothy W. Nelson, Ronald M. Gould, and
Sandra S. Ikuta, Circuit Judges.
Opinion by Judge Gould

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COUNSEL
Christopher E. Prince, Lesnick Prince LLP, Santa Monica,
California, for the appellant.

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IN MATTER OF MERUELO MADDUX PROPERTIES, INC.

Julia W. Brand, John Nowlan Tedford, Michael C. Abel, Danning Gill Diamond & Kollitz LLP, Los Angeles, California,
for the appellant.
Donald Lee Gaffney, Eric S. Pezold, Jasmin Yang, Michelle
M. Raji, Snell & Wilmer LLP, One Arizona Center, Phoenix,
Arizona, for the appellee.

OPINION
GOULD, Circuit Judge:
Chapter 11 debtor Meruelo Maddux Properties-760 S. Hill
Street LLC (“MMP Hill”), one of more than 50 subsidiaries
of Meruelo Maddux Properties, Inc. (“MMPI”), filed a motion
seeking a determination that it and other subsidiaries were not
subject to the single asset real estate provisions of the Bankruptcy Code, 11 U.S.C. §§ 101(51B) and 362(d)(3). Creditor
Bank of America filed a cross motion seeking to apply the
single asset real estate provisions to MMP Hill and another
subsidiary not at issue in this case. The bankruptcy court concluded that MMP Hill “appears to have the characteristics of
a [single asset real estate] case” but decided that it would not
apply the single asset real estate provisions because of the
consolidated, interrelated nature of the business operations of
MMPI and its subsidiaries. Bank of America appealed to the
district court, which reversed the bankruptcy court’s determination regarding MMP Hill, holding that MMP Hill should be
treated as a single asset real estate debtor because there is no
“whole enterprise exception” to the single asset real estate
provisions in the plain language of the statute. MMP Hill now
appeals, arguing that Congress did not intend the single asset
real estate provision to apply to debtors like MMP Hill and
that the district court erred by holding that Bank of America
was entitled to relief from the automatic stay. We have jurisdiction under 28 U.S.C. § 158(d), and we affirm the district

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court’s holding that the single asset real estate provisions
apply to MMP Hill.
I
MMPI owns and develops real property in the Los Angeles
area through a network of subsidiaries. MMPI has a centralized management team that operates MMPI and its subsidiaries, including MMP Hill. The business is operated on a
consolidated basis: revenues from operation of MMPI’s subsidiaries’ properties each day are swept into a single general
operating account that is used to pay expenses for MMPI and
its subsidiaries. MMPI and its subsidiaries file consolidated
financial reports with the SEC and consolidated tax returns
with the IRS. MMP Hill owns a 92-unit apartment complex
commonly known as “Union Lofts.” Bank of America loaned
MMP Hill $28.72 million in 2006 to renovate Union Lofts,
taking a security interest in the real estate. Bank of America
is also an unsecured creditor of MMPI based on guaranty
agreements in connection with the loan to MMP Hill and
loans to other MMPI subsidiaries.
In March 2009, MMPI and fifty-three of its subsidiaries,
including MMP Hill, each filed voluntary Chapter 11 petitions, which were jointly administered under Fed. R. Bankr.
P. 1015, but not substantively consolidated,1 by the bank1

Substantive consolidation is an uncodified, equitable doctrine allowing
the bankruptcy court, for purposes of the bankruptcy, to “combine the
assets and liabilities of separate and distinct—but related—legal entities
into a single pool and treat them as though they belong to a single entity.”
In re Bonham, 229 F.3d 750, 764 (9th Cir. 2000). The doctrine “enables
a bankruptcy court to disregard separate corporate entities, to pierce their
corporate veils in the usual metaphor, in order to reach assets for the satisfaction of debts of a related corporation.” Id. (quoting James Talcott, Inc.
v. Wharton (In re Continental Vending Machine Corp.), 517 F.2d 997,
1000 (2d Cir. 1975)). Appellate courts have ratified substantive consolidation orders when, for example, the debtors have abused corporate formalities, or creditors have treated the separate entities as a single unit and the
business affairs of the consolidated entities were hopelessly entangled. Id.

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ruptcy court. The motions at issue here were first filed in
April 2009 and were ruled on by the bankruptcy court in June
2009. Competing plans of reorganization were proposed that
covered MMPI and all of its subsidiaries. On June 24, 2011
the bankruptcy court confirmed a plan proposed by Charlestown Capital Advisors, LLC and Hartland Asset Management
Corporation (“the Charlestown Plan”), which (among other
things) removed Richard Meruelo and John Maddux from
management positions at the company. Meruelo and Maddux
have appealed the Charlestown Plan’s confirmation order.
The bankruptcy court denied their motion to stay the confirmation order pending appeal, and the plan became effective
on July 25, 2011.
II
The purpose of a single asset real estate determination is to
allow for relief from the automatic stay under 11 U.S.C.
§ 362(d), but as a practical matter no relief is currently possible because the stay was lifted by plan confirmation. This
raises a question of mootness, but we conclude that this case
is not moot because it is capable of repetition yet evading
review. Meyer v. Grant, 486 U.S. 414, 417 n.2 (1988). First,
the nature of the bankruptcy appellate process makes it highly
unlikely that appeals such as this one will be resolved before
the confirmation of a plan. See Bussel, Daniel J., Power,
Authority and Precedent in Interpreting the Bankruptcy Code,
41 UCLA L. Rev. 1063, 1092-93 (1994) (discussing the time
required for disposition of appeals in bankruptcy cases). Second, the parties have a continued interest in resolving this
question because Bank of America is still a secured creditor
of MMP Hill, and the parties would be in an identical situation if the Charlestown Plan were to be overturned on appeal
or if MMP Hill were again to seek relief by filing a successive
petition for Chapter 11 bankruptcy protection. Also, the
Charlestown Plan was not confirmed until briefing had been
completed in this case. “To abandon the case at [this]
advanced stage may prove more wasteful [of judicial

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resources] than frugal” because if either the plan was overturned or there was a second Chapter 11 filing, the issue
would once more be presented and would have to be relitigated from scratch. Friends of the Earth, Inc. v. Laidlaw
Envtl. Servs. (TOC), Inc., 528 U.S. 167, 192 (2000). We hold
that this case is not moot.
III
We review de novo the district court’s decision on appeal
from a bankruptcy case. Barrientos v. Wells Fargo Bank,
N.A., 633 F.3d 1186, 1188 (9th Cir. 2011). A bankruptcy
court’s interpretation of the bankruptcy code presents a question of law that we review de novo. Id. We review the bankruptcy court’s findings of fact for clear error. Leichty v.
Neary, 375 F.3d 854, 857 (9th Cir. 2004).
[1] To determine whether MMP Hill is a single asset real
estate debtor we look to the plain language of the statute.
United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241
(1985). “Where the statute’s language is plain, the sole function of the courts is to enforce it according to its terms, for
courts must presume that a legislature says in a statute what
it means and means in a statute what it says there.” Int’l Ass’n
of Machinists & Aerospace Workers v. BF Goodrich Aerospace Aerostructures Grp., 387 F.3d 1046, 1051 (9th Cir.
2004) (citations and internal quotation marks omitted). Single
asset real estate by statute is defined as real property that
meets three elements: that the property be, first, “a single
property or project, other than residential real property with
fewer than [four] residential units”; second, that the property
“generates substantially all of the gross income of a debtor
who is not a family farmer”; and, third, that “no substantial
business is being conducted by a debtor other than the business of operating the real property and activities incidental
thereto.” 11 U.S.C. § 101(51B).
[2] The single asset real estate provisions at first applied
only to debtors who owed four million dollars or less, but

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Congress removed this cap in 2005. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No.
109-8, § 1201(5)(B), 119 Stat. 23, 193 (2005). If the single
asset real estate provisions apply, the bankruptcy court “shall
grant relief from [the automatic stay], such as by terminating,
annulling, modifying, or conditioning such stay” to any creditor whose claim is secured by single asset real estate, unless:
Not later than [90 days from the filing of the bankruptcy petition] or 30 days after the court determines
that the debtor is subject to this paragraph, whichever is later—
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of
being confirmed within a reasonable time;
or
(B) the debtor has commenced monthly
payments [equal to the interest at the nondefault contract rate of interest]
11 U.S.C. § 362(d)(3). The bankruptcy court concluded that
MMP Hill “appears to have the characteristics of a [single
asset real estate] case,” suggesting that it found that Union
Lofts meets the elements of § 101(51B). We agree. Union
Lofts is (1) a single property that (2) generates all or substantially all of MMP Hill’s gross income and (3) MMP Hill’s
only business activities involve operating and collecting rents
from Union Lofts. In the absence of any evidence that MMP
Hill received funds from MMPI or its sister subsidiaries in
exchange for labor or services, or as profit from MMP Hill
investments, or that any money received from those entities
otherwise qualified as “income,” we reject MMP Hill’s argument that the consolidated management team and cash management system of MMPI and its subsidiaries allow MMP
Hill to claim income generated by other MMPI entities, as
well as the contention that any cash transferred to MMP Hill

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from MMPI or related entities should be characterized as “income” rather than as an equity investment by MMPI.
[3] The bankruptcy court held MMP Hill is “part of a
whole business enterprise to which it would not be appropriate to apply the [single asset real estate] provisions.” The district court reversed, holding that Union Lofts is single asset
real estate because it meets the elements of § 101(51B) and
that there was no basis for the bankruptcy court’s holding
absent substantive consolidation. See generally footnote 1,
supra. We agree with the district court, and we hold that the
plain language of § 101(51B) gives no basis for a “whole
business enterprise” exception. Absent a substantive consolidation order, we must accept MMP Hill’s chosen legal status
as a separate and distinct entity from its parent corporation
and sister subsidiaries, and look only to its assets, income, and
operations in determining whether Union Lofts is single asset
real estate.
[4] MMP Hill contends that we should “look to the substance and not the form” of the single asset real estate provisions because Congress did not intend to include entities that
were part of complicated financial and organizational structures within the single asset real estate provisions. The United
States Supreme Court has endorsed the concept that in “rare
cases the literal application of a statute will produce a result
demonstrably at odds with the intentions of its drafters, and
those intentions must be controlling,” and therefore the Court
reserved some possibility of adopting a “restricted rather than
a literal or usual meaning,” where accepting the literal words
of the statute “would thwart the obvious purpose of the statute.” Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571
(1982) (internal quotation marks omitted). More recently, the
Supreme Court has taken a stricter approach to statutory construction. See Lamie v. U.S. Trustee, 540 U.S. 526, 542 (2004)
(“If Congress enacted into law something different from what
it intended, then it should amend the statute to conform it to
its intent. ‘It is beyond our province to rescue Congress from

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its drafting errors, and to provide for what we might think . . .
is the preferred result.’ ”) (quoting United States v. Granderson, 511 U.S. 31, 68 (1994) (Kennedy, J., concurring)). Whatever the merits of a non-literal approach, we conclude that
this is not one of those “rare cases.” We presume that Congress said what it meant in the language it drafted. Int’l Ass’n
of Machinists & Aerospace Workers, 387 F.3d at 1051. Congress could amend § 101(51B) to insert the “whole business
enterprise” exception that MMP Hill champions, but it has not
done so. We here apply the statute as it is written.
IV
[5] Section 362(d) specifies that the bankruptcy court
“shall grant relief from [the automatic stay]” against single
asset real estate unless the debtor takes corrective action
within 90 days of the beginning of the case or 30 days of the
single asset real estate determination. 11 U.S.C. § 362(d)(3).
MMP Hill argues that even if it meets the definition of
§ 101(51B), the district court erred in holding that Bank of
America is entitled to relief from the automatic stay because
“a request for relief from the automatic stay under § 362(d)(3)
was never before the District Court.” We construe the district
court’s order to hold that MMP Hill meets the elements of
§ 101(51B). The order acknowledges the bankruptcy court’s
discretion to determine appropriate relief under § 362(d) and
is silent as to whether the debtor has taken any corrective
action under § 362(d)(3)(A) or (B), leaving those determinations for the bankruptcy court to make in the first instance.
We conclude that there is no error in this approach and no
error in the district court’s application of § 101(51B).
AFFIRMED.