Avondale Gateway Center Entitlement LLC v. National Bank of Arizona et al

Filing 18

ORDER that the 10 motion to substitute parties is granted. The Clerk shall substitute Avondale (2010) Holdings, LLLP as appellee in lieu of National Bank of Arizona. The decision below is affirmed. The Clerk shall terminate this action. Signed by Judge David G Campbell on 04/11/11. (ESL)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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)
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Avondale Gateway Center Entitlement,)
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LLC,
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Debtor
_________________________________)
Avondale Gateway Center Entitlement,)
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LLC,
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Appellant
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vs.
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National Bank of Arizona, et al.,
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Appellees.
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IN THE MATTER OF

No. CV10-1772-PHX-DGC
BK No.: 02-09-BK-12153-CGC

ORDER

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This is a bankruptcy appeal from the United States Bankruptcy Court for the District

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of Arizona. Avondale (2010) Holdings, LLLP has moved to be substituted as appellee in this

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case pursuant to a transfer of interest from Appellee National Bank of Arizona (“NBA”).

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Doc. 10. The motion is unopposed. The Court will grant the motion. LRCiv. 7.2(i). To

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avoid confusion in the discussion that follows, the Court will refer to Avondale Holdings as

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“NBA” and Appellant Avondale Gateway Center Entitlement, LLC as “Avondale.”

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Avondale’s appeal has been fully briefed. Docs. 8, 14, 17. For the reasons set forth

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below, the Court will affirm the Bankruptcy Court’s decision.1

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I.

Background.

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The relevant facts are not in dispute. Compare Doc. 8 at 6-11 with Doc. 14 at 7-9.

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Avondale borrowed $30,700,000 from NBA and $18,000,000 from MMA Realty

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Capital, LLC (“MMA”), and the loans were secured by trustee deeds to vacant land. Doc. 8

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at 6. The NBA trustee deed is a first-priority lien, and the MMA trustee deed is a second-

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priority lien. Id. Avondale, NBA, and MMA entered into a “Subordination and Intercreditor

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Agreement” (“Subordination Agreement”) (id.), the relevant terms of which will be discussed

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later in this order. Subsequently, Avondale filed for voluntary reorganization under

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Chapter 11 of the Bankruptcy Code. Id.

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As part of the bankruptcy proceedings, Avondale submitted a plan of reorganization

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to NBA and MMA.2 Id. at 9. MMA voted to approve the plan. Id. NBA cast two votes to

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reject the plan, one vote on behalf of itself and a second vote on behalf of MMA. Id. When

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Avondale challenged NBA’s casting of the second vote, the Bankruptcy Court held that the

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subrogation clause in the Subordination Agreement authorized NBA to vote on behalf of

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MMA (Doc. 8-4 at 39), struck MMA’s ballot, and accepted NBA’s ballot with two votes

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against the reorganization plan (id.).3 Avondale has appealed the ruling.

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II.

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Legal Standard.
Rule 8013 of the Federal Rules of Bankruptcy Procedure states:
On an appeal the district court . . . may affirm, modify, or

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Avondale’s request for oral argument is denied because the issues have been fully
briefed and oral argument will not aid the Court’s decision. See Fed. R. Civ. P. 78(b);
Partridge v. Reich, 141 F.3d 920, 926 (9th Cir. 1998).
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NBA asserts that “[t]he Plan proposes to pay $1.3 million per year for approximately
20 years on account of [NBA’s] Class 2-A claim while proposing that MMA’s Class 3 claim
will receive an immediate payment of $900,000 in full satisfaction of the Subordinate Debt.”
Doc. 14 at 8. Avondale does not dispute this assertion. See Docs. 8, 17.
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The Bankruptcy Court did not reach the issue of whether the subordination clause
also gives NBA the right to vote on behalf of MMA. Doc. 8-4 at 39:21-23.
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reverse a bankruptcy judge’s judgment, order, or decree or
remand with instructions for further proceedings. Findings of
fact, whether based on oral or documentary evidence, shall not
be set aside unless clearly erroneous, and due regard shall be
given to the opportunity of the bankruptcy court to judge the
credibility of the witnesses.

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This Court reviews the Bankruptcy Court’s conclusions of law de novo, but will not
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reverse the Bankruptcy Court’s findings of fact unless they are clearly erroneous. United
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States v. Olson, 4 F.3d 562, 564 (8th Cir. 1993).
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Under Arizona law, the construction or interpretation of a contract is a question of law
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for the court. Hadley v. Sw. Props., Inc., 570 P.2d 190, 193 (Ariz. 1977). “[I]f possible,
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meaning should be given to every word and phrase of a contract.” Hyde Park-Lake Park,
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Inc. v. Tucson Realty & Trust Co., 500 P.2d 1128, 1131 (Ariz. App. 1972); accord Taylor
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v. State Farm Mut. Auto. Ins. Co., 854 P.2d 1134, 1144 n.9 (Ariz. 1993). “The ordinary
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meaning of language should be given to words where circumstances do not show a different
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meaning is applicable.” Chandler Med. Bldg. Partners v. Chandler Dental Group, 855 P.2d
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787, 791 (Ariz. App. 1993). When “the provisions of the contract are plain and unambiguous
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upon their face, they must be applied as written, and the court will not pervert or do violence
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to the language used, or expand it beyond its plain and ordinary meaning or add something
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to the contract which the parties have not put there.” D.M.A.F.B. Fed. Credit Union v.
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Employer Mut. Liab. Ins. Co., 396 P.2d 20, 23 (Ariz. 1964).
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III.

Discussion.

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A.

Standing.

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NBA argues that Avondale has no standing to appeal, asserting that MMA is the only
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party who may do so. Doc. 14 at 5-6. The Bankruptcy Code provides that a debtor “may
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raise and may appear and be heard on any issue in a case under this chapter.” 11 U.S.C.
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§ 1109(b). In addition, Avondale has a direct financial interest in this issue as it concerns
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approval of Avondale’s plan of reorganization. The Court agrees with the Bankruptcy
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Court’s conclusion (Doc. 84-4 at 36) that the statute’s broad language and Avondale’s
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interest in approval of the plan grant Avondale standing to appeal NBA’s vote.
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B.

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The dispositive issue on appeal is whether the subrogation clause (the “Subrogation

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Clause”) in the Subordination Agreement authorizes NBA to vote on behalf of MMA. The

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Subrogation Clause reads as follows:

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Subrogation Clause.

10. Subrogation. [MMA] agrees that [NBA] shall be subrogated to [MMA]
with respect to [MMA’s] claims against Borrower and [MMA’s] rights, liens,
and security interests, if any, in any of the Borrower’s assets and the proceeds
thereof (excluding, however, [MMA’s] rights under any pledge of Borrower’s
membership interests made under the Subordinate Debt Documents) until the
Senior Debt shall have been paid in full, in cash.

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Doc. 8 at 7:13-17; Doc. 14 at 10:11-16; Doc. 17. Because contract interpretation is a matter
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of law, Hadley, 570 P.2d at 193, the ruling below is reviewed de novo, Olson, 4 F.3d at 564.
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The Effect of Subrogation.

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The parties argue that the Subrogation Clause unambiguously supports their respective
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positions. Doc. 8 at 14; Doc. 14 at 10. Under its plain language the Subrogation Clause
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subrogates NBA to MMA with respect to (1) MMA’s claims against Avondale, and
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(2) MMA’s “rights, liens, and security interests . . . [in Avondale’s] assets and the proceeds
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thereof,” with exceptions not relevant here. Doc. 8 at 7:13-17; Doc. 14 at 10:11-16.
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Avondale argues that MMA’s right to vote is not encompassed by this language. Doc. 8 at
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14. NBA responds by arguing that MMA’s voting rights in Avondale’s reorganization plan
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are part of MMA’s claims, and that the subrogation of MMA’s claims necessarily grants
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NBA the right to vote on behalf of MMA. Doc. 14 at 11. The parties do not argue that the
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Subordination Agreement provides an express definition for the term “claim.”
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As a starting point, the Court notes that the text of the Subrogation Clause does not
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expressly assign MMA’s voting rights to NBA. This is unlike clauses in other cases where
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the right to vote has been expressly transferred. See, e.g., In re Aerosol Packaging, LLC, 362
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B.R. 43, 45 (Bankr. N.D. Ga. 2006); In re 203 N. LaSalle St. P’ship, 246 B.R. 325, 328
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(Bankr. N.D. Ill. 2000); In re Inter Urban Broadcasting of Cincinnati, Inc., 1994 WL
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646176, *1 (E.D. La. 1994).
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Additionally, a “claim” under the United States Bankruptcy Code is a “right to
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payment” or, where performance is required, “an equitable remedy for breach of

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performance.” 11 U.S.C. § 101(5); Pa. Dep’t. of Pub. Welfare v. Davenport, 495 U.S. 552,

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558 (1990) (reading “claim” broadly, as any legal obligation that would give rise to a debt),

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superseded by statute as recognized in In re Ryan, 389 B.R. 710, 717 (9th Cir. BAP 2008).

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Although the right to vote is not a “claim,” it is a derivative right possessed by the holder of

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a claim. See 11 U.S.C. § 1126(a) (stating that “[t]he holder of a claim . . . may accept or

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reject a plan”). The critical issue, therefore, is the effect of subrogation on a claim holder’s

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right to vote on a reorganization plan.

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Under Arizona law, “assignment and subrogation are not identical legal principles.”

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Capitol Indem. Corp. v. Fleming, 58 P.3d 965, 969 (Ariz. App. 2002). An assignment may

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be limited to an individual right with regard to a matter. See Restatement (Second) of

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Contracts (“Restatement”) § 317(1) (1981) (“An assignment of a right is a manifestation of

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the assignor’s intention to transfer it by virtue of which the assignor’s right to performance

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by the obligor is extinguished in whole or in part and the assignee acquires a right to such

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performance”); Powers v. Taser Int’l, Inc., 174 P.3d 777, 782 (Ariz. App. 2007) (noting that

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Arizona generally follows the Restatement).

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Subrogation, by contrast, is the wholesale substitution of one party (i.e., “subrogee”)

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in place of another (i.e., “subrogor”) with respect to a claim. See Mosher v. Conway, 46 P.2d

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110, 473 (Ariz. 1935) (noting that the subrogee “steps into the shoes of the person to whose

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rights he is subrogated”). Consequently, the subrogee succeeds to all of the subrogor’s rights

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under the claim. As the Arizona Supreme Court has explained, “[s]ubrogation is the

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substitution of another person in the place of a creditor, so that the person in whose favor it

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is exercised succeeds to the rights of the creditor in relation to the debt.” See Liberty Mutual

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Ins. Co. v. Thunderbird Bank, 555 P.2d 333, 335 (Ariz. 1976) (quoting Mosher, 46 P.2d at

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112).

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Under the Subrogation Clause, therefore, NBA steps into the shoes of MMA with

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respect to the claim against Avondale and acquires all of MMA’s rights with respect to that

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claim. MMA’s right to vote on Avondale’s reorganization plan flows from its claim in
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bankruptcy against Avondale. 11 U.S.C. § 1126(a). As a result, NBA succeeds to that right

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as subrogee of MMA and as the effective holder of MMA’s claim.

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Avondale argues that the Subrogation Clause limits subrogation only to certain rights

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related to the claim, not all rights. Doc. 8 at 14. Although Arizona has recognized partial

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subrogation, this principle would not limit the rights to which NBA succeeds – it would, if

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applicable, merely allow both NBA and MMA to proceed pursuant to the same bundle of

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rights. See Tucson Gas, Elec. Light & Power Co. v. Board of Sup’rs of Pima County, 1436

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P.2d 942, 944 (Ariz. App. 1968) (recognizing partial subrogation and citing to Bryan v. So.

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Pac. Co., 286 P.2d 761, 766-67 (Ariz. 1955)); cf. Bryan, 286 P.2d at 766 (“[I]f the insurer

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paid only part of the loss, then both the insured and the insurer have substantive rights

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against the tortfeasor which qualify them as real parties in interest.” (quoting United States

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v. Aetna Cas. & Sur. Co., 338 U.S. 366, 381 (1949)).

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2.

Subrogation and Payment of MMA’s Claim.

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In Arizona, the right to subrogation can arise either by contract (conventional

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subrogation) or by the payment of the subrogor’s claim by the subrogee (equitable

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subrogration). Mosher, 46 P.2d at 112 (summarizing equitable subrogation as “when one,

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being himself a creditor, pays another creditor, whose claim is preferable to his, it is held that

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the person so paying is subrogated to the rights of the other creditor”); Fire Ins. Exch. v.

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Thunderbird Masonry, Inc., 868 P.2d 948, 951 (Ariz. App. 1993) (“Subrogation can be based

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either on specific language in the pertinent contract, known as conventional subrogation, or

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on the equitable doctrine of subrogation.”). Where subrogation arises from contract, the

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language of the contract controls when the subrogation is triggered. See Title Ins. Co. of

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Minn. v. Costain Ariz., Inc., 791 P.2d 1086, 1089 (Ariz. App. 1990) (“It is well settled that

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where an insured contracts with a third party requiring the latter to pay for loss or damage

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to insured property, the insurer, upon payment of the loss, is subrogated to the rights of the

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insured under the contract.” (emphasis added)).

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Avondale argues that the right to subrogation does not arise until subrogee NBA pays

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subrogor MMA’s claim. Doc. 8 at 11. But this is not an equitable subrogation case.
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Therefore, the language in the parties’ contract controls when subrogation is triggered. The

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Subrogation Clause states: “[MMA] agrees that [NBA] shall be subrogated to [MMA] . . .

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until the Senior Debt shall have been paid in full, in cash.” Doc. 8 at 7:13-17; Doc. 14 at

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10:11-16. The plain meaning of the Subrogation Clause does not contractually condition

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subrogation on payment of MMA’s claim – instead, it makes subrogation effective from the

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execution of the Subordination Agreement through payment of NBA’s claim. Therefore, the

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Court must reject Avondale’s argument.

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Enforceability of Subrogation in Bankruptcy.

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Avondale also argues that the Subrogation Clause is not enforceable in bankruptcy

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with respect to voting rights in a reorganization plan. Doc. 8 at 16-21. Avondale relies

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primarily on LaSalle and In re Hart Ski Mfg. Co., 5 B.R. 734, 736 (Bankr. D. Minn. 1980).

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LaSalle held in part that “subordination” does not allow for waiver of voting rights

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in bankruptcy because subordination “affects the order of priority of payment of claims in

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bankruptcy, but not the transfer of voting rights.” 246 B.R. at 331. LaSalle also held that

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the rules of bankruptcy procedure, more specifically Fed. R. Bankr. P. 3018(c), require a vote

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on a reorganization plan be signed by “the creditor or equity security holder or an authorized

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agent.” 246 B.R. at 331. Finally, LaSalle presented policy reasons why a subordinated

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creditor should not be precluded from voting in bankruptcy notwithstanding a pre-petition

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subordination agreement to the contrary. To the extent that LaSalle was limited to

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subordination agreements, it is inapposite: the issue on appeal involves a subrogation clause.

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Hart Ski is similarly inapposite. In contrast to a subordinated creditor, a subrogee steps into

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the shoes of the subrogor and succeeds to the latter’s rights. Liberty Mutual, 555 P.2d at 335.

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It is true that a subrogation agreement is not enforceable under Arizona law with

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respect to non-assignable rights. See Fleming, 58 P.3d at 970. Therefore, if a bankruptcy

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creditor’s right to vote a reorganization plan were non-assignable, the Subrogation Clause

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would be unenforceable as to that right. Courts have held that reorganization-plan voting

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rights are assignable. See Aerosol Packaging, 362 B.R. at 47; Urban Broadcasting, 1994

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WL 646176 at *2; In re Erickson Ret. Cmtys., LLC, 425 B.R. 309, 316 (Bankr. N.D. Tex.
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2010). The Court finds their reasoning persuasive in light of absence of precedent to the

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contrary. Accordingly, the Court concludes that the Subrogation Clause is enforceable in the

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Bankruptcy Court.

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IT IS ORDERED:

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1.

The motion to substitute parties (Doc. 10) is granted. The Clerk shall

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substitute Avondale (2010) Holdings, LLLP as appellee in lieu of National

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Bank of Arizona.

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2.

The decision below is affirmed.

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3.

The Clerk shall terminate this action.

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DATED this 11th day of April, 2011.

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