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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1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 10 11 12 13 14 15 16 17 ) ) Avondale Gateway Center Entitlement,) ) LLC, ) ) Debtor _________________________________) Avondale Gateway Center Entitlement,) ) LLC, ) ) Appellant ) ) vs. ) ) National Bank of Arizona, et al., ) ) Appellees. ) IN THE MATTER OF No. CV10-1772-PHX-DGC BK No.: 02-09-BK-12153-CGC ORDER 18 19 This is a bankruptcy appeal from the United States Bankruptcy Court for the District 20 of Arizona. Avondale (2010) Holdings, LLLP has moved to be substituted as appellee in this 21 case pursuant to a transfer of interest from Appellee National Bank of Arizona (“NBA”). 22 Doc. 10. The motion is unopposed. The Court will grant the motion. LRCiv. 7.2(i). To 23 avoid confusion in the discussion that follows, the Court will refer to Avondale Holdings as 24 “NBA” and Appellant Avondale Gateway Center Entitlement, LLC as “Avondale.” 25 26 27 28 Avondale’s appeal has been fully briefed. Docs. 8, 14, 17. For the reasons set forth 1 below, the Court will affirm the Bankruptcy Court’s decision.1 2 I. Background. 3 The relevant facts are not in dispute. Compare Doc. 8 at 6-11 with Doc. 14 at 7-9. 4 Avondale borrowed $30,700,000 from NBA and $18,000,000 from MMA Realty 5 Capital, LLC (“MMA”), and the loans were secured by trustee deeds to vacant land. Doc. 8 6 at 6. The NBA trustee deed is a first-priority lien, and the MMA trustee deed is a second- 7 priority lien. Id. Avondale, NBA, and MMA entered into a “Subordination and Intercreditor 8 Agreement” (“Subordination Agreement”) (id.), the relevant terms of which will be discussed 9 later in this order. Subsequently, Avondale filed for voluntary reorganization under 10 Chapter 11 of the Bankruptcy Code. Id. 11 As part of the bankruptcy proceedings, Avondale submitted a plan of reorganization 12 to NBA and MMA.2 Id. at 9. MMA voted to approve the plan. Id. NBA cast two votes to 13 reject the plan, one vote on behalf of itself and a second vote on behalf of MMA. Id. When 14 Avondale challenged NBA’s casting of the second vote, the Bankruptcy Court held that the 15 subrogation clause in the Subordination Agreement authorized NBA to vote on behalf of 16 MMA (Doc. 8-4 at 39), struck MMA’s ballot, and accepted NBA’s ballot with two votes 17 against the reorganization plan (id.).3 Avondale has appealed the ruling. 18 II. 19 Legal Standard. Rule 8013 of the Federal Rules of Bankruptcy Procedure states: On an appeal the district court . . . may affirm, modify, or 20 21 22 23 24 25 26 27 28 1 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). 2 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. 3 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. -2- 1 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. 2 3 4 This Court reviews the Bankruptcy Court’s conclusions of law de novo, but will not 5 reverse the Bankruptcy Court’s findings of fact unless they are clearly erroneous. United 6 States v. Olson, 4 F.3d 562, 564 (8th Cir. 1993). 7 Under Arizona law, the construction or interpretation of a contract is a question of law 8 for the court. Hadley v. Sw. Props., Inc., 570 P.2d 190, 193 (Ariz. 1977). “[I]f possible, 9 meaning should be given to every word and phrase of a contract.” Hyde Park-Lake Park, 10 Inc. v. Tucson Realty & Trust Co., 500 P.2d 1128, 1131 (Ariz. App. 1972); accord Taylor 11 v. State Farm Mut. Auto. Ins. Co., 854 P.2d 1134, 1144 n.9 (Ariz. 1993). “The ordinary 12 meaning of language should be given to words where circumstances do not show a different 13 meaning is applicable.” Chandler Med. Bldg. Partners v. Chandler Dental Group, 855 P.2d 14 787, 791 (Ariz. App. 1993). When “the provisions of the contract are plain and unambiguous 15 upon their face, they must be applied as written, and the court will not pervert or do violence 16 to the language used, or expand it beyond its plain and ordinary meaning or add something 17 to the contract which the parties have not put there.” D.M.A.F.B. Fed. Credit Union v. 18 Employer Mut. Liab. Ins. Co., 396 P.2d 20, 23 (Ariz. 1964). 19 III. Discussion. 20 A. Standing. 21 NBA argues that Avondale has no standing to appeal, asserting that MMA is the only 22 party who may do so. Doc. 14 at 5-6. The Bankruptcy Code provides that a debtor “may 23 raise and may appear and be heard on any issue in a case under this chapter.” 11 U.S.C. 24 § 1109(b). In addition, Avondale has a direct financial interest in this issue as it concerns 25 approval of Avondale’s plan of reorganization. The Court agrees with the Bankruptcy 26 Court’s conclusion (Doc. 84-4 at 36) that the statute’s broad language and Avondale’s 27 interest in approval of the plan grant Avondale standing to appeal NBA’s vote. 28 -3- 1 B. 2 The dispositive issue on appeal is whether the subrogation clause (the “Subrogation 3 Clause”) in the Subordination Agreement authorizes NBA to vote on behalf of MMA. The 4 Subrogation Clause reads as follows: 5 6 7 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. 8 Doc. 8 at 7:13-17; Doc. 14 at 10:11-16; Doc. 17. Because contract interpretation is a matter 9 of law, Hadley, 570 P.2d at 193, the ruling below is reviewed de novo, Olson, 4 F.3d at 564. 10 1. The Effect of Subrogation. 11 The parties argue that the Subrogation Clause unambiguously supports their respective 12 positions. Doc. 8 at 14; Doc. 14 at 10. Under its plain language the Subrogation Clause 13 subrogates NBA to MMA with respect to (1) MMA’s claims against Avondale, and 14 (2) MMA’s “rights, liens, and security interests . . . [in Avondale’s] assets and the proceeds 15 thereof,” with exceptions not relevant here. Doc. 8 at 7:13-17; Doc. 14 at 10:11-16. 16 Avondale argues that MMA’s right to vote is not encompassed by this language. Doc. 8 at 17 14. NBA responds by arguing that MMA’s voting rights in Avondale’s reorganization plan 18 are part of MMA’s claims, and that the subrogation of MMA’s claims necessarily grants 19 NBA the right to vote on behalf of MMA. Doc. 14 at 11. The parties do not argue that the 20 Subordination Agreement provides an express definition for the term “claim.” 21 As a starting point, the Court notes that the text of the Subrogation Clause does not 22 expressly assign MMA’s voting rights to NBA. This is unlike clauses in other cases where 23 the right to vote has been expressly transferred. See, e.g., In re Aerosol Packaging, LLC, 362 24 B.R. 43, 45 (Bankr. N.D. Ga. 2006); In re 203 N. LaSalle St. P’ship, 246 B.R. 325, 328 25 (Bankr. N.D. Ill. 2000); In re Inter Urban Broadcasting of Cincinnati, Inc., 1994 WL 26 646176, *1 (E.D. La. 1994). 27 Additionally, a “claim” under the United States Bankruptcy Code is a “right to 28 -4- 1 payment” or, where performance is required, “an equitable remedy for breach of 2 performance.” 11 U.S.C. § 101(5); Pa. Dep’t. of Pub. Welfare v. Davenport, 495 U.S. 552, 3 558 (1990) (reading “claim” broadly, as any legal obligation that would give rise to a debt), 4 superseded by statute as recognized in In re Ryan, 389 B.R. 710, 717 (9th Cir. BAP 2008). 5 Although the right to vote is not a “claim,” it is a derivative right possessed by the holder of 6 a claim. See 11 U.S.C. § 1126(a) (stating that “[t]he holder of a claim . . . may accept or 7 reject a plan”). The critical issue, therefore, is the effect of subrogation on a claim holder’s 8 right to vote on a reorganization plan. 9 Under Arizona law, “assignment and subrogation are not identical legal principles.” 10 Capitol Indem. Corp. v. Fleming, 58 P.3d 965, 969 (Ariz. App. 2002). An assignment may 11 be limited to an individual right with regard to a matter. See Restatement (Second) of 12 Contracts (“Restatement”) § 317(1) (1981) (“An assignment of a right is a manifestation of 13 the assignor’s intention to transfer it by virtue of which the assignor’s right to performance 14 by the obligor is extinguished in whole or in part and the assignee acquires a right to such 15 performance”); Powers v. Taser Int’l, Inc., 174 P.3d 777, 782 (Ariz. App. 2007) (noting that 16 Arizona generally follows the Restatement). 17 Subrogation, by contrast, is the wholesale substitution of one party (i.e., “subrogee”) 18 in place of another (i.e., “subrogor”) with respect to a claim. See Mosher v. Conway, 46 P.2d 19 110, 473 (Ariz. 1935) (noting that the subrogee “steps into the shoes of the person to whose 20 rights he is subrogated”). Consequently, the subrogee succeeds to all of the subrogor’s rights 21 under the claim. As the Arizona Supreme Court has explained, “[s]ubrogation is the 22 substitution of another person in the place of a creditor, so that the person in whose favor it 23 is exercised succeeds to the rights of the creditor in relation to the debt.” See Liberty Mutual 24 Ins. Co. v. Thunderbird Bank, 555 P.2d 333, 335 (Ariz. 1976) (quoting Mosher, 46 P.2d at 25 112). 26 Under the Subrogation Clause, therefore, NBA steps into the shoes of MMA with 27 respect to the claim against Avondale and acquires all of MMA’s rights with respect to that 28 claim. MMA’s right to vote on Avondale’s reorganization plan flows from its claim in -5- 1 bankruptcy against Avondale. 11 U.S.C. § 1126(a). As a result, NBA succeeds to that right 2 as subrogee of MMA and as the effective holder of MMA’s claim. 3 Avondale argues that the Subrogation Clause limits subrogation only to certain rights 4 related to the claim, not all rights. Doc. 8 at 14. Although Arizona has recognized partial 5 subrogation, this principle would not limit the rights to which NBA succeeds – it would, if 6 applicable, merely allow both NBA and MMA to proceed pursuant to the same bundle of 7 rights. See Tucson Gas, Elec. Light & Power Co. v. Board of Sup’rs of Pima County, 1436 8 P.2d 942, 944 (Ariz. App. 1968) (recognizing partial subrogation and citing to Bryan v. So. 9 Pac. Co., 286 P.2d 761, 766-67 (Ariz. 1955)); cf. Bryan, 286 P.2d at 766 (“[I]f the insurer 10 paid only part of the loss, then both the insured and the insurer have substantive rights 11 against the tortfeasor which qualify them as real parties in interest.” (quoting United States 12 v. Aetna Cas. & Sur. Co., 338 U.S. 366, 381 (1949)). 13 2. Subrogation and Payment of MMA’s Claim. 14 In Arizona, the right to subrogation can arise either by contract (conventional 15 subrogation) or by the payment of the subrogor’s claim by the subrogee (equitable 16 subrogration). Mosher, 46 P.2d at 112 (summarizing equitable subrogation as “when one, 17 being himself a creditor, pays another creditor, whose claim is preferable to his, it is held that 18 the person so paying is subrogated to the rights of the other creditor”); Fire Ins. Exch. v. 19 Thunderbird Masonry, Inc., 868 P.2d 948, 951 (Ariz. App. 1993) (“Subrogation can be based 20 either on specific language in the pertinent contract, known as conventional subrogation, or 21 on the equitable doctrine of subrogation.”). Where subrogation arises from contract, the 22 language of the contract controls when the subrogation is triggered. See Title Ins. Co. of 23 Minn. v. Costain Ariz., Inc., 791 P.2d 1086, 1089 (Ariz. App. 1990) (“It is well settled that 24 where an insured contracts with a third party requiring the latter to pay for loss or damage 25 to insured property, the insurer, upon payment of the loss, is subrogated to the rights of the 26 insured under the contract.” (emphasis added)). 27 Avondale argues that the right to subrogation does not arise until subrogee NBA pays 28 subrogor MMA’s claim. Doc. 8 at 11. But this is not an equitable subrogation case. -6- 1 Therefore, the language in the parties’ contract controls when subrogation is triggered. The 2 Subrogation Clause states: “[MMA] agrees that [NBA] shall be subrogated to [MMA] . . . 3 until the Senior Debt shall have been paid in full, in cash.” Doc. 8 at 7:13-17; Doc. 14 at 4 10:11-16. The plain meaning of the Subrogation Clause does not contractually condition 5 subrogation on payment of MMA’s claim – instead, it makes subrogation effective from the 6 execution of the Subordination Agreement through payment of NBA’s claim. Therefore, the 7 Court must reject Avondale’s argument. 8 3. Enforceability of Subrogation in Bankruptcy. 9 Avondale also argues that the Subrogation Clause is not enforceable in bankruptcy 10 with respect to voting rights in a reorganization plan. Doc. 8 at 16-21. Avondale relies 11 primarily on LaSalle and In re Hart Ski Mfg. Co., 5 B.R. 734, 736 (Bankr. D. Minn. 1980). 12 LaSalle held in part that “subordination” does not allow for waiver of voting rights 13 in bankruptcy because subordination “affects the order of priority of payment of claims in 14 bankruptcy, but not the transfer of voting rights.” 246 B.R. at 331. LaSalle also held that 15 the rules of bankruptcy procedure, more specifically Fed. R. Bankr. P. 3018(c), require a vote 16 on a reorganization plan be signed by “the creditor or equity security holder or an authorized 17 agent.” 246 B.R. at 331. Finally, LaSalle presented policy reasons why a subordinated 18 creditor should not be precluded from voting in bankruptcy notwithstanding a pre-petition 19 subordination agreement to the contrary. To the extent that LaSalle was limited to 20 subordination agreements, it is inapposite: the issue on appeal involves a subrogation clause. 21 Hart Ski is similarly inapposite. In contrast to a subordinated creditor, a subrogee steps into 22 the shoes of the subrogor and succeeds to the latter’s rights. Liberty Mutual, 555 P.2d at 335. 23 It is true that a subrogation agreement is not enforceable under Arizona law with 24 respect to non-assignable rights. See Fleming, 58 P.3d at 970. Therefore, if a bankruptcy 25 creditor’s right to vote a reorganization plan were non-assignable, the Subrogation Clause 26 would be unenforceable as to that right. Courts have held that reorganization-plan voting 27 rights are assignable. See Aerosol Packaging, 362 B.R. at 47; Urban Broadcasting, 1994 28 WL 646176 at *2; In re Erickson Ret. Cmtys., LLC, 425 B.R. 309, 316 (Bankr. N.D. Tex. -7- 1 2010). The Court finds their reasoning persuasive in light of absence of precedent to the 2 contrary. Accordingly, the Court concludes that the Subrogation Clause is enforceable in the 3 Bankruptcy Court. 4 IT IS ORDERED: 5 1. The motion to substitute parties (Doc. 10) is granted. The Clerk shall 6 substitute Avondale (2010) Holdings, LLLP as appellee in lieu of National 7 Bank of Arizona. 8 2. The decision below is affirmed. 9 3. The Clerk shall terminate this action. 10 DATED this 11th day of April, 2011. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -8-

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