Brody v. Geared Equity LLC et al

Filing 33

ORDER, the Clerk shall enter judgment reversing the orders of the Bankruptcy Court entered August 16 and November 21, 2013 (Bk. Docs. 116, 207) and remanding this case to the Bankruptcy Court for further proceedings consistent with this order the Clerk shall terminate these appeals. Signed by Judge Neil V Wake on 8/6/14. (REW)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Marvin D. Brody,

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Appellant,
Consolidated with:

v.
Geared Equity, LLC, et al.,

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Appellees.

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No. CV-13-02591-PHX-NVW

Marvin D. Brody,

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Lead No. CV-13-02090-PHX-NVW

Appellant,
ORDER

v.
Geared Equity, LLC, et al.,

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Appellees.

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These consolidated appeals arise out of Chapter 11 bankruptcy proceedings of

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Debtor/Appellant Marvin D. Brody. Appellee Geared Equity, LLC is a secured creditor.

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The amount in play in these appeals is about $200,000 in default interest. This is a

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surplus estate bankruptcy.

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I.

The Transaction and Initial Proceedings

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Brody borrowed $1.0 million, due in six months, from Geared Equity secured by a

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second lien behind a $2.6 million first lien on a house in Coronado, California. Two

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months later he borrowed another $300,000, also due four months thereafter. The loans

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were for improvements to the house, to be resold to repay the loans and return Brody’s
investment and a hoped-for profit. The notes called for 18% annual interest and 30%
default interest. Brody invested another $150,000 in improving the house. All the loans
were over-secured, whether the house’s value was $8.0+ million, as Brody contends, or
the $6.6 million at which it later sold.

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Brody did not complete the improvements or resell the house in time, and the
loans went into default on September 5, 2012. Brody asked Geared Equity to delay
foreclosure while he continued marketing the property, as a pending foreclosure or
consequent bankruptcy proceeding would depress the market value of the house. He
opened up his construction and marketing activities to Geared Equity.

delayed four more months before commencing a deed of trust sale on January 18, 2013.
Brody filed chapter 11 bankruptcy proceedings on February 11, 2013, to stop the
trustee’s sale two days later.

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The lender

On May 13, 2013, Brody filed and sought approval of a plan of reorganization and
disclosure statement that would cure the defaults upon a sale of the house, with postdefault interest at the 18% contract rate, not the 30% default rate (Bk. Doc. 65). Geared
Equity moved on July 26, 2013, to lift the stay to proceed with the trustee’s sale (Bk.
Doc. 74), and four days later Brody moved to approve a pending $6.6 million sale by
August 16, 2013, and for accelerated approval of the plan and disclosure statement (Bk.
Docs. 81, 79). The motions were expedited to an August 9, 2013 hearing.
II.

Agreements of the Parties at the August 9, 2013 Hearing and the Appeals

Brody sought accelerated approval of the pending sale and of the proposed plan and
disclosure statement, rather than a sale under 11 U.S.C. § 363 outside the plan. He did so
to take advantage of the rule that a cure of a default in the plan freed the debtor of the
higher default interest rate and left the creditor unimpaired and therefore not entitled to
vote on the plan. See In re Entz-White Lumber & Supply, Inc., 850 F.2d 1338, 1341–42
(9th Cir. 1988). But if the sale was under 11 U.S.C. § 363 before and outside the
confirmed plan, the post-default interest would not be limited to the contract rate and the
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default rate would have to be paid to render Geared Equity unimpaired. See Gen. Elec.
Capital Corp. v. Future Media Prods. Inc., 536 F.3d 969, 973, amended, 547 F.3d 956
(9th Cir. 2008).
Geared Equity disputed that a cure even under an approved plan would suffice
without default interest.

It was undisputed that Brody would have to sell under a

confirmed plan to have any chance to avoid the default interest rate. But closing the
proposed August 16, 2013 sale for $6.6 million would benefit both sides. Geared Equity
would get its principal, contract interest, and attorney’s fees without further delay or
contingency. Brody would get some return, though not all he hoped for. The need for
and risks from threatened foreclosure would be gone. Therefore, the parties agreed at the
August 9, 2013 hearing to let the August 16, 2013 sale proceed, leaving Brody in the
same position he would be if the sale were under a confirmed plan. Geared Equity so
agreed in clear terms:

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What I propose we do today is enter the 363 sale order with an
understanding, and your Court can rule that it is without prejudice to any of
these arguments, meaning that if we go down the road, you know, some
ways and then we confirm the plan, that we will agree that the time delay -the temporal delay between the 363 sale and when you consider the plan
down the road won’t have any effect on their Entz-White arguments.
We’re fine with that. Because that just preserves the status quo, versus
having a confirmation order entered. So that would be our suggestion.

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....

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And I’ve conferred with my client. And I’m perfectly willing to represent
on the record, and you can -- you can reflect it in the minute entry,
however you want to do it, that any plan confirmation order that may be
entered down the road when we take up these issues, and in the meantime
try to find a way to get it resolved, would be without prejudice to their
Entz-White argument; meaning that the fact that the 363 closed and then
there’s this temporal gap doesn’t foreclose their Entz-White arguments.
I would be fine with that.

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Appellant’s Excerpts of Record at 319–21 (emphasis added). Geared Equity did not want

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delay in the sale or think it needed an extra obstacle to Brody’s strategy to avoid the

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default interest rate. Geared Equity had the courage of its convictions.

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However, when submitting a proposed form of order to the Bankruptcy Court,
Geared Equity attempted to renounce its agreement and waiver previously made in open
court. On August 16, 2013, the Bankruptcy Court entered an order rejecting Brody’s
position on the merits, relying on Congress’s 1994 amendment to 11 U.S.C. § 1123(d)
(Bk. Doc. 116). The Bankruptcy Court therefore denied confirmation of Brody’s plan as
written without default interest to cure the Geared Equity loans. On December 10, 2013,
this Court granted Brody’s motion for interlocutory appeal pursuant to 28 U.S.C.
§ 158(a)(3) (Doc. 17).
By order of November 21, 2013, the Bankruptcy Court denied Brody’s objection
to Geared Equity’s claim, upholding the 30% default interest rate as the August 16, 2013
order had, and finding the interest not a penalty (Bk. Doc. 207). Brody appealed that
order on December 4, 2013 (Bk. Doc. 213). The briefing on the second appeal concluded
on April 17, 2014, and the two appeals were consolidated on May 19, 2014 (Doc. 25).
The money has been set aside pending the outcome of these appeals.
III.

Entz-White Remains Good Law and the Law in the Ninth Circuit

The rule of Entz-White, 850 F.2d 1338, is that an otherwise full cure of a debtor’s
default does not require payment of post-default interest at the higher default rate. The
Ninth Circuit so held based on persuasive case authority from analogous situations and
without an explicit statutory definition of cure.
Geared Equity presents two arguments to escape this rule.

First is that the

qualification of Future Media, 536 F.3d 969, governs here because the August 16, 2013
sale was done before and outside a confirmed plan. This argument is foreclosed by
Geared Equity’s express agreement and waiver at the August 9, 2013 hearing that the sale
may go ahead “without prejudice to their Entz-White argument; meaning that the fact that
the 363 closed and then there’s this temporal gap doesn’t foreclose their Entz-White
arguments.” Geared Equity was “fine with that” and “that would be our suggestion.”
They made other statements to the same effect. Geared Equity’s attempt a few days later

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and again in these appeals to retreat from its agreement and waiver is ineffective. That
argument fails.
Geared Equity’s other argument is that Congress overturned the rule in Entz-White
when it amended 11 U.S.C. § 1123(d) in 1994. Lower courts have divided on this
question. The ruling in this case parts with the interpretation of both the bankruptcy
judges in this District who addressed this before. In re Phoenix Bus. Park Ltd. P’ship,
257 B.R. 517, 519–23 (Bankr. D. Ariz. 2001) (Case, J.); In re DSBC Investments, L.L.C.,
No. 4:09-BK-03146, 2009 WL 2998940, at *2 (Bankr. D. Ariz. Sept. 11, 2009) (Marlar,
J.) (“This court does not need to re-invent the wheel, nor could it write more eloquently
than Judges Morgan and Case, in reaching the same conclusion.”); accord In re Zamani,
390 B.R. 680, 685–87 (Bankr. N.D. Cal. 2008) (Morgan, J.) Those judges have rejected
that interpretation of the 1994 amendment of 11 U.S.C. § 1123(d).
Rather than repeat at length what Judge Case has already said so well, this Court
adopts his opinion in In re Phoenix Bus. Park Ltd. P’ship. Entz-White remains the law of
the circuit, binding on this Court. Even as res nova, this Court finds it good law now, as
it was then. The 1994 amendment of 11 U.S.C. § 1123(d) does not sustain the orders on
appeal.
If the 1994 amendment of 11 U.S.C. § 1123(d) touches on the Entz-White rule at
all, it more plausibly codifies that rule than repeals it, as Professor Klee concluded long
ago. Kenneth N. Klee, Adjusting Chapter 11: Fine Tuning the Plan Process, 69 Am.
Bankr. L. J. 551, 558 (Fall 1995). Judge Collins’s concern that Brody should have to pay
the odious 30% default interest rate because he agreed to it and the estate has a surplus
would fit this transaction if it had not gone into bankruptcy. If Geared Equity had taken
the gamble of working with Brody to a sale without a foreclosure, its right to the 30%
post-default interest rate would have been secure. But bankruptcy is in the background of
every commercial agreement, and there can be no reliance on a term that bankruptcy law
defeats. One can only hope and work to keep it out of bankruptcy. Geared Equity chose

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its advantages when it attempted to enrich itself with a multi-million dollar forfeiture of
the equity in the house and thus forced Brody into bankruptcy.
Because the November 21, 2013 order in the second appeal was predicated on the
August 16, 2013 order in the first appeal, the November 21, 2013 order too is in error and
must be reversed.
IT IS THEREFORE ORDERED that the Clerk enter judgment reversing the
orders of the Bankruptcy Court entered August 16 and November 21, 2013 (Bk. Docs.
116, 207) and remanding this case to the Bankruptcy Court for further proceedings
consistent with this order. The Clerk shall terminate these appeals.
Dated this 6th day of August, 2014.

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