JPMCC 2007 - CIBC 19 East Greenway LLC v. Bataa/Kierland LLC, et al

Filing 20

MEMORANDUM DECISION - The order of the bankruptcy court confirming the Amended Plan of Reorganization is hereby REVERSED, and the matter is REMANDED to the bankruptcy court for further proceedings consistent with this decision. On remand the bankru ptcy court must accept as established fact that: 1. The value of Debtors real property securing the claim of JPMCC 2007CIBC 19 East Greenway, LLC is not less than $18,118,815; and 2. Bataa Oil is indebted to Debtor in the sum of $14,900,000, in which JPMCC 2007CIBC 19 East Greenway, LLC has a security interest. The Clerk of the Court is directed to enter judgment accordingly. (See document for further details). Signed by Judge John W Sedwick on 8/28/14. (LAD)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA
In re:
Case No. 2:14-cv-00596-PHX-JWS
BATAA/KIERLAND LLC,
MEMORANDUM DECISION
Debtor.
JPMCC 2007–CIBC 19 EAST
GREENWAY, LLC,
Appellant,
vs.

On Appeal From
U.S. Bankruptcy Court, District of Arizona
Hon. Randolph J. Haines, Judge
Bankruptcy Case No. 2:11-bk-05850-MCW

BATAA/KIERLAND LLC,
Appellee.

JPMCC 2007–CIBC 19 East Greenway, LLC timely appeals from the order of the
bankruptcy court confirming the Plan of Reorganization proposed by Debtor
Bataa/Kierland LLC (hereinafter “Plan”). The bankruptcy court had jurisdiction under 28
U.S.C. §§ 157(a), (b)(2)(A) and 1334. This Court has jurisdiction under 28 U.S.C.
§ 158(a)(1), (c)(1)(A).
Dean C. Waldt and Andrew A. Harnish of Ballard Spahr LLP, Phoenix, Arizona,
appeared on behalf of the Appellant JPMCC 2007–CIBC 19 East Greenway, LLC .
John J. Hebert and Philip R. Rudd of Polsinelli PC, Phoenix, Arizona, appeared
on behalf the Appellee Bataa/Kierland LLC.
The court has determined that the facts and legal arguments are adequately
presented in the briefs, and oral argument would not significantly assist in the resolution

of the issues presented on appeal. Accordingly, the requests for oral argument are
denied, and the matter is submitted for decision on the briefs.1
I. BACKGROUND/ISSUES PRESENTED
Once again this court must address the proposed plan of reorganization in this
case.2 Accordingly, the parties are familiar with the facts, and they are not repeated
herein except to the extent necessary to an understanding of this decision.
Bataa/Kierland LLC (hereinafter “Debtor”) filed a petition for bankruptcy relief under
Chapter 11 of the Bankruptcy Code. After holding a hearing, the bankruptcy court
confirmed the plan of reorganization proposed by Debtor over the objections of JPMCC
2007–CIBC 19 East Greenway, LLC (hereinafter “JPMCC”). JPMCC appealed from the
confirmation order, this court vacated the decision of the bankruptcy court and
remanded for further consideration consistent with the court’s decision. 3 On remand,
after Debtor amended the plan, the bankruptcy court confirmed the amended proposed
plan over the objections of JPMCC. JPMCC has timely appealed from that order.4
As relevant to this appeal, in vacating the first confirmation order and remanding
in Bataa/Kierland II, this Court specifically held that: (1) the holding by the bankruptcy

1

Fed. R. Bank. P. 8012.

2

In re Bataa/Kierland, LLC, 496 B.R. 183 (D. Ariz. 2013) (“Bataa/Kierland II”). Other
aspects of the case have also been the subject of appeals: see In re Bataa/Kierland, LLC,
Case No. 2:12-cv-01696-JWS (“Bataa/Kierland I”); In re Bataa/Kierland, LLC, Case No. 2:13cv-00179-JWS (Bataa/Kierland III); and In re Bataa/Kierland, LLC, Case No. 2:13-cv-02340JWS, consolidated with Case No. 2:13-cv-02341-JWS (“Bataa/Kierland IV”).
3

Bataa/Kierland II.

4

At Docket 18 this Court requested the parties address the question of the impact of
the pending appeal in Bataa/Kierland IV on this Court’s jurisdiction in this appeal. In response
at Docket 19 the parties opined that the appeal in Bataa/Kierland IV has no effect on the
jurisdiction of this Court in this appeal. This Court agrees.
2

court that Debtor was required to reimburse Kierland II for part of the construction costs
of the parking garage was unsupported by the evidence; (2) any claim that Kierland II
had for the costs of erecting the parking garage should have been disallowed or, even if
properly allowed, allowed as an unsecured claim; (3) re-characterization of the $14.9
million pre-petition transfer by Debtor to Kierland II was unsupported by the evidence;
(4) questioned the treatment of $729,467.44 in net cash collateral proceeds; and
(5) remanded for redetermination of the common expenses, if any, Debtor was required
to reimburse Kierland II for the use of the parking garage. No further appeal was taken
from that decision.
Upon remand, JPMCC moved in the bankruptcy court for an order converting the
case to a Chapter 7 case and, concurrently therewith moved separately for relief from
the automatic stay. The bankruptcy court denied both motions, and JPMCC appealed
to this court. In Bataa/Kierland IV this Court affirmed the decision of the bankruptcy
court to the extent that it denied the motion to convert; and reversed to the extent it
denied the motion for relief from the automatic stay, remanding for reconsideration
consistent with this Court’s decision. 5 Debtor has appealed from that Order.6
Debtor filed a document entitled “Notice of: (1) Amendment to Proposed Parking
Agreement; and (2) Amendment to Amended Plan of Reorganization dated
September 2, 2011.” The amendment of the plan was limited to increasing the amount
of the new capital contribution from $350,000.00 to $550,000.00. 7 As relevant to this

5

Bataa/Kierland IV, 2:13-cv-02340-JWS, Docket 39.

6

Id., Docket 41.

7

Docket 10-5 at 171–184.
3

appeal, the bankruptcy court confirmed the plan as amended, finding: (1) after
deducting the value of the parking on Kierland II property that the value of Debtor’s real
property was $13.9 million; (2) declined to approve or disapprove the Parking
Agreement; and (3) that Debtor did not have any ownership interest in or possession of
the $14.9 million transferred from Debtor to Bataa Oil. 8
On appeal, JPMCC raises fifteen issues:
1.

Whether the bankruptcy court erred by entering the Confirmation Orders and

confirming the Amended Plan in non-compliance with the mandates of this court set
forth in the District Court Confirmation Decision and the District Court Reversal
Decision;
2.

Whether the bankruptcy court erred by confirming the Amended Plan, which

incorporates the Amended Parking Agreement, and reducing the value of the Property
by the cost to Debtor of the Amended Parking Agreement, thereby reducing Appellant’s
allowed secured claim in that amount, while simultaneously holding that the bankruptcy
court did not “approve” the Amended Parking Agreement to bypass the mandate of this
court in the District Court Reversal Decision;
3.

Whether the bankruptcy court erred by determining that the value of the Property

is $13.9 million, which included an express deduction in value for the net present value
cost to Debtor of the Amended Parking Agreement, in disregard of the mandate of this
court in the District Court Reversal Decision.

8

Docket 10-5 at 798–806.
4

4.

Whether the bankruptcy court erred by confirming the Amended Plan without

ruling on whether the Amended Plan meets the requirements of Section 1129(a)7
(other than feasibility under Section 1129(a)(11)), and specifically declining to apply the
requirements of Section 1129(a), including but not limited to, the good faith requirement
of Section 1129(a)(3), the best interest of creditor test of Section 1129(a)(7) or the
requirement of acceptance of at least one impaired class of Section 1129(a)(10);
5.

Whether the bankruptcy court erred by confirming the Amended Plan that

violates Section 1129(a)(3) because it was not proposed in good faith;
6.

Whether the bankruptcy court erred by confirming the Amended Plan that

violates Section 1129(a)(7) because it fails the best interest of creditors test;
7.

Whether the bankruptcy court erred by confirming the Amended Plan that

violates Section 1129(a)(10) because Appellant is the only remaining creditor for
purposes of confirmation and Appellant affirmatively objects to the Amended Plan;
8.

Whether the bankruptcy court erred by finding that the Amended Plan was

feasible under Section 1129(a)(11);
9.

Whether the bankruptcy court erred by confirming the Amended Plan that

violates the absolute priority rule of Section 1129(b)(2)(B) without satisfaction of the
judicially created “new value” exception to the absolute priority rule;
10.

Whether the bankruptcy court erred when finding that by increasing the

proposed new value contribution of Bataa Oil, LLC (“Bataa Oil”) from $350,000 (an
amount which was found by this court in the District Court Confirmation Decision to be
de minimis as a matter of law) to $550,000 the contribution was no longer de minimis;

5

11.

Whether the bankruptcy court erred by finding that Debtor satisfied the five

requirements of the new value exception to the absolute priority rule in accordance with
the mandates of this court under the District Court Confirmation Decision and the
District Court Reversal Decision;
12.

Whether the bankruptcy court erred by finding that the proposed $550,000 new

value contribution by Bataa Oil, LLC was “new” in light of the mandates of the District
Court Confirmation Decision and the District Court Reversal Decision, absent any
substantial new evidence presented by Debtor to meet the burden of proof established
by this Court;
13.

Whether the bankruptcy court erred by finding that Appellant’s security interest in

the $14.9 million transferred from Debtor to Bataa Oil established by the District Court
has no effect on the amount of Appellant’s allowed secured claim because such funds
were not owned or possessed by Debtor at the time of the confirmation of the Amended
Plan;
14.

Whether the bankruptcy court erred by finding, by a preponderance of the

evidence, without citing to any new evidence, that the $14.9 million recharacterization of
the accounts receivable due to Debtor from Bataa Oil, on the eve of bankruptcy as an
equity distribution was proper; and
15.

Whether the bankruptcy court erred by failing to reconsider the Stay Relief

Motion as required by the District Court Reversal Decision, and upon such
reconsideration, grant Appellant stay relief under Section 362(d).

6

II. STANDARD OF REVIEW
A district court sitting in its bankruptcy appellate capacity reviews findings of fact
for clear error and conclusions of law de novo.9 The bankruptcy court’s findings of fact
must be accepted “unless the court is left with the definite and firm conviction that a
mistake has been committed.”3 “Mixed questions of fact are reviewed de novo.”4
The interpretation of a contract is governed by Arizona law and is reviewed de novo.5
A bankruptcy court’s determination of whether a proposed plan of reorganization is
feasible, i.e., not likely to be followed by liquidation or further reorganization, is one of
fact reviewed for clear error.6
This case returns to this court after remand. On remand, the bankruptcy court
was limited by two rules: the law of the case and the rule of mandate. It is well
established that once a case has been decided by a higher court on appeal and
remanded to the trial court, whatever was before the appellate court and disposed of
by its decision, is considered to be finally settled. The lower court is bound by that
decision as the law of the case and must follow it according to the mandate. The lower
court may not, directly or indirectly, examine or otherwise vary or depart from any
matter decided by this court in Bataa/Kierland II, except to the extent to resolve that

9

In re JTS Corp., 617 F.3d 1102, 1086–87 (9th Cir. 2010) (citing In re Strand, 375 F.3d
854, 857 (9th Cir. 2004)).
3

Id. (quoting In re Greene, 583 F.3d 614, 618 (9th Cir. 2009) (internal quotation marks
omitted)).
4

Id. (quoting In re Chang, 163 F.3d 1138, 1140 (9th Cir. 1998) (internal quotation
marks omitted)).
5

Starrag v. Maersk, Inc., 486 F.3d 607, 611 (9th Cir. 2007).

6

Harbin v. IndyMac Bank, FSB (In re Harbin), 486 F.3d 510, 517 (9th Cir. 2007).
7

which has been remanded. The rule of mandate does not, however, affect those
matters the higher court did not decide. Therefore, this court must distinguish between
matters that were finally decided by it in Bataa/Kierland II, which are beyond the
jurisdiction of the bankruptcy court, and those that were not.7 The bankruptcy court
had discretion to depart from the law of the case if: “1) the first decision was clearly
erroneous; 2) an intervening change in the law has occurred; 3) the evidence on
remand is substantially different; 4) other changed circumstances exist; or 5) a
manifest injustice would otherwise result.”8 None of those conditions are present in
this case.
III. DISCUSSION
A. Appraised Value
In its decision, the bankruptcy court found:
Therefore based on all of the evidence presented in this and the prior
confirmation trial, as well as the two District Court opinions and the recorded
CC&Rs, the Court finds and concludes that the only evidence of the current
“as is” value of the Debtor’s real property is the opinion of Debtor’s expert
on the assumption that the Parking Agreement is effective. Therefore the
Court finds and concludes that the current value of the real property is $13.9
million.9
To that the bankruptcy court added $400,000.00 for the cash collateral on hand at the
time of confirmation for a total value of the secured claim of $14.3 million.10

7

United States v. Kellington, 217 F.3d 1084, 1093 (9th Cir. 2000) (citing and quoting In
re Sanford Fork & Tool Co., 160 U.S. 247, 256 (1895)).
8

United States v. Cuddy, 147 F.3d 1111, 114 (9th Cir. 1998).

9

Docket 10-5 at 801.

10

Id. at 803.
8

It is undisputed that at the time of the confirmation hearing the appraised value
of the Debtor’s property, without deduction for parking, was at least $18,118,815. 11
Debtor’s appraiser then reduced that value by $4.4 million, resulting in a rounded value
of $13.7 million.12
It is undisputed that prior to the time it was subdivided 415 surface parking
spaces were located on the parcel transferred to Kierland II. 13 In Bataa/Kierland II both
the bankruptcy court and this court further held that Debtor was entitled to use the preexisting parking spaces without further payment to Kierland II, the difference being that
this court deducted the number of surface parking spaces that existed prior to
construction of the parking garage from the number of spaces Debtor required in the
parking garage.14 After construction of the parking garage, there were at least 76
parking spaces on Debtor’s property and 206 surface parking spaces on Kierland II
property.
In declining to approve or disapprove the parking agreement, the bankruptcy
court held:
This Court is neither approving the Parking Agreement nor
determining how many spaces the Debtor may use under the CC&Rs, nor
determining what a “fair” parking agreement would provide. Those are

11

Docket 10-5 at 664–65, 667–69 (testimony of Dennis P. Farr, the NAI appraiser
retained by Debtor). The City of Phoenix set the appraised value “as-is” at $18.5 million.
Docket 10-5 at 680 (testimony of Kaja Farnsworth, Senior Appraiser in the Phoenix office).
12

Docket 10-5 at 664. The record does not reflect the reason for the $200,000
difference between the appraiser’s testimony and the bankruptcy court’s finding. That
difference is, however, irrelevant to the issues presented on this appeal.
13

Id. at 676. The court further notes that this evidence was not in the record at the time
Kierland II was decided. 496 B.R. at 193.
14

Kierland II, 496 B.R. at 193.
9

either business issues for the reorganized debtor, or perhaps the subject of
litigation with Kierland II (and possibly Bankers Trust). They are not for this
Court to decide, on this record.
The only relevance of the Parking Agreement is whether it provides
sufficient assurance to a prospective buyer of adequate parking, at a fair
cost, so that the prospective buyer would be willing to pay as much as it
would for a building that owned its own adequate parking. So only the
expert witnesses, but not this Court, were required to come to some
conclusion as to the propriety and fairness of the Parking Agreement, as it
would be viewed by the market of prospective buyers. The Debtor’s expert
opined that the Parking Agreement was not only appropriate but would be
required by any prospective buyer. The Creditor’s expert provided no
testimony or evidence to the contrary, and certainly provided no testimony
or implication that the Parking Agreement would be viewed by the market
as somehow improper.15
It appears undisputed that the $18.1 m illion valuation is dependent upon the
existence of the availability of adequate parking for Debtor’s building. It is also
undisputed that the CC&Rs created an easem ent for the benefit of Debtor to use the
surface parking on the property conveyed to Kierland II at the time of the conveyance.
The problem is that there does not appear to be an evidentiary basis for the $4.4
million reduction in value.
The error committed by the bankruptcy court in this instance was that it declined
to determine how many spaces the Debtor may use under the CC&Rs. That was the
central issue with respect to the valuation question. Instead, the bankruptcy court
relied upon the opinion of the appraisers that, on the assumption that adequate
parking was not available, reduced the value by $4.4 million.16 The problem with the
bankruptcy court’s approach is that in reaching its decision it implicitly determined that

15

Docket 10-5 at 802.

16

In reducing the value, the appraiser assumed that the parking agreement was in
effect. Docket 10-5 at 659–663.
10

the CC&R’s did not provide adequate parking for Debtor’s property. That is, the
reduction in value was appropriate if, and only if, the Debtor was not entitled to
adequate parking on the Kierland II property under the CC&Rs. Thus, this court is
tasked with the function of determining whether this implicit determination is correct.
For the reasons that follow, this court disagrees with the bankruptcy court.
Under Arizona law the interpretation of the CC&Rs, a contract, is a question of
law reviewed de novo on appeal. 17 In reversing the bankruptcy court on the issue of
the scope of the CC&Rs in Bataa/Kierland II, this court held:
As this court understands the decision of the bankruptcy court, it
interpreted the easement created by the CC & Rs as being limited to the
surface parking spaces on the Kierland II property, but that easement did
not extend to the additional parking in the parking structure based on its
finding that the CC & Rs were not ambiguous on this point. However,
because this court finds that an ambiguity existed, resolution of that
ambiguity is a factual determination to be resolved by the trier of fact on
remand.18
Unfortunately, the bankruptcy court did not address this issue, nor does it appear that
Debtor, the party who presumptively has the extrinsic evidence, has presented any
further evidence on the interpretation of the CC&Rs. While remand to the bankruptcy
court for the taking of additional evidence on this issue might otherwise be appropriate,
the matter has already been remanded once and, despite the clear instructions of this
Court, Debtor has chosen not to present any further evidence. Accordingly, this court
will resolve the issue on the basis of the existing record.

17

See Andrews v. Blake, 69 P.3d 7, 11 (Ariz. 2003); Smith v. Melson, Inc., 659 P.2d
1264, 1266 (Ariz. 1983).
18

Kierland II, 496 B.R. at 192 (citations omitted).
11

The facts in the record are: (1) JPMCC’s predecessor-in-interest consented to
the subdivision of the property, releasing its security interest in the parcel conveyed to
Kierland II; (2) in transferring part of the real property to Kierland II, Debtor either
reserved to itself, or was granted, an easement to use the existing parking on the
parcel conveyed to Kierland II; (3) at the time of subdivision, 415 parking spaces
existed on the parcel conveyed to Kierland II; (4) in developing the parcel conveyed to
it, Kierland II replaced the 415 surface parking spaces with 206 surface parking spaces
and 341 spaces in a parking garage; and (5) to provide adequate parking, Debtor
required the use of 336 parking spaces on Kierland II property.
As noted in Kierland II both the bankruptcy court and this court found that
Debtor was entitled to the use of the remaining surface parking spaces on the Kierland
II property without further compensation to Kierland II. 19 The only open question on
remand was the right, if any, of Debtor to use the additional parking in the parking
garage that it needed to meet code. Yet, the opinion of the appraiser upon whom the
bankruptcy court relied was based upon the assumption that, absent the parking
agreement, Debtor had no right to any of the parking on Kierland II property . This was
erroneous: Debtor indisputably had a right to use the 206 surface parking spaces on
Kierland II property. Thus, neither the assumption of the appraiser nor the bankruptcy
court’s reliance thereon had any evidentiary support in the record.
As noted above, in Bataa/Kierland II there was no evidence in the record
concerning the number of surface parking spaces that existed on the Kierland II

19

Kierland II, 496 B.R. at 193.
12

property prior to construction of the parking garage. That omission has been
eliminated. It is undisputed that the number of parking spaces on Debtor’s property,
combined with the existing surface parking on Kierland II property at the time the
property was subdivided, were sufficient to satisfy Debtor’s parking requirements. As
this court pointed out in Bataa/Kierland II with respect to the number of parking spaces
available prior to construction of the Kierland II building:
[. . . .] That number is essential to a determination of how many
spaces would be needed in the parking garage to satisfy applicable parking
regulations. What the bankruptcy court appears to have overlooked is the
fact that until Kierland II erected the second office building there was no
apparent necessity for additional parking, let alone a parking garage. This
proposition which is at least consistent with the record suggests that the
necessity for the construction of the parking garage might have been solely
a result of the construction of the second office building by Kierland II.
Bankruptcy is an equitable proceeding. It may be equitable to require
Debtor to reimburse Kierland II for the reasonable value of constructing
additional parking needed to meet Debtor's parking requirements, it would
not be equitable to require Debtor to contribute to the cost of erecting
parking spaces for the use of Kierland II. Debtor and Kierland II may be
likened to pockets in a pair of pants owned by Bataa Oil. It is inequitable to
permit the transfer of funds from one pocket in a pair of pants (Debtor) to
the other pocket (Kierland II) simply to prevent the funds from being taken
by the person to whom they are owed (JPMCC) for the ultimate benefit of
the owner of the pants (Bataa Oil). 20
Neither Debtor nor the bankruptcy court took this into consideration. The facts in the
record unequivocally establish that, prior to the construction of the Kierland II building,
Debtor was entitled to the use of 415 spaces on the parcel conveyed to Kierland II:
more than is required under the building codes. As was noted in Bataa/Kierland II,
construction of the parking structure was directly connected to, and made necessary
by, erection of the Kierland II building.

20

Kierland II, 496 B.R. at 193–94 (emphasis in the original) (footnote omitted).
13

The record is also devoid of any evidence that the subdivision of the parcel and
transfer of a portion to Kierland II was supported by any consideration other than the
CC&Rs, which granted Debtor an easement in the then existing parking spaces without
any provision that Debtor had to make any further payment to Kierland II for the
continued use. This is to what JPMCC’s predecessor-in-interest agreed when it
released its security interest in the parcel conveyed to Kierland II. It strains credulity
beyond the breaking point to assume that any prudent lender would agree to release
part of its security under circumstances that could lead to a significant reduction in the
value of its security by the unilateral action of Debtor and Kierland II. That is precisely
what Debtor proposed and the bankruptcy court at least implicitly held. Also relevant is
that approval of the subdivision by the City of Phoenix was expressly conditioned upon
the provision that Debtor retain adequate parking on the Kierland II property.
The court also rejects Debtor’s argument based upon Kierland II’s assumption
that, in the absence of a parking agreement, it could in some manner restrict the
access of Debtor’s tenants to the parking, or otherwise interfere with the rights of
Debtor’s tenants to access and use the parking on Kierland II property. If Kierland II
did so it would be directly interfering with the rights of the easement holder. By
analogy, the court notes that, in this respect, the easem ent in question is similar to a
utility easement. That is, the subservient tenement in a utility easement cannot restrict
or otherwise interfere with the right of the utility to access the easement or take actions
necessarily appurtenant to the purpose of the easement.
Based upon the preponderance of the evidence, this court holds that, as a
matter of law, the parking easement contained in the CC&Rs granted Debtor an
14

easement in the continued use of the parking spaces physically located on the
Kierland II property without reimbursement for the cost of constructing the parking
garage. This holding does not, however, preclude the parties from entering into an
agreement that provides for the Debtor to share in the costs associated with the
operation of the parking located on Kierland II property on a pro rata basis according to
each party’s use of the parking.
In light of this court’s holding, the experts’ opinions to the extent they reduce the
value of the Debtor’s property based on the assumed lack of access to adequate
parking are contrary to the facts. As such they are not entitled to any weight or
consideration. Accordingly, this court finds the value of the property in which JPMCC
has a security interest is $18,118,815.
B. Characterization of the $14.9 Million Disbursement to Bataa Oil
In BataaKierland II this court specifically found that re-characterization of the
$14.9 million disbursed by Debtor to Bataa Oil as a return of equity was unsupported
by the evidence.21 In its Memorandum Decision in Bataa/Kierland IV, this court further
directed the bankruptcy court to:
3.

Recognize that JPMCC has a security interest in the $14.9 million
transferred from Debtor to Bataa Oil, except to the extent that Debtor
establishes by a preponderance of the evidence that the transfer was
properly re-characterized as an equity distribution to Bataa Oil,
including, but not limited to, consideration of the extent to which
treatment as a return of equity would either constitute a voidable
fraudulent transfer under federal bankruptcy law, or was contrary to
the otherwise applicable provisions of Arizona law.22

21

Kierland II, 496 B.R. at 194–98.

22

Docket 10-5 at. 853 (Memorandum Decision in Bataa/Kierland IV, 2:13-cv-02340-

JWS).
15

In its order confirming the Amended Plan the bankruptcy court found:
The District Court’s Memorandum Decision also required this Court
to “recognize that JPMCC has a security interest in the $14.9 million
transferred from Debtor to Bataa Oil . . . .” This Order does so recognize.
However, like cash collateral that has been spent prior to the confirmation
trial, any such funds that were not owned by the Debtor as of the
confirmation trial have no effect on the amount of the Secured Creditor’s
secured claim. On the record currently before this Court, this Court has no
basis to recognize or determine whether the Secured Creditor has any claim
against Batta [sic] Oil. It is undisputed, however, that the Debtor did not
have any ownership or possession of the referenced $14.9 million as of the
confirmation trial, and therefore it has no effect on the amount of the
Creditor’s secured claim.23
The bankruptcy court further held:
No Evidence of Improper Distributions
The Secured Creditor also apparently attempted to submit evidence
of an alleged impropriety or avoidability of a few transfers made by the
Debtor to Bataa Oil in 2010 and 2011. It is not at all clear to what
confirmation issue the Creditor thought such evidence was relevant. There
is no pending avoidance action. Even if the Creditor had an avoidance
action it could file against Batta Oil, that would have no effect on its secured
or unsecured claim against the Debtor.
The only possible relevance of the Debtor having such a claim might
be to demonstrate that a Chapter 7 trustee could recover such amounts
from Batta Oil, which if proven might demonstrate that the Debtor’s plan fails
to satisfy the best interests test of § 1129(a)(7). But that confirmation
requirement is not presently before this Court, because the District Court’s
remand was only to consider the satisfaction of the requirements of
§ 1129(b).
Regardless of what relevance it might have had, the preponderance
of the evidence did not establish the availability of any transfer by the
Debtor to Bataa Oil. The only possible such evidence came in the expert
testimony of Michael Tucker based on his review of a very small number of
book entries reflecting transfers from the Debtor to Bataa Oil. But
Mr. Tucker admittedly did not consider, or even apparently have any
awareness of, virtually simultaneous transfers of identical amounts from
Bataa Oil to the Debtor. Mr. Tucker’s failure to consider the equivalent
transfers from Bataa Oil to the Debtor eliminates all probative value and

23

Docket 10-5 at 803–04.
16

credibility to his testimony and opinion that there were any avoidable
transfers.24
The bankruptcy court clearly misconstrued the decision of this Court. This court
agrees that there is no dispute that Debtor did not hav e any ownership or possession
in the $14.9 million itself—that is not the issue. Nor does JPMCC make a direct claim
against Bataa Oil. Likewise, the bankruptcy court’s finding regarding avoidance of the
transfers in 2010 and 2011 misses the point. The issue was the re-characterization of
the transfer of the $14.9 million as a return of equity instead of a loan from Debtor to its
parent, Bataa Oil. If the latter, it was an asset of Debtor to which JPMCC’s security
interest attached. In Bataa/Kierland II this court specifically found that the recharacterization of the transfers from a loan to a distribution of equity was unsupported
by the evidence and remanded to allow Debtor to provide additional evidence in
support of the re-characterization.
That Bataa Oil changed the characterization of the transfers to it as a return of
equity on its books post hoc does not constitutes sufficient additional credible
evidence. It is as self-serving as the testimony of the ultimate owners, David and Anne
Calvin. Debtor did, however, introduce the testimony of two certified public
accountants.
One CPA called by Debtor who reviewed Debtor’s books testified that with
respect to the treatment of the payments made by Debtor to Bataa Oil:
A
Well, the conclusion is that originally if these payments are made to
a shareholder and related party, if there's no documentation indicating that
there is actually a loan, there's no loan document, there's no agreement to

24

Id. at 805–06.
17

pay interest, there's no repayment terms, there's no maturity date, no
penalty for non-repayment, it really isn't, and shouldn't be considered a loan.
Q
Okay. So if all those factors existed, the characterization, the initial
characterization of those distributions as loans would be improper. Is that
your opinion?
A
Yes.
Q
Okay. Based on your review of the situation, did you reach any
conclusions or opinions concerning the recharacterization of those
distributions from loans to equity distributions?
A
Yes.
Q
Okay. And what was that conclusion or opinion?
A
My opinion is that was the appropriate adjustment to make, to
reclassify these accounts receivable as distributions if, in fact, they're never
going to be repaid and never were intended to be repaid. 25
This testimony, while relevant to the issue of whether the transfer should have
been properly booked as return of equity under generally accepted accounting
principles, does not address the issue before the court in a bankruptcy case. What
Debtor overlooks is the qualification provided by the expert: “if, in fact, they’re never
going to be repaid and never were intended to be repaid.” (Emphasis added.) As
noted in Kierland II, Debtor introduced no evidence that establishes those facts other
than the uncorroborated testimony of one of the Bataa Oil principals, Anne Calvin.
This testimony, while perhaps providing some modicum of evidentiary support for the
re-characterization, must be weighed against the other evidence, or lack thereof, in the
record. When weighed against the evidence that prior to their re-characterization on
the eve of the bankruptcy filing the $14.9 million was carried on Debtor’s books as an
account payable and on Bataa Oil’s as a corresponding account receivable, the weight
of this testimony pales.

25

Docket 10-5 at 630–31 (testimony of Lynne Bouvea, CPA).
18

Debtor’s reliance on the federal income tax treatment of the income of Debtor is
also misplaced. It is undisputed that Bataa Oil, a Subchapter S corporation, and its
wholly-owned subsidiaries, Debtor and Kierland II, file a single, consolidated tax
return.26 In that case, taxable income is determined by aggregating the profits and
losses of the consolidated companies, with the taxable income determined by the net
operating gain or loss, which is in turn reported on the return filed by Bataa/Oil.27 As a
Subchapter S corporation, the taxable income (or loss) is reported on the income tax
returns of the shareholders and the taxes paid on that income paid by them,28 in this
case, David and Anne Calvin.29 The tax treatment of distributions by Bataa Oil to its
shareholders differs based upon the existence of accumulated earnings and profits
and the basis in the stock. 30 Indeed, Debtor’s own witness testified that the
characterization of inter-company transactions as either loans or equity distributions
had no tax significance.31 The relevance of the treatment of the transactions in
question for federal income tax purposes to the issue before the courts is unexplained
and inexplicable.
The testimony of Michael Tucker, called as a witness by JPMCC, also
undercuts any claim that the re-characterization was proper. He testified that the
elimination of the receivable from the balance sheet rendered Debtor insolvent as of
26

See 26 U.S.C. §§ 1501, et seq.; Docket 10-5 at 620 (Bartels’ testimony).

27

26 U.S.C. § 1552.

28

26 U.S.C. § 1366.

29

Docket 10-5 at 617-19 (Bartels’ testimony).

30

26 U.S.C. § 1368.

31

Docket 10-5 at 622–23 (Bartels’ testimony).
19

July 14, 2010, and continued to be so throug h the date the petition was filed.32 That
testimony was uncontroverted. In his analysis Mr. Tucker did not render an opinion,
one way or the other, whether the $14.9 million adjustment for the receivable from
Bataa Oil was appropriate or inappropriate. For the purpose of his analysis he
assumed it was appropriate.33
To the extent that the bankruptcy court rejected the testimony of Mr. Tucker, it
appears to be related to the witness’ testimony regarding $870,000 in payments made
by Debtor to insiders (Bataa Oil and Anne Calvin) in the year preceding the
bankruptcy, as reflected on the books of both Debtor and Bataa Oil, not his testimony
regarding the insolvency of Debtor as early as July 14, 2010.34 On direct examination
the inquiry was directed solely to disbursements made by Debtor to Bataa Oil and
Anne Calvin; no question was posed regarding payments by Bataa Oil to Debtor. On
cross-examination Mr. Tucker was asked whether he had considered a $250,000
transaction in October 2010 reflecting the payment to Debtor by Bataa Oil, to which he
responded he had not. 35 Whether the witness considered payments made by Bataa
Oil to Debtor prior to the year immediately preceding the filing to the issue of payments
made during that year, a matter on which he was not asked to testify on direct, hardly
reflects upon his credibility concerning the transfers made during that year.

32

Docket 10-5 at 425–431.

33

Docket 10-5 at 428–29.

34

Docket 10-5 at 431–33.

35

Docket 10-5 at 453–54.
20

He was also questioned about a February 2011 check from Debtor payable to
Bataa Oil in the amount of $200,000.36 Clearly, because it was not asked, Mr. Tucker
did not consider this in his direct testimony. As noted above, on direct examination,
the witness was only asked about transfers from Debtor to Bataa Oil during that year,
not transfers from Bataa Oil to Debtor. At most, his testimony on cross reduces the
net amount of the transfers made from Debtor to insiders by $200,000: net $670,000.
This is hardly the “equivalent amount” found by the bankruptcy court. Based upon this
record, the bankruptcy court clearly erred in rejecting the testimony of Mr. Tucker.
While this court agrees that, to the extent these transfers were fraudulent,
JPMCC should have brought an adversary proceeding to avoid them; the failure to do
so does not necessarily render that evidence irrelevant to the confirmation process. It
is clear that Bataa Oil (or its shareholder, Anne Calvin) realized $670,000 in
presumptively fraudulent transfers during the year preceding the filing. The amended
plan confirmed by the bankruptcy court provides for an additional contribution of “new
value” in the amount of $550,000. How a contribution of an amount less than the sum
the evidence establishes was improperly withdrawn from Debtor by its principals within
the year immediately preceding the filing can constitute “new value” under the
principles of equity is also unexplained and inexplicable.37
This court also directed that, on remand, consideration be given to the effect of
Arizona law on the transfers in question. Neither the parties nor the bankruptcy court
36

Docket 10-5 at 454–57.

37

The court notes that, in light of its decision regarding the value of the real property
and the treatment of the $14.9 million in disbursements from Debtor to Bataa Oil, this issue is
rendered moot.
21

addressed the applicability or effect of Arizona law on these transfers. This court
assumes without deciding that Arizona law would not permit an insolvent corporation
from making a distribution either in the form of dividends or in return of equity.38
By failing to adequately address the specific matters identified by this court in
Kierland II, the bankruptcy court clearly erred in reaffirming re-characterization of the
$14.9 million transferred from Debtor to Bataa Oil as a return of equity.
IV. CONCLUSION/ORDER
For the reasons stated in Part III above, the bankruptcy court’s findings of fact
and conclusions on the matters discussed do not withstand scrutiny on the record
presented. Weighing all the evidence, this court is left with the firm conviction that the
bankruptcy court’s findings of fact on the matters upon which it relied in confirming the
plan were mistaken.
The order of the bankruptcy court confirming the Amended Plan of
Reorganization is hereby REVERSED, and the matter is REMANDED to the
bankruptcy court for further proceedings consistent with this decision. On remand the
bankruptcy court must accept as established fact that:
1.

The value of Debtor’s real property securing the claim of JPMCC 2007–CIBC 19
East Greenway, LLC is not less than $18,118,815; and

38

In its order confirming the original plan the bankruptcy court noted: “Given the
significantly deteriorated and deteriorating real estate market in 2007, and the fact that the
Debtor would still have a debt to the lender for the amount of any such distribution for which it
received no valuable asset in exchange, there is a significant likelihood that the distribution
rendered the Debtor balance sheet insolvent.” Kierland II, 496 B.R. at 196 (quoting the
bankruptcy court’s decision confirming the plan).
22

2.

Bataa Oil is indebted to Debtor in the sum of $14,900,000, in which JPMCC
2007–CIBC 19 East Greenway, LLC has a security interest.
The Clerk of the Court is directed to enter judgment accordingly.39
DATED: August 28, 2014.

/s/ JOHN W. SEDWICK
SENIOR UNITED STATES DISTRICT JUDGE

39

Fed. R. Bank. P. 8016(a).
23