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In re O'Bannon Plaza LLC O'Bannon Plaza LLC

United States District Court, D. Nevada

October 22, 2014



ANDREW P. GORDON, District Judge.

Debtor O'Bannon Plaza LLC appeals the bankruptcy court's order on Debtor's objections to the secured claim of Appellee CAB Properties, LLC ("CAB"). Debtor argues the assignment through which CAB obtained its secured interest is invalid because it conflicts with the underlying deed of trust, and because the note was sold in a manner that violated state and federal securities laws. Alternatively, Debtor argues that if the assignment is valid, CAB owes Debtor amounts held in escrow by the prior lender. Debtor also argues the bankruptcy court erred by failing to reduce CAB's attorney's fees. Finally, Debtor argues CAB should not be entitled to default interest because its overly aggressive conduct wrongfully pushed Debtor into liquidation.

Debtor waived its arguments about the invalidity of the assignment to CAB because Debtor raised those arguments for the first time on appeal. I affirm the bankruptcy court's ruling that CAB was not required to reimburse Debtor for the escrow funds. Finally, I affirm the attorney's fee award.

I. Background

Debtor owned property known as O'Bannon Plaza, located on Rainbow Boulevard in Las Vegas, Nevada. (Dkt. #34-3 at 110.) Debtor and First Union National Bank entered into a promissory note and deed of trust secured by the property. (Dkt. #18-2 at 17-29; Dkt. #18-3; Dkt. #18-4; Dkt. #18-5 at 1-6.) The note fully matured on March 1, 2011. (Dkt. #18-2 at 17; Dkt. #34-2 at 122.) Debtor was unable to refinance or pay off the loan, and filed for Chapter 11 bankruptcy on January 13, 2012. (Dkt. #18-5 at 30; Dkt. #34-2 at 1, 67; Dkt. #34-3 at 100.) Appellee CAB purchased the note through an auction. (Dkt. #18-5 at 24-30; Dkt. #34-3 at 42-46.) CAB did not initially file a proof of claim, but Debtor estimated CAB's secured claim to be $3, 193, 697.00. (Dkt. #18-2 at 3-4; Dkt. #34-2 at 74, 79.)

Debtor proposed a plan of reorganization pursuant to which Debtor would make monthly payments to CAB for ten years. CAB objected to Debtor's plan of reorganization, moved to appoint a trustee, and moved to convert the case to a Chapter 7 proceeding. (Dkt. #34-2 at 19, 22-23.) CAB objected to Debtor's disclosure statement as materially misleading, and argued the plan of reorganization was deficient for a number of reasons. (Dkt. #XX-X-XX-XX.) The bankruptcy court appointed a trustee on April 11, 2013, but denied the request to convert the case at that point, and allowed Debtor to move forward with confirmation. (Dkt. #34-2 at 26-27; Dkt. #18-10 at 14, 16, 19, 24.)

Following appointment of the trustee, the bankruptcy court granted the motion to convert the case to a Chapter 7 proceeding. (Dkt. #34-2 at 40.) The bankruptcy court thereafter approved the trustee's motion to sell the property free and clear of any liens. (Dkt. #34-2 at 41, 49.) CAB filed a declaration setting forth its claim for the purpose of allowing it to credit bid at the auction, which the bankruptcy court deemed sufficient to constitute a proof of claim. (Dkt. #18-2 at 3-4.) The property was sold at auction to an unrelated third party for $5, 575, 000. (Dkt. #18-2 at 5.)

Following the auction, Debtor objected to the amount of the sale proceeds CAB claimed it was entitled to in the declaration. (Dkt. #34-3 at 99-107.) Specifically, Debtor argued CAB had not accounted for $35, 048.89 Debtor had paid to the prior lender before Debtor filed for bankruptcy, as well as $87, 432.24 in escrow funds held by the prior lender that Debtor contended should have been turned over to Debtor upon assignment of the note to CAB. (Dkt. #34-3 at 100-01.) Debtor also argued CAB had not supported its requested attorney's fees nor explained how the requested amount was reasonable. (Dkt. #34-3 at 105-06.) Debtor also challenged CAB's entitlement to charge a default interest rate after the parties had entered into a stipulation providing for monthly adequate assurance payments to CAB. (Dkt. #34-3 at 106.) The parties filed supplemental briefs and the bankruptcy court held two hearings on the objections. (Dkt. #18-1 at 4-25; Dkt. #34-2 at 52-55.)

The bankruptcy court overruled Debtor's objections to CAB's secured claim except to disallow $15, 000 of CAB's requested attorney's fees. (Dkt. #34-2 at 97.) The bankruptcy court thus allowed CAB's secured claim in the following amounts: (1) $3, 085, 526.03 in principal on the note, (2) $960, 324.39 in interest and late charges, and (3) $289, 577.64 in costs and expenses, including reasonable attorney's fees, for a total allowed secured claim of $4, 335, 428.06. (Dkt. #34-2 at 97.) Debtor now appeals the bankruptcy court's rulings.

II. Waiver

Debtor raises for the first time on appeal the issue of whether the assignment from the prior lender to CAB was invalid, either because it conflicted with the terms of the deed of trust or because the auction of the note violated state and federal securities laws. Debtor argues that whether CAB should have to pay Debtor the escrowed funds held by the prior lender was an issue throughout the bankruptcy proceedings. Alternatively, Debtor argues extraordinary circumstances warrant my considering the issues for the first time on appeal.

"Absent exceptional circumstances, [the Court] generally will not consider arguments raised for the first time on appeal, although [the Court has] discretion to do so." In re Am. W. Airlines, Inc., 217 F.3d 1161, 1165 (9th Cir. 2000). "Exceptional circumstances exist when: (1) review will prevent a miscarriage of justice; (2) a change in the law raises a new issue pending appeal; and (3) the issue presented is purely one of law and either does not depend upon the factual record developed below, or the pertinent record has been fully developed." In re Home Am. T.V.-Appliance Audio, Inc., 232 F.3d 1046, 1052 (9th Cir. 2000) (internal quotation marks and citation omitted).

Debtor did not argue before the bankruptcy court that the assignment of the note from the prior lender to CAB was invalid. Debtor argued language in the assignment was inconsistent with language in the deed of trust regarding what happened to the escrow funds upon assignment, but Debtor argued the result was that CAB must pay Debtor the escrow amounts. (Dkt. #35-1 at 8-9.) Debtor did not argue that the alleged inconsistency invalidated the assignment. Likewise, Debtor argued below that the way the note was auctioned violated Nevada law, but that argument was in the context its argument that CAB's fees were unreasonable because CAB was not acting like a reasonable secured creditor. ( Id. at 15-16.) Debtor did not argue the assignment to CAB was invalid due to the sale of the note being conducted in violation of state law.

No exceptional circumstances support consideration of these arguments for the first time on appeal. Debtor does not identify any change in the law that raised new issues pending appeal. Nor will considering Debtor's newly raised issues prevent a miscarriage of justice. Debtor took the position before the bankruptcy court that CAB owed the escrow funds and Debtor should not have to pursue the prior lender for the funds. Yet its position on appeal that the assignment is invalid would not make CAB liable for the escrow funds and would require Debtor to pursue the prior lender. That is precisely the result Debtor sought to avoid before the bankruptcy court. There is no miscarriage of justice because invalidating the assignment would put Debtor in the same position it is already in. Nothing in the bankruptcy court's ruling prohibits Debtor from pursuing the prior lender for any improperly retained escrow funds, and if the assignment was invalidated Debtor still would have to pursue the prior lender to collect the funds.[1] Further, ...

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