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In re R&S St. Rose, LLC

United States District Court, D. Nevada

September 30, 2019

In re R&S ST. ROSE, LLC, Debtor,
v.
R & S ST. ROSE LENDERS, LLC; R & S ST. ROSE, LLC; R & S INVESTMENT GROUP, LLC; COMMONWEALTH LAND TITLE INSURANCE COMPANY; THE CREDITOR GROUP; and THE U.S. TRUSTEE, Appellees. BRANCH BANKING AND TRUST COMPANY, Appellant,

          ORDER

          MIRANDA M. DU CHIEF UNITED STATES DISTRICT JUDGE

         I. SUMMARY

         Branch Banking and Trust Company, as successor in interest to the Federal Deposit Insurance Corporation (FDIC) as receiver for Colonial Bank N.A. (“BB&T”), appeals the Bankruptcy Court's confirmation of R&S St. Rose Lenders' (“Lenders”) Third Amended Chapter 11 Plan of Liquidation (“Plan”) in Lenders' Chapter 11 bankruptcy proceedings. BB&T's argument here is essentially that Lenders' confirmed Plan does not meet the “good faith” standard of the Bankruptcy Code because it rewards (or constitutes) a “Ponzi scheme” and achieves a result that is fundamentally unfair and inconsistent with the objectives and purposes of the Bankruptcy Code. (ECF No. 14.) Having considered the parties' arguments and the record, this Court will affirm the confirmation of Lenders' Plan.

         II. BACKGROUND

         The underlying facts of this case largely overlap with the facts in the Chapter 11 bankruptcy case filed by R&S St. Rose, LLC (“Rose”) (bankruptcy No. 11-14974-MKN) (“Rose Bankruptcy Case”). The overlapping factual details may be found on the Court's docket at ECF No. 108 in No. 2:17-cv-1251-MMD.

         On April 28, 2017, the Bankruptcy Court entered its Order on Confirmation of Debtor's Third Amended Plan of Liquidation (“Plan Confirmation Order”) wherein it confirmed Lenders' Plan. (ECF No. 15 at 7-8.) In that order, the Bankruptcy Court directed that $6, 359, 052 be held back from distribution to Class 1 to protect BB&T's estimated pro rata distribution in the event BB&T's claim, then on appeal, [1] is ultimately allowed. (Id.; id. at 22 n.24.)

         BB&T's appeal is timely, and the Court has jurisdiction under 28 U.S.C. § 158(a)(1).

         III. LEGAL STANDARD

         This Court reviews “the bankruptcy court's conclusions of law de novo and its findings of fact for clear error.” In re Bonham, 229 F.3d 750, 762 (9th Cir. 2000). The bankruptcy court's factual findings are clearly erroneous only if the findings “leave the definite and firm conviction” that the bankruptcy court made a mistake. In re Rains, 428 F.3d 893, 900 (9th Cir. 2005). “A bankruptcy court abuses its discretion if it applies the law incorrectly or if it rests its decision on a clearly erroneous finding of a material fact.” In re Brotby, 303 B.R. 177, 184 (B.A.P. 9th Cir. 2003); see also In re Plyam, 530 B.R. 456, 461 (B.A.P. 9th Cir. 2015) (“A bankruptcy court abuses its discretion if it applies the wrong legal standard, misapplies the correct legal standard, or if its factual findings are illogical, implausible, or without support in inferences that may be drawn from the facts in the record.”).

         The Court may affirm the bankruptcy court's decision “on any ground fairly supported by the record.” In re Warren, 568 F.3d 1113, 1116 (9th Cir. 2009). In addition, the Court need not address arguments not raised in the trial court but “may do so to (1) prevent a miscarriage of justice or to preserve the integrity of the judicial process, (2) when a change of law during the pendency of the appeal raises a new issue, or (3) when the issue is purely one of law.” In re Lakhany, 538 B.R. 555, 560 (B.A.P. 9th Cir. 2015).

         IV. DISCUSSION [2]

         BB&T contends that Lenders' confirmed Plan is lacking in good faith under 11 U.S.C. § 1129(a)(3) because (1) it endorses a Ponzi scheme and the Bankruptcy Court erred in finding otherwise and (2) its distribution scheme is unfair to BB&T. (ECF No. 14.) The Court first explains the framework for its good faith analysis and then address each of BB&T's arguments in turn.

         Section 1129(a)(3) requires that the plan be proposed “in good faith and not by any means forbidden by law.” By its definition, good faith means honesty in belief or purpose, faithfulness to one's duty or obligation, observance of reasonable commercial standards of fair dealing, and the absence of intent to defraud or to seek unconscionable advantage. Black's Law Dictionary (10th ed. 2009). As a general rule, a Chapter 11 plan is proposed in good faith where it achieves “a result consistent with the objectives and purposes” of the Bankruptcy Code and exhibits “fundamental fairness” in dealing with creditors. Marshall v. Marshall (In re Marshall), 721 F.3d 1032, 1046 (9th Cir. 2013); Jorgensen v. Fed. Land Bank of Spokane (In re Jorgensen), 66 B.R. 104, 108-09 (9th Cir. BAP 1986). In making a good faith determination a court considers the totality of the circumstances surrounding the plan. In re Stolrow's Inc., 84 B.R. 167, 172 (B.A.P. 9th Cir. 1988). A finding of good faith “will not be overturned unless the opponent of the plan can show that the finding was clearly erroneous.” Id. (citations omitted).

         A. Whether Lenders' Plan of Liquidation ...


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