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In re Mortgs. Ltd.

United States Court of Appeals, Ninth Circuit

November 12, 2014

IN THE MATTER OF: MORTGAGES LTD., Debtor, REV OP GROUP, Appellant,
v.
ML MANAGER LLC, Appellee. REV OP GROUP, Appellant,
v.
ML MANAGER LLC, an Arizona limited liability company, Appellee, MORTGAGES LTD., Debtor In Re. IN THE MATTER OF: MORTGAGES LTD., Debtor, BEAR TOOTH MOUNTAIN HOLDINGS, L.L.P.; PUEBLO SERENO MOBILE HOME PARK, L.L.C.; QUEEN CREEK XVIII, L.L.C.; MORLEY ROSENFELD, M.D. P.C. RESTATED PROFIT SHARING PLAN, and/or their successsors and assigns (collectively the Rev Op Investors), Appellants,
v.
ML MANAGER LLC, Appellee. IN RE: MORTGAGES LTD., Debtor, QUEEN CREEK XVIII, L.L.C., Appellant,
v.
ML MANAGER LLC, Appellee

Argued and Submitted, January 16, 2014, San Francisco, California

Page 624

Appeal from the United States District Court for the District of Arizona. D.C. Nos. 2:11-cv-00853-RCJ, 2:08-bk-07465-RJH. D.C. No. 2:10-cv-01819-RCJ. D.C. No. 2:10-cv-01917-RCJ. D.C. No. 2:12-cv-00036-RCJ. Robert Clive Jones, District Judge, Presiding.

SUMMARY[**]

Bankruptcy

The panel reversed the bankruptcy court's declaratory judgment that ML Manager LLC had agency authority to sell property of the bankruptcy estate of Mortgages Ltd.

Pursuant to the confirmed Chapter 11 plan of reorganization of Mortgages Ltd., a private lender for certain real estate investments in Arizona, ML Manager was the manager of the loans left in Mortgages Ltd.'s portfolio. Mortgages Ltd. raised money from investors to extend loans to real estate purchasers, secured by the purchased real estate, and acted as servicing agent for the loans and properties. The investors received pass-through fractional interests in the real estate that secured the loans and the resulting loan payments. They acquired an actual interest in each underlying loan.

Rev Op Group, a group of pass-through investors, objected to ML Manager's proposed sale of some of the loans. The bankruptcy court held that these investors had executed an agency agreement with ML Manager, which had an agency coupled with an interest that was irrevocable under Arizona law.

The panel held that the appeal from the declaratory judgment was not equitably moot because Rev Op Group sought a stay and was diligent. In addition, even though substantial consummation of the plan had occurred, the panel could fashion effective relief because modification of the declaratory judgment would not inequitably affect innocent third parties, and the bankruptcy court on remand would be able to devise an equitable remedy.

The panel held that the bankruptcy court erred in concluding that Rev Op Group was bound to the agency agreements because the Group denied in its answer that its investors had signed any documents that included the agency provisions. The panel held that under the federal pleading rules, a court cannot disregard statements in a pleading unless the court specifically determines that the statement was made in bad faith under Federal Rule of Civil Procedure 11, or should be struck under Rule 12(f). Accordingly, the bankruptcy court erred in rejecting Rev Op Group's denials as implausible. The panel reversed the bankruptcy court's declaratory judgment and remanded the case.

Bryce A. Suzuki (argued), Robert J. Miller, Justin A. Sabin, Bryan Cave LLP, Phoenix, Arizona, for Appellants.

Cathy L. Reece (argued), Fennemore Craig, P.C., Phoenix, Arizona; Keith L. Hendricks and Joshua T. Greer, Moyes Sellers & Hendricks, Phoenix, Arizona, for Appellee.

Before: J. Clifford Wallace and Jay S. Bybee, Circuit Judges, and Robert W. Gettleman, Senior District Judge.[*]

OPINION

Page 625

WALLACE, Senior Circuit Judge.

Mortgages Ltd. was a private lender for certain real estate investments in Arizona. Mortgages Ltd. raised money from investors to extend loans to real estate purchasers, secured by the purchased real estate, and acted as servicing agent for the loans and properties. The investors received " pass-through" fractional interests in the real estate that secured the loans and the resulting loan payments. The pass-through investors acquired an actual interest in each underlying loan.

On June 24, 2008, Mortgages Ltd. filed for Chapter 11 bankruptcy. The company was restructured through a confirmed bankruptcy plan. Pursuant to that plan, the entity ML Manager LLC (ML Manager), the appellee here, manages and operates

Page 626

the loans left in Mortgages Ltd.'s portfolio. ML Manager took a $20 million loan in " exit financing" to pay for expenses related to the completed bankruptcy. The bankruptcy plan was confirmed by the bankruptcy court in May 2009.

After confirmation, ML Manager sought to sell some of the loans in Mortgages Ltd.'s portfolio. In response, a group of pass-through investors (Rev Op Group) objected to the sales. Rev Op Group and ML Manager then moved, essentially, for cross-declaratory judgments to resolve ML Manager's powers regarding Mortgages Ltd.'s portfolio.

Rev Op Group moved for partial summary judgment on the ground that because ML Manager acted as " agent" for each investor, it could not sell the properties if any investor, the " principal," objected. According to Rev Op Group, if ML Manager sought to sell properties over its objection, the investors in Rev Op Group could simply revoke the agency. ML Manager responded that it did not have simple agency authority, revocable at will by the principal. Instead, it claimed that it held an interest in Mortgage Ltd.'s underlying loan pool, which gave ML Manager an " agency coupled with an interest," which is not revocable under Arizona law. See Phoenix Title & Trust Co. v. Grimes, 101 Ariz. 182, 416 P.2d 979, 981 (Ariz. 1966) (in banc).

Simultaneously, ML Manager moved for a declaratory judgment that all investors had executed documents designating ML Manager as agent and that those agency documents had been properly transferred to ML Manager. Rev Op Group denied that it had executed the agreements. According to Rev Op Group, while its investors had signed " Subscription" and " Revolving Opportunity" agreements, the investors had not signed versions of those agreements that included a provision binding all signers to an agency relationship with ML Manager. Rev Op Group also argued that even if its ...


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