FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: PALMDALE HILLS PROPERTY,
LLC,
Debtor,
PALMDALE HILLS PROPERTY, LLC;
SCC/PALMDALE, LLC; SUNCAL No. 10-60004
SUMMIT VALLEY, LLC; SUNCAL
EMERALD MEADOWS, LLC; SUNCAL BAP No.
09-1101-HPaMk
BICKFORD RANCH, LLC; ACTON
ESTATES, LLC; SUNCAL OPINION
COMMUNITIES I, LLC,
Appellants,
v.
LEHMAN COMMERCIAL PAPER, INC.,
Appellee.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Hollowell, Pappas, and Markell, Bankruptcy Judges,
Presiding
Argued and Submitted
June 8, 2011—Pasadena, California
Filed August 3, 2011
10091
10092 IN RE: PALMDALE HILLS PROPERTY
Before: Betty B. Fletcher and N. Randy Smith,
Circuit Judges, and Rudi M. Brewster,
Senior District Judge.*
Opinion by Judge N.R. Smith
*The Honorable Rudi M. Brewster, Senior District Judge for the U.S.
District Court for Southern California, San Diego, sitting by designation.
10094 IN RE: PALMDALE HILLS PROPERTY
COUNSEL
Paul J. Couchot (argued) and Sean Okeefe, Winthrop Cou-
chot, P.C., Newport Beach, California, for appellants Palm-
dale Hills Property, LLC, et al.
Christopher R.J. Pace, Weil Gotshal & Manges, LLP, Miami,
Florida (argued), Dean A. Ziehl, Pachulski Stang Ziehl &
Jones LLP, Los Angeles, California, for appellee Lehman
Commercial Paper, Inc.
OPINION
N.R. SMITH, Circuit Judge:
An automatic stay imposed by 11 U.S.C. § 362(a) bars
actions that would diminish the estate of a debtor in bank-
ruptcy (the first debtor). Therefore, if another (also a debtor
in bankruptcy) wants to equitably subordinate the creditor
claims of the first debtor, it must seek relief from stay from
the first debtor’s home bankruptcy court. We affirm the judg-
ment of the Bankruptcy Appellate Panel (BAP).
FACTS AND PROCEDURAL HISTORY
1. The Loans
Over several years, various Lehman entities1 entered into
1
The relevant entities are Lehman Commercial Paper, Inc. (Lehman),
which is a debtor in bankruptcy proceedings in the Southern District of
New York, and Lehman ALI (ALI), which owns Lehman Commercial
Paper, Inc., and is not in bankruptcy.
IN RE: PALMDALE HILLS PROPERTY 10095
credit agreements with the Palmdale Hills, LLC2 entities.
These agreements were secured by the properties Palmdale
was developing, Palmdale’s personal property, and/or equity
interests in the Palmdale entities. By 2008, Palmdale owed
Lehman approximately $649 million plus interest. Although
three loans, the SunCal I Loan, the Ritter Ranch Loan, and the
Mezzanine Loan, are the subject of this appeal, only the Ritter
Ranch Loan is significant. The Ritter Ranch Loan originated
from a credit agreement dated February 8, 2007 and is
secured by liens on projects owned by Palmdale Hills Prop-
erty, LLC and an equity interest in Palmdale Hills, LLC. As
discussed below, this loan has two components: a Term Loan,
which was sold to Fenway Capital, and a Revolver Loan,
which was not sold.
2. Bankruptcy Proceedings
Palmdale filed for chapter 11 bankruptcy in November
2008 in the Central District of California. On January 6, 2009,
Palmdale began an adversary proceeding against ALI, and
later Lehman, to equitably subordinate ALI’s security inter-
ests, which were based on Lehman’s loans to Palmdale. On
January 23, 2009, Lehman filed eight motions for relief from
Palmdale’s stay to foreclose on the collateral securing the
loans that were in default. Lehman argued that relief was war-
ranted, because the property was declining in value. It also
argued that it was entitled to relief from stay, because any
reorganization plan was unfeasible. Any reorganization plan
would require equitably subordinating Lehman’s security
interests, which was prohibited by the automatic stay in Leh-
man’s own bankruptcy proceeding in the Southern District of
New York.
2
The debtors in this bankruptcy case are: Palmdale Hills Property, LLC;
SCC/Palmdale, LLC; SunCal Communities I, LLC; SunCal Bickford
Ranch, LLC; SunCal Emerald Meadows, LLC; SunCal Summit Valley,
LLC; and Acton Estates, LLC. The cases are being jointly administered.
Collectively “Palmdale.”
10096 IN RE: PALMDALE HILLS PROPERTY
On March 10, 2009, the California bankruptcy court denied
each of the motions, holding that equitable subordination, like
other defenses such as claim objection, would not violate Leh-
man’s stay. Lehman appealed the bankruptcy court’s rulings
regarding the scope and application of Lehman’s automatic
stay to the Bankruptcy Appellate Panel for the Ninth Circuit.
3. The October Order
While Lehman’s appeal was pending before the BAP,
Palmdale discovered that Lehman had transferred some of its
loans to Fenway Capital under a Master Repurchase Agree-
ment (MRA). Palmdale moved to strike Lehman’s proofs of
claim on the basis that, as neither the owner of the loans nor
an agent of the creditor, Lehman had no standing to file the
proofs. The California bankruptcy court considered the MRA
and determined that Lehman had sold the loans to Fenway
Capital. The “sold loans,” for which the proofs of claim were
filed, included the SunCal I Loan and Ritter Ranch Loan.3 The
court rejected Lehman’s argument that the transfer was only
as security. Lehman filed a motion asking the court to clarify
that the sold loans did not include the revolver components of
those loans. That motion is still undecided by the California
bankruptcy court.
4. The Motion to Dismiss
On October 20, 2009, Palmdale moved to dismiss Leh-
man’s appeal to the BAP, claiming that (1) the bankruptcy
court’s finding that Lehman had sold the loans to Fenway
Capital deprived Lehman of standing to appeal, because Leh-
man’s stay would only protect Lehman’s property; (2)
because the stay does not protect loans Lehman no longer
owns, there is no injury to redress; and (3) the appeal is moot.
3
The other loans, SunCal PSV, SunCal Delta Coves, SunCal Marble-
head/Heartland, SunCal Oak Valley, and SunCal Northlake, are not the
subject of this appeal.
IN RE: PALMDALE HILLS PROPERTY 10097
5. The BAP Opinion
The BAP found the appeal was not moot, because effective
relief could still be granted. Lehman Commercial Paper, Inc.
v. Palmdale Hills Prop., LLC (In re Palmdale Hills Prop.,
LLC), 423 B.R. 655, 662 (B.A.P. 9th Cir. 2009). It was “not
clear that all the loans [Lehman] made to [Palmdale] were the
subject of the October Order.” Id. The BAP also held that
Lehman had standing under the person aggrieved test,
because it had “an interest in at least one of the loans,” and
may have an interest “under a contractual repurchase obliga-
tion.” Id.
The BAP finally held that, because equitable subordination
seeks to minimize an otherwise allowable claim, it is an affir-
mative action to take control of Lehman’s property and thus
prohibited by Lehman’s stay. Id. at 665 (citing In re Enron
Corp., 2003 Bankr. Lexis 2261 (Bankr. S.D.N.Y. Jan. 13,
2003)). Thus, before Palmdale could subordinate Lehman’s
claims and transfer Lehman’s liens to the estate, it had to
apply for relief from stay from Lehman’s home bankruptcy
court in the Southern District of New York. Id. at 668. Palm-
dale timely appealed to the Ninth Circuit on January 8, 2010.
6. Palmdale’s Relief From Stay Motion in the New York
bankruptcy court.
After the BAP decision, Palmdale filed a motion in the
New York bankruptcy court for a determination that the stay
did not apply, or in the alternative, for relief from stay. On
May 17, 2010, the bankruptcy court (Judge Peck) handling
Lehman’s bankruptcy denied Palmdale’s Motion. The court
stated that “[t]he stay applies and the motion is denied,” but
seemed to defer its decision because of the Ninth Circuit
appeal. Transcript of Hearing at 75, In the Matter of Lehman
Brothers Holdings Inc., et al., Nos. 08-13555 (JMP); 08-
01420(JMP), (Bankr. S.D.N.Y. May 12, 2010) (hereafter
Transcript of Hearing).
10098 IN RE: PALMDALE HILLS PROPERTY
Palmdale appealed the denial of the relief from stay
motions to the district court in New York. The district court
construed the bankruptcy court’s decision as not coming “to
any independent conclusions as to the scope of the stay.” In
re Lehman Brothers Holdings, Inc., 435 B.R. 122, 137
(S.D.N.Y. 2010). It noted that the written order did not men-
tion the scope of the stay and that such a decision would con-
flict with the court’s intent to defer to the Ninth Circuit. Id.
The Second Circuit affirmed this interpretation. Suncal
Cmtys. I LLC v. Lehman Commercial Paper, Inc., 402 F.
App’x. 634, 636 (2d Cir. 2010).
DISCUSSION
I. The BAP correctly held that Lehman had standing to
appeal the bankruptcy court’s finding that the automatic
stay did not prevent equitably subordinating Lehman’s
claims.
Standing is an issue of law which we review de novo. May-
field v. United States, 599 F.3d 964, 970 (9th Cir. 2010). Fac-
tual determinations underlying the standing decision are
reviewed for clear error. San Diego Cnty. Gun Rights Comm.
v. Reno, 98 F.3d 1121, 1124 (9th Cir. 1996). We may affirm
the BAP “on any ground finding support in the record.” In re
Siriani, 967 F.2d 302, 304 (9th Cir. 1992). We review the
BAP decision de novo and may only reverse the factual find-
ings of the bankruptcy court if clearly erroneous. Id. at 303-
04. Whether Lehman satisfies the “person aggrieved” test is
a question of fact that is reviewed for clear error. Duckor
Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.), 177
F.3d 774, 777 (9th Cir. 1999).
A. Article III Standing
Article III standing is a necessary component of subject
matter jurisdiction. To have Article III standing, Lehman must
show:
IN RE: PALMDALE HILLS PROPERTY 10099
(1) it has suffered an “injury in fact” that is (a) con-
crete and particularized and (b) actual or imminent,
not conjectural or hypothetical; (2) the injury is
fairly traceable to the challenged action of the defen-
dant;4 and (3) it is likely, as opposed to merely spec-
ulative, that the injury will be redressed by a
favorable decision.
Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC),
Inc., 528 U.S. 167, 180-81 (2000).
[1] In order to suffer an injury from the bankruptcy court’s
decision allowing equitable subordination, Lehman must have
some interest in a claim that would be subordinated. Lehman
argues that it had standing to appeal because it owned at least
two of the loans related to the appeal—the Ritter Ranch
Revolver Loan and the Mezzanine Loan.
Lehman cannot rely on its interest in the Mezzanine Loan
(which undisputedly was not transferred to Fenway Capital by
the MRA) to show that it suffered an injury in fact. Lehman
represented to the court that the collateral securing the Mezza-
nine Loan has no value. A claim is only secured up to the
value of the creditor’s interest in the property, the remainder
of the claim is unsecured. 11 U.S.C. § 506(a)(1). Because the
value of Lehman’s interest in the collateral is $0, the lien
would also have no value. Therefore, the claim is effectively
unsecured. As such, subordinating the claim could not affect
the value of Lehman’s estate.
[2] However, Lehman’s interest in the Ritter Ranch
4
In bankruptcy proceedings, the injury may also be traceable to the
action of the bankruptcy court. Sherman v. SEC (In re Sherman), 491 F.3d
948, 965 (9th Cir. 2007). Here, the bankruptcy court’s holding would
allow Palmdale to exercise control over the property of Lehman’s estate
through equitable subordination. A favorable decision by the BAP would
prevent the subordination.
10100 IN RE: PALMDALE HILLS PROPERTY
Revolver Loan, if retained, would establish Article III stand-
ing. The collateral for the combined Ritter Ranch Loan had a
value of $42,900,000. Therefore, subordinating the claim and
transferring the lien to the debtor would constitute an actual
and concrete injury to Lehman’s estate, by limiting Lehman’s
ability to recover the value of its collateral for that loan. The
injury is traceable (1) to Palmdale, which sought equitable
subordination; and (2) to the bankruptcy court’s order, which
would allow equitable subordination. The BAP’s opinion
could redress the imminent injury from subordination by pro-
hibiting subordination without a relief from stay issued by the
New York court.
Nothing in the record supports Palmdale’s assertion that the
Ritter Ranch Revolver Loan was transferred to Fenway Capi-
tal. The Ritter Ranch credit agreement establishes that there
was both a Term loan and a Revolver loan. The proof of claim
likewise shows both a Term and a Revolver loan. The
O’Keefe declaration in support of Palmdale’s motion to strike
Lehman’s proofs of claim relies on both the MRA and the
confirmations to indicate which loans were transferred, how,
and to whom. The only evidence cited by the bankruptcy
court for its finding that the Ritter Ranch Loan was sold is
“Ex. ‘B-I,’ Okeefe Decl.” However, Exhibit D (which is the
only confirmation related to the Ritter Ranch Loan), specifi-
cally indicates that the “Ritter Ranch Term Loan” was the
only loan transferred. Further, the value of the Term Loan in
the confirmation exactly matches the amount of the Term
Loan in the proof of claim: $208,477,500. The Ritter Ranch
Loan including the Revolver, however, has a face value of
$287,252,096.31. Finally, Palmdale conceded at oral argu-
ment that it could not point to any evidence that would sup-
port the finding that the entire Ritter Ranch Loan was sold to
Fenway.
B. Prudential Standing
[3] The prudential standing doctrine or the “person
aggrieved test” provides that “[o]nly those persons who are
IN RE: PALMDALE HILLS PROPERTY 10101
directly and adversely affected pecuniarily by an order of the
bankruptcy court . . . have standing to appeal that order.”
Fondiller v. Robertson (Matter of Fondiller), 707 F.2d 441,
442 (9th Cir. 1983). We generally do not invoke this doctrine
“in instances in which the appellant was the party that brought
the motion at issue on appeal. Instead, we have invoked it
when the appellant is a party other than the moving party.” In
re Sherman, 491 F.3d at 957 n.8. Here, Lehman brought the
motion for relief from stay that was on appeal to the BAP,
therefore, it has prudential standing.
II. The BAP correctly determined the appeal was not
moot.
“The party asserting mootness has a heavy burden to estab-
lish that there is no effective relief remaining for a court to
provide.” Pintlar Corp. v. Fidelity and Casualty Co. of N.Y.
(In re Pintlar Corp.), 124 F.3d 1310, 1312 (9th Cir. 1997).
Palmdale has not met that burden. Because Lehman owns the
Ritter Ranch Revolver Loan, the BAP’s opinion preventing
equitable subordination was effective relief from the bank-
ruptcy court’s decision.
III. The BAP correctly determined that Lehman’s
automatic stay prevented Lehman’s claims from being
subordinated.
[4] In order to protect the estate from being depleted by
creditors’ lawsuits and seizures of property and provide the
debtor breathing room to reorganize, 11 U.S.C. § 362(a)
imposes an automatic stay. White v. City of Santee (In re
White), 186 B.R. 700, 704 (B.A.P. 9th Cir. 1995). To accom-
plish these goals, § 362 prohibits (1) commencing or continu-
ing actions against the debtor that began or could have begun
before the bankruptcy was filed, or to recover a pre-petition
claim against the debtor; and (2) “any act to obtain possession
of property of the estate or of property from the estate or to
exercise control over property of the estate.” 11 U.S.C.
10102 IN RE: PALMDALE HILLS PROPERTY
§ 362(a)(1) & (3). We review de novo the scope or applicabil-
ity of the automatic stay under the Bankruptcy Code, 11
U.S.C. § 362, because it is a question of law. See McCarthy,
Johnson & Miller v. N. Bay Plumbing, Inc. (In re Pettit), 217
F.3d 1072, 1077 (9th Cir. 2000).
[5] The stay does not prevent a plaintiff/debtor from con-
tinuing to prosecute its own claims nor does it prevent a
defendant from protecting its interests against claims brought
by the debtor. Gordon v. Whitmore (In re Merrick), 175 B.R.
333, 337-38 (B.A.P. 9th Cir. 1994). This is true, even if the
defendant’s successful defense will result in the loss of an
allegedly valuable claim asserted by the debtor. Martin-
Trigona v. Champion Fed. Sav. and Loan Ass’n, 892 F.2d
575, 577 (7th Cir. 1989).
Bankruptcy courts, therefore, differentiate between actions
for affirmative relief against the debtor’s estate, which are
stayed, and defensive actions, which are not. It is clear, for
example, that a claim objection or motion to disallow a claim
is generally defensive and therefore not stayed. See id. This
is only natural, because the core power of the bankruptcy
court is to determine the validity, amount, and priority of
claims. 28 U.S.C. § 157(b)(2). “In a claim objection, the court
investigates the existence, validity, and enforceability of
claims and determines whether the claim is allowed by appli-
cable law.” In re Palmdale Hills, 423 B.R. at 665 (citing Mur-
gillo v. Cal. State Bd. of Equalization (In re Murgillo), 176
B.R. 524, 532-33 (B.A.P. 9th Cir. 1995)). This process pro-
tects both the estate and other creditors from invalid claims.
Moreover, it does not harm the claiming debtor’s estate,
because it does not exercise control of an allowed claim, but
rather determines that the asserted claim is not allowed by
law. USA Capital Realty Advisors, LLC v. USA Capital Diver-
sified Trust Deed Fund, LLC (In re USA Commercial Mortg.
Co.), 377 B.R. 608, 617 (B.A.P. 9th Cir. 2007). The debtor’s
estate still has the claim, but its facade of validity has been
IN RE: PALMDALE HILLS PROPERTY 10103
stripped away to reveal that the claim is (and always has
been) worthless.5
[6] In contrast, “subordination of a claim presupposes that
the claim is allowed but for equitable reasons must be subor-
dinated to the other allowed claims.” Id. In such a case, the
claiming debtor has a valid allowed claim with an established
priority, which may even be secured by a valid lien. Equitable
subordination changes the character and value of the lien. For
example, in In re USA, equitable subordination of the general
claims would allow them lower priority than the LLC mem-
bers’ equity interests. Id. at 618. In contrast to disallowance
of a claim, where no property changes hands, a court may
order that “any lien securing such a subordinated claim be
transferred to the estate.” 11 U.S.C. § 510(c)(2). Here, for
example, transferring the liens from Lehman’s estate to Palm-
dale’s estate would give the Palmdale estate millions of dol-
lars worth of property, in which it formerly had no equity, at
the expense of leaving Lehman unsecured. Although Lehman
might ultimately recover nothing, just as if the claim had been
disallowed, the difference is that Lehman began with a valid,
enforceable claim secured by a lien, which would be wrested
from its estate and given to Palmdale.6
[7] The BAP did not err in holding that equitable subordi-
nation in this situation was an affirmative action that would
5
In this way, objecting to a claim is similar to allowing a defendant to
contest a civil claim brought by a plaintiff/debtor. See, e.g., In re Merrick,
175 B.R. at 338 (“While it is true that a successful defense to a lawsuit
eliminates its alleged value, this results in no loss to the estate . . . . There
can be no loss of what does not exist.”). In both cases, the legal proceed-
ings ultimately determine whether the claimant ever had a valid claim.
6
Equitable subordination, unlike disallowance, more closely resembles
a counterclaim. The claim is already allowed, but Palmdale is asserting
that although it is valid, it should be conveyed to the estate based on equi-
table grounds. A counterclaim, even in a case where a defense does not
violate the stay, is still subject to the stay. Eisinger v. Way (In re Way),
229 B.R. 11, 14 (B.A.P. 9th Cir. 1998).
10104 IN RE: PALMDALE HILLS PROPERTY
violate Lehman’s stay. There is no binding authority to the
contrary. Moreover, its decision is consistent with the purpose
of § 362 to protect the bankruptcy estate. The decision does
not bar Palmdale from equitably subordinating Lehman’s
claims. It merely requires Palmdale to bring an adversary pro-
ceeding in Lehman’s bankruptcy court or file for relief from
stay, thus allowing Lehman’s bankruptcy court to control the
distribution of Lehman’s estate. See Snavely v. Miller (In re
Miller), 397 F.3d 726, 730, 732 (9th Cir. 2005).
[8] We can find only one published case addressing both
equitable subordination and the scope of an automatic stay, In
re Metiom, 301 B.R. 634 (Bankr. S.D.N.Y. 2003). However,
we do not find In re Metiom helpful in making this decision.
In re Metiom involved an unsecured claim, and so could not
involve the transfer of a lien to the estate of the “defending”
debtor. This case is different. The bankruptcy court’s ability,
in equitably subordinating a secured claim, to transfer prop-
erty from the bankruptcy estate, means that a claim for equita-
ble subordination of a secured claim is an “act to . . . exercise
control over property of the estate” subject to stay. 11 U.S.C.
§ 362(a)(3).
[9] Further, the Southern District of New York does not
speak with one voice on this issue. For example, that court
had held, prior to In re Metiom, that an adversary complaint
against another debtor for equitable subordination was an
offensive action subject to the automatic stay. In re Enron
Corp., 2003 Bankr. LEXIS 2261, at *23 (Bankr. S.D.N.Y.
Jan. 13, 2003). Although In re Enron is unpublished, Judge
Peck7 (adjudicating Palmdale’s motion for relief from Leh-
7
Judge Peck denied a motion for contempt in the Shinsei Bank Matter
relating to a plan to subordinate claims allegedly in violation of the stay.
However, that case was highly dependant on issues of Japanese law,
which Judge Peck confirmed at the Palmdale hearing. Transcript of Hear-
ing at 76 (“[Shinsei] was incredibly fact specific, and is not subject to
broad application in the U.S.”).
IN RE: PALMDALE HILLS PROPERTY 10105
man’s stay) unequivocally declared that “the law in the South-
ern District of New York, as stated by Judge Gonzalez in the
Enron Case, and I choose to follow his reasoning, is that liti-
gation brought by a party against a debtor seeking to equitably
subordinate claims of that debtor constitutes a violation of the
automatic stay.” Transcript of Hearing at 75. In view of this
support from other courts and because equitable subordination
has the effect of taking a valid, enforceable claim and its
accompanying lien from the debtor’s estate, we affirm the
BAP’s judgment.8
AFFIRMED.
8
Appellant’s Motion to take Judicial Notice of Pleadings is denied.
Appellee’s Motion to Strike Portion of Appellants’ Reply Brief is denied.