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Lehman Commer. Paper, Inc. v. Palmdale Hills Prop., LLC (In re Palmdale Hills Prop., LLC)

Lehman Commer. Paper, Inc. v. Palmdale Hills Prop., LLC (In re Palmdale Hills Prop., LLC)

United States Bankruptcy Appellate Panel for the Ninth Circuit

September 25, 2009, Argued and Submitted at Pasadena, California; December 15, 2009, Filed

BAP Nos. CC-09-1100-HPaMk, CC-09-1101-HPaMk, CC-09-1102-HPaMk, CC-09-1103-HPaMk, CC-09-1104-HPaMk, BAP No. CC-09-1105-HPaMk, CC-09-1106-HPaMk, CC-09-1107-HPaMk (Related Appeals)

Opinion

 [*659]  HOLLOWELL, Bankruptcy Judge:

The issue presented in this appeal is whether a debtor violates the automatic stay of its creditor's bankruptcy case when it proposes to equitably subordinate the creditor's claim and transfer the lien securing the claim under § 510(c). 1 Because, in this case, equitable subordination would modify the creditor's property interest, we find it violates the creditor's automatic stay. Accordingly, we REVERSE those provisions of the bankruptcy court's orders on appeal that find otherwise.

I. FACTS

Lehman Commercial Paper Inc. ("Lehman Commercial") is a debtor in a chapter 11 bankruptcy case in the Southern District of New York. Palmdale Hills Property, LLC ("Palmdale") filed a chapter 11 bankruptcy petition on November 6, 2008, in the Central District  [**2] of California. The case is being jointly administered with seventeen of Palmdale's related entities ("Debtors"). 2 Debtors are part of an integrated network of companies that operate as the Sun Cal Companies, or SunCal, and were formed as part of a joint venture to  [*660]  develop twenty-one residential real estate projects with affiliates of Lehman Brothers, Inc.

Lehman Brothers and its affiliates, including Lehman ALI, Inc. (ALI) 3 and Lehman Commercial, provided over $ 2.3 billion in  [**3] financing for the projects through a series of loan agreements and equity arrangements on Debtors' projects. Among other things, Debtors allege that the structure of these financing arrangements constituted manipulative lending practices and fraudulent conveyances. Debtors contend that the complete control of Lehman Brothers, as well as ALI and Lehman Commercial, over the use of the funds in the loan facility created Debtors' debt burdens and ultimately forced Debtors to file for bankruptcy protection.

On November 10, 2008, soon after filing bankruptcy, Debtors sought blanket relief from the automatic stay in Lehman Commercial's bankruptcy case in the Southern District of New York "to allow the Debtors to generally administer their California Chapter 11 cases in order to avoid the need for having to file repeated relief from stay motions in New York." The bankruptcy court in New York denied the broad relief, but did so without prejudice so that Debtors could refile specific stay relief requests as needed.

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423 B.R. 655 *; 2009 Bankr. LEXIS 4294 **; 63 Collier Bankr. Cas. 2d (MB) 937

In re: PALMDALE HILLS PROPERTY, LLC Debtor. LEHMAN COMMERCIAL PAPER, INC., Appellant, v. PALMDALE HILLS PROPERTY, LLC, et al., Appellees.

Subsequent History: Related proceeding at In re Lehman Bros. Holdings, 2010 U.S. Dist. LEXIS 164625, 2010 WL 11713067 (S.D.N.Y., June 21, 2010)

Related proceeding at In re Lehman Bros. Holdings, Inc., 435 B.R. 122, 2010 U.S. Dist. LEXIS 88865 (S.D.N.Y., Aug. 27, 2010)

Affirmed by Palmdale Hills Prop., LLC v. Lehman Commer. Paper, Inc. (In re Palmdale Hills Prop., LLC), 654 F.3d 868, 2011 U.S. App. LEXIS 15907 (9th Cir., Aug. 3, 2011)

Prior History:  [**1] Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. SA 08-17206-ES. Honorable Erithe A. Smith, Bankruptcy Judge, Presiding.

CORE TERMS

subordination, automatic stay, equitable, bankruptcy court, bankruptcy case, loans, violating, disallowance, lender's, proof of claim, securing, Orders, adversary proceedings, bankrupt estate, filing proof, counterclaims, reorganization, inequitable, liens, equitable exception, affirmative relief, allowed claim, applicability, initiated, rights

Civil Procedure, Justiciability, Mootness, General Overview, Appeals, Reviewability of Lower Court Decisions, Bankruptcy Law, Procedural Matters, Judicial Review, Jurisdiction, Standards of Review, De Novo Standard of Review, Automatic Stay, Scope of Stay, Claims Against Estate Property, Relief From Stay, Procedural Matters, Claims, Types of Claims, Definitions, Bankruptcy, Objections to Claims, Proof of Claim, Effects & Procedures, Unsecured Priority Claims, Subordination, Allowance of Claims