There was some serious discussion at one of the programs at the 9th Circuit Judicial Conference about Sunnyslope, more in the area of equitable mootness than in property valuation issues. Someone reminded us that a confirmed plan in a corporate chapter 11 cannot be modified after it has been substantially consummated. In Sunnyslope, everyone involved in the case agreed that the plan was substantially consummated. The opinion says, “the plan as approved by the bankruptcy court was substantially consummated, as all parties acknowledge.” So it must be “unraveled,” – pitched out. The court (the two person majority) concluded, “As a result, the plan of reorganization confirmed by the bankruptcy court and affirmed by the district court must be set aside.” So I guess it will not be modified, the parties will simply start over four years later.
The group listening to the discussion and commenting on the case seemed to agree that the matter was equitably moot and the appeal should have been dismissed. A white knight put in $1.2 million of new money which presumably has been spent. The court’s response to that is that the white knight was a smart group of investors and should have known about the reversal risk. Further, they took over the debtor so they are not really an innocent third party (says the 9th). But the white knight put the money into a building worth about $3 million but must now pay over $7 million.
The case has not yet made it back to the bankruptcy court in Phoenix. On 4/21/2016, the debtor filed a Petition for Rehearing or hearing en banc. The court ordered the bank to file a response to that petition which it did on 5/27/2016. The parties are now waiting to see if the 9th Circuit will hear it en banc. One of the judges must make a “call,” which will result in a vote on whether to hear it en banc. That is what we are waiting for.
There might be a book in this.