IN RE WOODSIDE GROUP, LLC

• Citation: 427 B.R. 817
• Decision Date: 22 January 2010
• Docket Number: Bankruptcy No. 6:08-bk-20682-PC.,Adversary No. 6:09-ap-01453-PC.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California
• Parties: In re WOODSIDE GROUP, LLC, et al., Debtors. Official Committee of Unsecured Creditors, on behalf of the Estate of Woodside Group, LLC, et al., Plaintiff, v. Ezra K. Nilson, et al., Defendants.

427 B.R. 817

In re WOODSIDE GROUP, LLC, et al., Debtors.

Official Committee of Unsecured Creditors, on behalf of the Estate of Woodside Group, LLC, et al., Plaintiff, v. Ezra K. Nilson, et al., Defendants.

Bankruptcy No. 6:08-bk-20682-PC. Adversary No. 6:09-ap-01453-PC.

United States Bankruptcy Court, C.D. California, Riverside Division.

January 22, 2010.

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Donald L. Gaffney, Esq., Don Bivens, Esq., Snell & Wilmer, L.L.P., Phoenix, AZ, Eric S. Pezold, Esq., Snell & Wilmer, L.L.P., Costa Mesa, CA, Attorney for Plaintiff, Official Committee of Unsecured Creditors.

Tony Castanares, Esq., Stephan M. Ray, Esq., Lauren N. Gans, Esq., Stutman, Treister & Glatt, P.C., Los Angeles, CA, Mark F. James, Esq., Gary A. Dodge, Esq., Hatch, James & Dodge, Salt Lake City, UT, Attorneys for Defendants Ezra K. Nilson, et al.

Evan C. Borges, Esq., Irella & Manella, LLP, Newport Beach, CA, Attorneys for Defendants David Crockett, Abby Crockett, Seth Ure & Brett Ure.

MEMORANDUM DECISION

PETER H. CARROLL, Bankruptcy Judge.

Plaintiff, Official Committee of Unsecured Creditors, on behalf of the Estate of Woodside Group, LLC, et al. (the "Committee") seeks a preliminary injunction restricting the use and disposition of approximately $110 million in tax refunds either received or to be received by the Defendants, Ezra K. Nilson, Leicha B. Nilson, the Jessica Nilson Trust, the Nellie Jo Nilson Trust, the Brett Nilson Trust, the Abby Nilson Trust, the Joy Nilson Trust, the Benjamin Ezra Nilson Trust, Jessica Nilson, Nellie Jo Nilson, Brett Ure (f/k/a Brett Nilson), Abby Crockett (f/k/a Abby Nilson), Joy Nilson, Benjamin Ezra Nilson, Seth Ure, David Crockett, Andrew B. Hayworth, Nathan W. Pugsley, Bart Nilson, Kathy Nilson, Elizabeth Baker, Douglas Baker, Jason Reese Baker, Blake Jonas Baker, Rex James Baker, Leonard K. Arave, the Jill Arave Trust, the Matthew Len Arave Trust, the Christopher Brian Arave Trust, Jill Call-Arave (f/k/a Jill Arave), Matthew Len Arave, Christopher Brian Arave, Michael Cosgrave, Wayne R. Farnsworth, and Scott Nelson (collectively, the "Defendants") pending an adjudication of the merits of the Committee's causes of action in this adversary proceeding.

At the hearing, Donald L. Gaffney, Don Bivens, and Eric S. Pezold appeared for the Committee. Tony Castanares, Stephan M. Ray, and Lauren N. Gans appeared for Defendants, Ezra K. Nilson ("Nilson"), Leicha B. Nilson, Leonard K. Arave ("Arave"), Nathan W. Pugsley ("Pugsley"), Nelle Pugsley, Andrew B. Haywood ("Haywood"), Joy Haywood, Michael Cosgrave, Jessica Cosgrave ("Cosgrave"), Scott Nelson ("Nelson"), Benjamin Ezra Nilson, Jill Call-Arave, Matthew Len Arave, Christopher Brian Arave, and the Benjamin Ezra Nilson (the "Nilson Defendants"). Evan C. Borges appeared for Defendants, David Crockett ("Crockett") and Abby Crockett and Defendants, Seth Ure ("Ure") and Brett Ure. The court, having considered the pleadings, evidentiary record, and arguments of counsel, makes the following findings of fact and conclusions of law¹ pursuant to F.R.Civ.P. 52(a)(1), as incorporated into FRBP 7052.²

I. STATEMENT OF FACTS

A. The Woodside Entities

Woodside Group, LLC ("Woodside Group") and its affiliates and subsidiaries (the "Woodside Entities") operate one of largest privately held homebuilding companies in the nation. Woodside Group is the parent company of multiple subsidiaries. Through approximately 188 of those subsidiaries (the "Restricted Subsidiaries"), Woodside Group engages in real estate development and residential construction in eight states. While the Restricted Subsidiaries have significant homebuilding operations in Nevada, Arizona, Utah, Minnesota, Florida, Maryland, and Texas, approximately 42% of the Restricted Subsidiaries' homebuilding revenues are derived from operations in California. The operations of Woodside Group are financed through Woodside Group's affiliate, Pleasant Hill Investments, LC ("PHI").

Woodside Group also has subsidiaries engaged in business activities outside its homebuilding operations (the "Unrestricted Subsidiaries").³ The Unrestricted Subsidiaries purchase land from third parties, hold real estate, obtain zoning and other entitlements on long-term projects, reinsure the Restricted Subsidiaries, invest in joint venture projects with other homebuilders, perform renovation work on government facilities, and sell land to the Restricted Subsidiaries at market prices.

Woodside Group provides certain administrative functions for its subsidiaries including cash management, employee benefits, managerial assistance, accounting, financial, planning, and insurance review. In exchange for these services, the subsidiaries pay Woodside Group an administrative fee.

Woodside Group was profitable for nearly 30 years. Between 2002 and 2006, Woodside Group outperformed its competitors with respect to EBITDA margins by an average of between 5% and 9%. Woodside Group's KPMG-audited financial statements for December 31, 2006, showed assets of $1,892,664,000, liabilities of $1,059,333,000, and total equity of $824,211,000. Beginning in 2007, however, Woodside Group's operations were stressed by a deterioration in real estate market conditions, a significant decline in home prices, a lack of residential mortgage loans, and a consistently high inventory of existing homes. Still, the Woodside Entities generated revenues exceeding $1 billion during 2007. At the close of 2007, Woodside Group's KPMG audits showed assets of $1,503,108,000, liabilities of $1,054,043,000, and equity of $438,400,000. On the date of the order for relief, the Woodside Entities had approximately $70 million in cash and employed approximately 494 employees.

B. Ownership & Management

Nilson, Woodside Group's Chairman and Chief Executive Officer, founded Woodside Group in 1977. Nelson is Woodside Group's Chief Operations Officer, and Arave serves as Woodside Group's Chief Financial Officer. Nilson, Nelson, and Arave also constitute Woodside Group's Board of Directors. Approximately 95% of the equity in Woodside Group is owned by Nilson, Nelson, and Arave (the "senior management"), and members of the Nilson family, either individually or in trust.

C. Debt Structure

1. JPMorgan Chase Loan Agreement

On May 5, 2006, JPMorgan Chase Bank, N.A. ("JPMorgan Chase"), as administrative agent for JPMorgan Chase Bank, N.A., Bank of America, N.A., U.S. Bank National Association, Washington Mutual Bank, Wachovia Bank, National Association, Bank of the West, Guaranty Bank, Union Bank of California, N.A., First Commercial Bank, New York Agency, Suntrust Bank, Comerica Bank, AmSouth Bank, Compass Bank, and Wells Fargo Bank, National Association (the "Bank Group") and PHI executed a Credit Agreement (the "Credit Agreement") dated May 5, 2006, under the terms of which the Bank Group agreed to make a revolving unsecured line of credit to PHI in the maximum principal amount of $620,000,000 (the "Revolving Loan"). In conjunction therewith, Woodside Group and each of the Restricted Subsidiaries executed and delivered to JPMorgan Chase a Repayment Guaranty dated May 5, 2006, unconditionally guarantying payment of the amounts due under the Credit Agreement. Under the terms of the Credit Agreement, PHI was permitted to borrow money from the Bank Group pursuant to a borrowing base calculation, i.e., the outstanding amount of the Revolving Loan could not exceed the value of a pool of land and housing assets held by the Restricted Subsidiaries (the "Borrowing Base") minus other indebtedness of Woodside Group, PHI, and the Restricted Subsidiaries, as calculated pursuant to § 2.20 of the Credit Agreement.

On May 5, 2006, Nilson, Nelson, Arave, the Jessica Nilson Trust, the Joy Nilson Trust, the Benjamin Ezra Nilson Trust, the Brett Nilson Trust, the Abby Nilson Trust, the Nellie Jo Nilson Trust, Victory Holdings, Inc., Reliance Structural Warranty Insurance Company, Inc., Atherton Construction, Inc., Alameda Investments, LLC, Hillsborough Corporation, and Wasatch Pacific Investments, LLC (the "Subordinated Lenders"), executed and delivered to JPMorgan Chase a Continuing Subordination and Standstill Agreement dated May 5, 2006 (the "Subordination Agreement"), under the terms of which the Subordinated Lenders subordinated their claims against Woodside Group, PHI, and each of the subsidiaries and affiliates listed in Exhibit A to the Subordination Agreement (the "Borrowing Group") to the payment of amounts due under the Credit Agreement. The Borrowing Group was permitted to make distributions to the Subordinated Lenders (the "Permitted Payments") under the Subordination Agreement,⁴ but only if no default existed or had occurred under the Credit Agreement.⁵ As of March 31, 2008, approximately $314 million in principal was outstanding under the Credit Agreement.

2. Noteholder Debt

The operations of Woodside Group were also financed through capital raised by PHI under the terms of four Note Purchase Agreements dated September 16, 2003, May 25, 2004, July 7, 2005, and March 28, 2006 (the "Noteholder Debt"). The Noteholder Debt is owed to Metropolitan Life Insurance Company, Security Life of Denver Insurance Company, AXA Equitable Life Insurance Company, John Hancock Life Insurance Company, and New York Life Insurance Company (the "Noteholder Group"). PHI's obligations on account of the Noteholder Debt are unsecured, but are guaranteed by Woodside Group and the Restricted Subsidiaries. As of March 31, 2008, approximately $372 million in principal was owed on the Noteholder Debt.

3. Zion's Credit Facility

The Unrestricted Subsidiaries were not borrowers or guarantors of either the debt owing to the Bank Group or the Noteholder Group. However, the operations of certain Unrestricted Subsidiaries—Victory Holdings, LLC; Atherton Construction, LLC; Walnut Creek Development, LLC; and Danville Investments, LLC (the "Zions...