Davis v. Int'l Bank of Commerce (In re Diamond Beach VP, LP)

• Decision Date: 29 April 2016
• Docket Number: Case No. 1:14–cv–00046,Adversary Proceeding No. 12–01006
• Citation: 551 B.R. 590
• Parties: In re: Diamond Beach VP, LP, Debtor. Randall J. Davis, Appellant, v. International Bank of Commerce, Appellee.
• Court: U.S. District Court — Southern District of Texas

551 B.R. 590

In re: Diamond Beach VP, LP, Debtor.Randall J. Davis, Appellant

v.International Bank of Commerce, Appellee.

Case No. 1:14–cv–00046

Adversary Proceeding No. 12–01006

United States District Court, S.D. Texas, Brownsville Division.

Signed April 29, 2016

Jeffrey T. Nobles, Trent L. Rosenthal, Beirne, Maynard & Parsons, LLP, Meagan Wilder Glover, Gray Reed & McGraw, P.C., Houston, TX, for Appellant.

John F. Higgins, IV, Porter Hedges LLP, Houston, TX, for Appellee.

Edward L. Rothberg, Melissa A. Haselden, Terry Josh Judd, Hoover Slovacek, LLP, Galleria Tower II, Houston, TX, for Debtor.

MEMORANDUM OPINION AND ORDER

Andrew S. Hanen, United States District Judge

This case concerns a dispute over the valuation of an unfinished condominium complex. The immediate purpose of the valuation is to determine the amount of a deficiency judgment. Appellant, Randall Davis (hereinafter referred to as “Davis,” or “Appellant”), is appealing a judgment of the United States Bankruptcy Court for the Southern District of Texas. The judgment, in Davis' opinion, values the unfinished complex (hereinafter, the “Project,” or “Diamond Beach”) too low—thereby increasing the amount of the deficiency judgment Davis must pay International Bank of Commerce (hereinafter, “IBC,” the “Bank,” or “Appellee”).

I. Facts and History of the Case

The project, known as Diamond Beach VP, LP (hereinafter, “Diamond Beach”), was designed to be a luxury condominium project in Galveston, Texas. Diamond Beach was to be built in two phases. IBC financed the land and construction costs for the project. Davis, Diamond Beach's principal owner, guaranteed, in part, the debt to IBC. Construction on Phase I began pursuant to a construction loan agreement Davis and the Bank signed in September 2006. For various reasons, including the devastation wrought by Hurricane Ike in September 2008 on the Galveston real estate market and the Galveston mortgage market, Diamond Beach encountered difficulties selling its condominiums. As a result, Diamond Beach found itself unable to repay the Bank. It ultimately filed for bankruptcy in 2012. Though Phase I was ultimately completed, construction of Phase II never began.¹

Various forms of intrigue attended Diamond Beach's descent into bankruptcy. Davis alleged that a Bank employee threatened to ruin his development career. The Bank also brought a state court lawsuit against Davis. The suit alleged, in part, that Davis attempted to defraud the Bank by siphoning money into limited partnerships and family annuities. The Bank dismissed this suit two weeks after filing it. The Bankruptcy Court stated that Davis has not been able to obtain financing since the substance of the state lawsuit made it into the Houston Chronicle. These episodes, however, do not bear directly on the appeal at bar. The Court notes them only because the Bankruptcy Court stated such events would lead it to view skeptically the testimony of IBC's agents and witnesses.

In April 2012, Diamond Beach filed a voluntary Chapter 11 petition for bankruptcy. In re Diamond Beach VP, LP , 506 B.R. 701, 706 (Bankr.S.D.Tex.2014). The Bankruptcy Court subsequently confirmed the Chapter 11 plan. Id . Diamond Beach ultimately negotiated a settlement agreement with IBC, which allowed IBC's prepetition claim in the amount of $28,193,759.32.² Id . Per the settlement's terms, in June 2012 IBC was also allowed to foreclose on Diamond Beach. Id .

The settlement provided that the Bankruptcy Court would determine the value of the Diamond Beach Property. Id . It further determined that the IBC deficiency judgment would equal the difference between the Bankruptcy Court's valuation and the agreed–to prepetition claim. Id . The deficiency would be an allowed unsecured claim and would be paid by Davis due to his guarantees.³ Id . Thus, the higher the Bankruptcy Court valued Diamond Beach, the less Davis would owe the Bank in deficiency judgment; the lower the Bankruptcy Court valued Diamond Beach, the more Davis would owe the Bank.

The particular contours of this appeal derive from the project's peculiar structure when it finally reached the Bankruptcy Court. The project's structure is laid out in the Declaration of Diamond Beach Condominiums and its subsequent amendments (hereinafter, the “Declaration”). These documents are somewhat ambiguous, and this resulted in multiple inconclusive interpretations during the trial. The project's peculiar structure also results from a transfer of the ownership of its completed amenities immediately preceding the bankruptcy filing and the fact that the project went bankrupt prior to completion. This transfer was a pivotal point discussed at oral argument in this Court.⁴ [Tr. of Oral Arg., Doc. No. 30 at 32].

The Declaration envisioned a total of 240 luxury condominium units, 117 in the first phase (hereinafter, “Phase I”) and 123 in the second phase (hereinafter, “Phase II”).⁵ [Decl. of Diamond Beach Condominiums, Pl.'s Ex. 108, Doc. No. 28–135 Art. V § 5.1]. Phase I and Phase II were to be constructed on separate, adjacent portions of the same piece of real property (hereinafter, the “Phase I land” and the “Phase II land”), their boundaries delineated by the Declaration. [Doc. No. 30; Doc. No. 28–135 Art. I § 1.2]. A lavish array of recreational facilities known as the “common elements” (hereinafter, the “common elements,” the “common amenities,” or the “shared amenities”) was to lie between both Phases and the Gulf of Mexico.

The Declaration envisaged a scheme for the common elements' governance, upkeep, use, and ownership. [Doc. No. 28–135 Art. VII § 7.1, Art. IX § 9]. Regardless of the original plan, the ultimate result was that, instead of both Phases owning the common amenities, Phase I owns the common elements by itself while Phase II merely possesses a right to use them.⁶ [Doc. No. 30 at 28–30, 32–34]. Phase II is also burdened with the duty to pay for its percentage of the upkeep of the shared amenities. Phase II's right to use the common elements is the key for the purposes of this appeal, and it will be discussed in greater detail below.

The Declaration states that each Phase was to be constituted by the residential units and common elements that fell within that Phase's real property boundaries as delineated by the Declaration. [Doc. No. 28–135 Art. I § 1.2]. The Declaration states that all units in both Phase I and Phase II have, “appurtenant to each unit,” “an individual share” of the common elements. [Id . at Art. V § 5.3]. Ultimately, the common elements were built on the real property delineated in the Declaration and its amendments as Phase I;⁷ thus, for purposes of this appeal, the common elements are, as noted, owned by Phase I.⁸ At oral argument before this Court the parties agreed that Phase II owns only a right to use the common elements. [Doc. No. 30 at 28, 30, 32–34]. The Court proceeds on this understanding of the ownership and right to use arrangement: Phase I owns the common elements and Phase II merely possesses a right to use them.⁹

Before filing for Chapter 11 bankruptcy and ceasing work on Phase I, Diamond Beach had completed 116 of the Phase I units. Construction had not begun on Phase II, though Diamond Beach had obtained permits to construct 120 units on the Phase II land. Apart from the condominium units it had built, Diamond Beach had also completed the above referenced common elements and amenities on the Phase I land.

These common elements range from the grand to the ordinary. They include the largest resort pool in Texas (300 feet plus), a state–of–the–art fitness center, a large bar, a lazy river, a kids club, a video game room (utilizing a Wii), a heated indoor pool, a private wine bar, a game room, outdoor cabanas, and access to private beaches. They also include the shared entranceways, elevators, and walkways of which owners of both Phases would make regular use.¹⁰

To better convey Diamond Beach's unusual structure, the Court includes below a visual representation of Diamond Beach. This representation was not one admitted into evidence but was created by the Court, based on the trial evidence and the oral argument before this Court.

II. The Bankruptcy Court's Decision

A. What the Bankruptcy Court Decided

The Bankruptcy Court found that Phase II's “highest and best use” was a speculative holding for future condominium development. This mirrored the conclusion of three of the four experts' trial testimony. [Aug. 2012 Report of Stephen Duplantis, Pl.'s Ex. 32, Doc. No. 28–32 at 53]; [Report of Mathew Deal, Def.'s Ex. 5A, Doc. No. 29–12 at 12–13]; [Report of Ronald Little, Pl.'s Ex. 54, Doc. No. 28–76 at 17]. The Bankruptcy Court set the total value of Phase II and the unsold Phase I condominium units at $21,533,898.51. In re Diamond Beach , 506 B.R. at 703. This resulted in a deficiency balance of $6,044,694.38, which presumably will be satisfied pursuant to the parties' settlement agreement. Id .

B. The Bankruptcy Court's Findings and Conclusions

As noted, Diamond Beach was and, for the most part, still is a half–finished condominium complex. One component (Phase I) is fully developed and consists of 116 completed condominium units. On this part sit the common elements. The other component (Phase II) is vacant land planned and zoned for 123 condominium units. Nothing sits on this part, neither condominium units nor common elements. To determine the amount of deficiency balance owed by Davis, the Bankruptcy Court had to value two aspects. The first was the forty–one condominium units on Phase I that, at the time of valuation, had not sold. The second was the value of the undeveloped Phase II land adjacent to the completed component of Diamond Beach (Phase I). This would necessarily include the value of the Phase II land by itself plus the value of the right to use the Phase I amenities which the owner of the Phase II land would possess.

The Bankruptcy Court valued the forty–one unsold Phase I condominium units at...