In re 222 Liberty Associates
| Decision Date | 26 October 1989 |
| Docket Number | Bankruptcy No. 88-11535S,Adv. No. 89-0832S. |
| Citation | 105 BR 798 |
| Parties | In re 222 LIBERTY ASSOCIATES, Debtor. Donald L. WOLK, Plaintiff, v. GOLDOME REALTY CREDIT CORP., Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Stephen Raslavich, Philadelphia, Pa., for debtor.
Laurence J. Kaiser, Kronish, Lieb, Weiner & Hellman, New York City, for plaintiff/Donald L. Wolk.
Peter Meltzer, Drinker, Biddle & Reath, Philadelphia, Pa., for Goldome Realty Credit Corp.
Andrew N. Schwartz, Philadelphia, Pa., for Creditors' Committee.
Steven B. Mirow, Philadelphia, Pa., for Banks.
Kenneth Carobus, Philadelphia, Pa., for Holt's Cigar.
James J. O'Connell, Asst. U.S. Trustee Philadelphia, Pa.
The instant adversarial proceeding, seeking that we determine, pursuant to 11 U.S.C. §§ 506(a), (d), the amount of the secured claim of the Defendant, GOLDOME REALTY CREDIT CORP. (hereinafter referred to as "Goldome"), against the sole asset of the Debtor, 222 LIBERTY ASSOCIATES (hereinafter "the Debtor") a building situated at 110-16 South 16th Street, Philadelphia, Pennsylvania (hereinafter "the Building"), must be resolved before the Confirmation Hearing of October 25, 1989, on the Fifth Amended Restated Plan of Reorganization (hereinafter "the Plan") which has been proposed by one of the Debtor's two general partners, Plaintiff DONALD L. WOLK (hereinafter "Wolk"). Since the proposed disposition of the Building pursuant to the Plan does not contemplate its sale on the open market, and proof of any such sale costs except the share of the City and state transfer taxes which the Debtor must pay is not quantified in the record, we decline Wolk's invitation to deduct additional sale costs from the fair market value less the prior tax liens in making the § 506 calculation. However, since we find that Goldome's appraisal overstated the cost of repairs necessary to render the Building satisfactorily rehabilitated by about $1 million, we determine that its fair market value is $4.5 million. We deduct therefrom $300,000, the proximate valid prior real estate tax liens and $78,750, which we calculate to be the Debtor's share of the transfer taxes. We therefore conclude that Goldome's allowed secured claim in the Building, pursuant to § 506 is $4,121,750.
Our most comprehensive history of the underlying main case is set forth in an Opinion of May 22, 1989, arising out of litigation surrounding an attempted rescission of an agreement by one Brad Cohen (hereinafter "Cohen") and his corporation to purchase the Building, reported at In re 222 Liberty Associates, 99 B.R. 639, 641 (Bankr.E.D.Pa.1989). After the rather mysterious and obviously Wolk-orchestrated amicable resolution of the proceeding in issue there on the eve of trial on August 3, 1989, by Cohen's agreeing to forfeit the $250,000 deposit which he had previously vigorously resisted losing, the tension point of this case has devolved into a question of whether Wolk, who has proposed a series of Plans, could satisfy the demands of Goldome, which had granted a construction loan to the Debtor the balance of which appears to exceed the value of the Building.
Goldome, becoming frustrated with Wolk's efforts, set the present series of events into motion on July 11, 1989, by filing a motion to convert the case to Chapter 7 or dismiss pursuant to 11 U.S.C. § 1112(b) on the ground that neither Wolk nor any other party was likely to propose a confirmable Plan. After several continuances, we scheduled, inter alia, this motion, per an Order of August 23, 1989, on a must-be-tried basis on September 6, 1989, the same date that a hearing on a Third Amended Disclosure Statement accompanying a Fourth Amended Plan of Wolk was held. After an extended colloquy with interested counsel on September 6, 1989, we entered, on the following day, September 7, 1989, what we intended as an order which would determine the final disposition of Wolk's efforts, providing as follows:
1. Certain Objections of Goldome to the Disclosure Statement were sustained, but Wolk was given permission to file a contemplated Fourth Amended Disclosure Statement accompanying a Fifth Amended Plan on or before September 13, 1989, to which Objections were due by September 18, 1989.
2. Wolk was to file the instant § 506 proceeding, which he contended must be resolved before confirmation, on or before September 15, 1989; it was to be answered by October 6, 1989; and it was to be tried on October 11, 1989.
3. The Confirmation hearing on the Plan and the § 1112(b) motion of Goldome, which "in all probability" would be "granted as of course if Wolk's plan cannot be confirmed" were scheduled on October 25, 1989.
Matters have proceeded thereafter as scheduled in the September 7, 1989, Order. The Fourth Amended Disclosure Statement was prepared and approved on September 19, 1989. Voting on the Plan is in progress. This proceeding was tried in one long trial day on October 11, 1989. Given our need to expedite resolution of this matter to meet the deadlines imposed in the September 7, 1989, Order, we were required to request the parties to file post-trial Briefs on October 17, 1989, and then proceed to decide this matter immediately thereafter on the next day. Our Opinion is prepared in narrative form to speed that process.
There are only two factual findings which we must make to resolve this proceeding. The first is the fair market value of the Building. The second is the amount of the prior liens on it. The parties agree that these findings are at least the starting point of the § 506 process. We determine, as a matter of law in the only significant disputed legal issue, that, except for subtracting the Debtor's share of the transfer taxes, they are the stopping point as well.
The touchstone of the valuation process is comparison of two extremely complete and articulate appraisals by two equally-impressively competent appraisers, Louis A. Iatarola (hereinafter "Iatarola") who, hired by Wolk, valued the Building at $4.2 million, and Reaves C. Lukens (hereinafter "Lukens"), hired by Goldome, who valued it at $5.5 million.
Despite the disparity of their bottom-line results, the approach of these two appraisers was so nearly alike that we are compelled to conclude that the proper methodology was stipulated between the parties. Both relied primarily on an income capitalization analysis which yielded almost identical figures for the value of the Building as satisfactorily renovated, $10.2 million (Lukens) and $10.15 million (Iatarola). They then each deducted the cost of repairs, incidental expenses to achieve an acceptable occupancy rate (such as leasing commissions), interest costs, and a margin for entrepreneurial profit.
The main differences are that Iatarola pegged the repair costs at just under $4 million, while Lukens arrived at a figure for such costs at about $3 million. Also, the element of entrepreneurial profit yielded a divergence of over $500,000, as Iatarola set the figure at $870,000, and Lukens opined that $300,000 was quite adequate.
All of the evidence in this record supported the accuracy of the $4 million repairs figure. Iatarola arrived at his figure in light of a detailed evaluation by architect Jay Cohn (hereinafter "Cohn"), who testified in support of his figures. It was developed, in the testimony of Iatarola and Cohn, that Cohn had upgraded earlier estimates of contractor Thomas J. Sullivan (hereinafter "Sullivan"), who had estimated the repairs at approximately $1.4 million. The presence of the Sullivan figures, which seemingly placed Cohn's figures in question, was turned to Wolk's advantage when Goldome unwittingly called Sullivan as its witness. While adhering to the figures he had submitted, Sullivan testified that (1) He had computed his figures on the basis of completing what repairs had been started when he inspected the Building, not performing what repairs he believed was needed. He testified that over $400,000 additional repairs were, in his opinion, necessary to adequately rehabilitate the Building; (2) Even more significantly, he testified that his figures had measured the cost of repairing only the general building conditions and not the tenant fit-outs that were needed to lease the building after its total rehabilitation, since it was almost vacant above the street floor. He estimated the cost of tenant fit-outs at $2.2 million. Therefore, Sullivan's measurement of total necessary repair costs coincided almost precisely with Cohn's figure of $4.0 million.1
Lukens, meanwhile, arrived at his repair figures without the benefit of any consultant architects or contractors, and he admitted no personal expertise in this area. We are therefore unable to credit his figures, which were rebutted by experts called by Goldome as well as by Wolk.
Both realtors secondarily supported their respective income capitalization calculations with data from comparable sales. However, in making his computations applying this method, Lukens calculated the comparable value of the Building, if satisfactorily renovated, and then again deducted his approximately $3.0 repair figure. Since we conclude that this repair figure is $1 million too low, this calculation similarly is determined by us to be $1 million too low.
We are, however, unwilling to accept Iatarola's bottom line figure, because we found Lukens' testimony regarding the quantum of appropriate entrepreneurial profit more convincing. We are therefore prepared to accept Lukens' $5.5 million figure, with a downward adjustment of $1 million for under-estimation of necessary repairs. We therefore conclude that the fair market value of the Building, at the crucial period of confirmation, see, e.g., In re Blakey, 76 B.R. 465, 468-69, modified...
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