In re Anthem Communities/RBG, LLC, 01-17528 EEB.
| Decision Date | 28 September 2001 |
| Docket Number | No. 01-17528 EEB.,01-17528 EEB. |
| Citation | 267 BR 867 |
| Parties | In re ANTHEM COMMUNITIES/RBG, LLC, EIN# XX-XXXXXXX, Debtor. |
| Court | U.S. Bankruptcy Court — District of Colorado |
COPYRIGHT MATERIAL OMITTED
Garry R. Appel, Appel & Lucas, PC, Denver, CO, for Anthem Communities/RBG, LLC.
Glen E. Keller, David Graham & Stubbs, LLP, Denver, CO, for Compass Bank.
ORDER DENYING COMPASS BANK'S MOTION TO RECONSIDER DENIAL OF STAY RELIEF MOTION
The Debtor is a limited liability company, formed for the purpose of developing, constructing, and marketing a luxury residential development, with 48 residences. The Debtor has completed substantially all of the development's infrastructure and common areas and sold 29 fully-constructed residences. It has sold five vacant lots to another developer. Of the remaining 14 residences, which are only partially constructed, three are subject to a first deed of trust held by Wells Fargo Bank, N.A. and the remaining 11 units are subject to a first deed of trust held by Compass Bank ("Compass" or the "Bank"). The Court has approved an arrangement by which Wells Fargo will fund completion of construction of its three units. On the other hand, prior to the bankruptcy filing, Compass refused to provide any additional construction financing and instead declared defaults on its loans and commenced foreclosure and receivership actions in state court. Six days after the Debtor's Chapter 11 filing, Compass filed two motions: a Motion for Abstention Pursuant to 11 U.S.C. § 305 or in the Alternative for Relief from the Automatic Stay and a Joint Motion of Compass Bank and Roger L. Morgan, Receiver, to Excuse Compliance with 11 U.S.C. § 543(a) and (b). At the conclusion of the final hearing, the Court ruled in favor of the Debtor on both motions.
In its Motion for Reconsideration, the Bank asserts that the Court erred when it denied its motion for relief from stay on the basis that the Bank had failed to establish its prima facie case under both 11 U.S.C. § 362(d)(1) and (2).1 According to the Bank, it was error for the Court to enter judgment sua sponte against the Bank, at the close of all the evidence, when the Debtor did not make a motion for the entry of judgment at the close of the Bank's case. In other words, the Bank contends that, if the respondent fails to request a directed verdict or motion for a judgment at the close of the movant's case and instead presents evidence in defense, the respondent is deemed to have waived any argument, and the court is prohibited from ruling, that the movant failed to meet its prima facie case. Alternatively, the Bank argues that it did present sufficient evidence to carry its burden and the Court erred by ignoring certain evidence. For the reasons set forth below, the Court denies the Bank's Motion for Reconsideration.
The Bank asserted that it was entitled to relief from stay to exercise its rights against its collateral under both Section 362(d)(1) and (2).2 To succeed on its Section 362(d)(2) claim, it had to establish that the Debtor had no equity in this property and that the property was not necessary to an effective reorganization. To obtain relief under Section 362(d)(1), the Bank had to demonstrate "cause" for granting relief, which it asserted existed in this case because its interests were inadequately protected due to the lack of an equity cushion in the property. Thus, valuation evidence played a key role in determining both claims for relief. The Court found the valuation evidence offered by both sides to be lacking. Its ruling was based in large part on the applicable burden of proof and/or the burden of going forward with evidence.
In a hearing on a motion for relief from stay, the party requesting relief has the burden of proving a lack of equity and the debtor has the burden of proof on all other issues in stay relief matters. 11 U.S.C. § 362(g). This allocation of the burden is straightforward to apply in the context of a Section 362(d)(2) claim. The creditor must establish the lack of equity and then the burden shifts to the debtor to establish that the property is necessary for an effective reorganization. The burden is not so simple to apply in connection with a Section 362(d)(1) claim when the basis for "cause" is the lack of an equity cushion to adequately protect the creditor. Can the creditor fail to establish lack of equity in connection with its (d)(2) claim, but then force the debtor to prove equity in order to defeat the (d)(1) claim? Clearly, the debtor has the burden of proof on the issue of adequate protection under Section 362(d)(1). If the debtor has no other means to protect the creditor, i.e. no funds to make periodic payments or other collateral to offer, does the burden immediately shift to the debtor to prove an equity cushion once a creditor has alleged "cause?" If so, this would mean that a creditor could file a motion for relief alleging cause, introduce evidence at the hearing of its secured status and then abruptly sit down, resting its case. To avoid relief entering, the typically impecunious debtor would then have to prove the existence of an equity cushion, in seeming contradiction of the allocation of the burden regarding equity in Section 362(g).
By distinguishing between the ultimate burden of persuasion and the initial burden of going forward, this apparent contradiction vanishes. In re Elmira Litho, Inc., 174 B.R. 892, 900 (Bankr. S.D.N.Y.1994). Thus, before the debtor is put to its proof on the issue of adequate protection, the creditor must carry its initial burden of going forward with evidence of "cause," including a lack of adequate protection and then the burden will shift to the debtor to persuade the court that the creditor is adequately protected. Id.; In re Sonnax Indus., Inc., 907 F.2d 1280 (2d Cir.1990); In re A & A Transp., Inc., 10 B.R. 867 (Bankr.D.Mass.1981); In re Brown, 78 B.R. 499 (Bankr.S.D.Ohio 1987).
How does the creditor satisfy its initial burden of going forward with evidence of lack of adequate protection? The Supreme Court has defined the secured creditor's right to adequate protection as including "the right . . . to have the security applied in payment of the debt upon completion of the reorganization; and that that interest is not adequately protected if the security is depreciating during the term of the stay." United Sav. Ass'n v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 370, 108 S.Ct. 626, 630, 98 L.Ed.2d 740 (1988). Evidence of the erosion of the creditor's position or of a threatened erosion satisfies this initial burden.
The erosion may be shown through evidence of declining property values, the increasing amount of the secured debt through interest accruals or otherwise, the non-payment of taxes or other senior liens, failure to insure the property, failure to maintain the property, or other factors that may jeopardize the creditor's present position. It may be necessary to show a combination of these factors and/or to show that the circumstances as a whole are sufficient to jeopardize the creditor's interest in the property. For example, evidence of non-payment alone may not be sufficient if the collateral is a publicly-traded security that has a demonstrated track record of appreciation in value. The secured creditor's initial burden also requires that it show that the threatened harm is attributable to the stay. If the debtor farmer suffered a crop failure due to weather conditions in the year before the bankruptcy filing, but the post-petition crop is not jeopardized and crop prices remain stable, then the erosion of the creditor's position is not attributable to the stay.
In the present case, the Bank's valuation evidence was insufficient to meet its burden of going forward in four respects: (a) its appraisal testimony was wholly unreliable; (b) it was based on a lump sum, "as is" valuation; (c) it demonstrated no decline in value; and (d) it did not quantify the impact of future interest accruals and senior liens.
The Bank introduced valuation evidence through the written appraisals and testimony of Mr. Acheson, a self-employed residential appraiser. His testimony was honest, forthright, and given in good faith, but he lacked the expertise to render this valuation. He admitted that he had never valued a partially-developed project as a whole before. He rendered the opinion that the project, as-is, was worth $3,443,500, but admitted that he found no comparables on which he could rely and that he did not use either a cost or income approach to value the project. He took an estimated retail value, valuing each unit separately on an as-completed basis and then aggregated these values, subtracted the aggregate cost of completion estimates supplied by the Debtor, subtracted a six percent marketing cost, and then subtracted $930,000, which he explained was the cost of hiring a contractor to complete construction. He could not explain how he arrived at that amount or whether this was a valid deduction, given that it was a cost that the Bank would incur if it foreclosed, but not one the Debtor would incur as the developer itself. He then factored in an estimated cost of borrowing which assumed that all costs of completion would be borrowed up front and that all units would not be sold for five or six months.
The Bank's loan documentation revealed that the Bank had made eight separate loans, which presently aggregate $3,555,431.71. Each loan is collateralized by either...
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