In re Arnold, 2:12–bk–15623–RK.

Citation471 B.R. 578
Decision Date17 May 2012
Docket NumberNo. 2:12–bk–15623–RK.,2:12–bk–15623–RK.
PartiesIn re David L. ARNOLD and Grace E. Arnold, Debtors.
CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California

471 B.R. 578

In re David L. ARNOLD and Grace E. Arnold, Debtors.

No. 2:12–bk–15623–RK.

United States Bankruptcy Court,
C.D. California,
Los Angeles Division.

May 17, 2012.


[471 B.R. 580]


Mark Bradshaw, Foothill Ranch, CA, James C. Bastian, Jr., Irvine, CA,

[471 B.R. 581]

Rika Kido, Irvine, CA, Melissa Davis, Irvine, CA, Robert E. Huttenhoff, Irvine, CA, for Debtors.

MEMORANDUM DECISION RE DENIAL OF APPROVAL OF THE DEBTORS' AMENDED DISCLOSURE STATEMENT

ROBERT N. KWAN, Bankruptcy Judge.

On August 24, 2011, Debtors David L. Arnold and Grace E. Arnold filed a Disclosure Statement and a proposed Chapter 11 Plan of Reorganization. A hearing was held on approval of the Disclosure Statement on September 28, 2011. Issues regarding the confirmability of the Plan were raised by creditor U.S. Bank, arguing that the court should not approve the Disclosure Statement because the Plan violated the absolute priority rule. The hearing was continued, and the Debtors filed an Amended Disclosure Statement and proposed Chapter 11 Plan of Reorganization dated and filed on October 14, 2011. On November 16, 2011, the court held a hearing on the Amended Disclosure Statement, where U.S. Bank objected on the same grounds. That hearing was continued to January 18, 2012. Supplemental briefing was filed, and before that hearing, the court vacated the January 18 hearing and took the matter under submission.

While the matter was under submission, the Bankruptcy Appellate Panel (“BAP”) of the Ninth Circuit, in a divided 2–1 decision, issued an opinion on March 19, 2012 in Friedman v. P+P, LLC (In re Friedman), 466 B.R. 471 (9th Cir. BAP 2012), which held that the absolute priority rule does not apply in Chapter 11 bankruptcy cases of individual debtors after the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Pub.L. No. 109–8, 119 Stat. 23 (2005). On March 20, 2012, the court issued an order inviting further briefing from the parties in light of this recent BAP decision. A final hearing on the Debtors' Disclosure Statement was held on April 25, 2012. The court now enters this memorandum decision.

The court finds that the Amended Disclosure Statement does not contain adequate information. The court also concludes that the absolute priority rule applies in this individual Chapter 11 bankruptcy case, and the court finds that the proposed Plan would violate the absolute priority rule. Therefore, the court denies approval of the Amended Disclosure Statement.

BACKGROUND

The Debtors commenced their bankruptcy case by filing a voluntary Chapter 11 petition on March 3, 2011. The Debtors are the co-trustors and co-trustees of the David L. and Grace E. Arnold Trust Dated July 21, 2004 (the “Trust”). 1 The Trust is a revocable trust that held title to several investment properties and the Debtors' current residence. Soon after the Debtors' filing, a limited partnership named Full House Enterprises, L.P. (“Full House”) also filed a voluntary Chapter 11 petition. Full House has a sophisticated business structure in which B & D Real Estate, LLC (“B & D”) is the general partner, the Trust is the limited partner,

[471 B.R. 582]

and the Trust is also B & D's managing member. Stipulated Facts at 2. Thus, both the Trust and Full House were completely controlled by the Debtors. Id.

Through the Trust, the Debtors had acquired a number of investment properties. The properties were highly leveraged as of the Petition Date:

1. El Camino Business Center is multi-tenant office complex with 36,366 square feet of rentable space. The Debtors in their Schedules and Amended Disclosure Statement state that this property is valued at $5,434,000. The Debtors also state in these documents that the outstanding amount owing to U.S. Bank on the El Camino Business Center is $4,500,000 (including both the mortgage and the equity line of credit). Based on these figures of the Debtors, the loan-to-value ratio for the El Camino Business Center is approximately 82%. U.S. Bank on its proof of claim filed in this case asserts that as of the Petition Date, the outstanding amount owing to U.S. Bank on a loan secured by the El Camino property is $4,616,074.08. Proof of Claim No. 22–1, filed by U.S. Bank National Association on July 12, 2011. This amount includes the outstanding balance on the mortgage in the amount of $4,422,791.53 (including principal of $3,977,639.43, interest of $395,017.37, and late charges of $50,134.73) as well as the outstanding balance on the equity line of credit in the amount of $193,282.55 (including principal in the amount of $170,550.11, interest in the amount of $20,769.22, and late fees in the amount of $1,963.22). Id. Based on the Debtors' valuation in their Schedules and the outstanding balance figures of U.S. Bank, the loan-to-value ratio for the El Camino Business Center is approximately 85%.

2. Treehaven Plaza is a multi-tenant office complex with 19,274 square feet of rentable space. The Debtors in their Schedules state that this property is valued at $2,795,000. The Debtors also state in these documents that the outstanding amount owing to U.S. Bank on this property is $2,770,000. Based on these figures provided by the Debtors, the loan-to-value ratio for the Treehaven property is approximately 99%.2

3. Yorba Professional and Business Centers are two multi-tenant office buildings with a total of 17,453 square feet of rentable space. The Debtors allege in their Schedules that the value of the Yorba Professional and Business Centers is $2,950,000 and the outstanding amount owing to U.S. Bank is $2,407,975. U.S. Bank contends that as of the Petition Date, the outstanding amount owing to U.S. Bank on Yorba Professional and Business Centers is $2,667,708.76 (including principal of $2,387,661.49, interest of $248,543.10 and late charges of $34,504.17). Motion for Order Approving Stipulation for Relief from Stay (Docket No. 26) at 3. Using the Debtors' outstanding balance amounts, the loan-to-value ratio on the Yorba Professional Business Centers is approximately 82%. Using

[471 B.R. 583]

U.S. Bank's outstanding balance amounts, the loan-to-value ratio on the Yorba Professional and Business Centers is approximately 90%.

4. Lido Sands Property is the Debtors' principal residence. The Debtors allege in their Schedules and their Amended Disclosure Statement that the value of the Lido Sands Property is $1,300,000. The Debtors allege in these documents that the outstanding amount owing to U.S. Bank on the Lido Sands Property is $1,200,000. U.S. Bank contends that as of October 24, 2011, the outstanding amount owing to U.S. Bank on the Lido Sands Property is $1,256,313.16 (including principal of $1,190,607.77, interest of $22,170.93, and late charges of $43,534.46). Motion for Relief from the Automatic Stay filed by U.S. Bank (Docket No. 122) at 7. Using the Debtors' outstanding balance amounts, the loan-to-value ratio on the Lido Sands Property is approximately 92%. Using U.S. Bank's outstanding balance amounts, the loan-to-value ratio on the Lido Sands property is approximately 97%.

5. Beacon Bay Property is a land lease from the City of Newport Beach and the Debtor's former residence. The Debtors allege in their Schedules and their Amended Disclosure Statement that the Beacon Bay Property's value is $3,495,000. The Debtors allege in these documents that the outstanding amount owing to Chase Home Finance, LLC (“Chase”) on the Beacon Bay Property is $2,150,000 and the amount owing to U.S. Bank is $1,000,000. Therefore, using the Debtors' outstanding balance amounts, the loan-to-value ratio on the Beacon Bay Property is approximately 90%.3

U.S. Bank asserts liens on each of the Debtors' above-listed properties. Relief from the automatic stay has been granted as to Treehaven Plaza and the Yorba Professional and Business Centers, and a state court receiver is administering each of these properties.

On the Petition Date in this case, Full House held title to three other properties:

1. Costa Mesa Property, a commercial office building totaling 26,841 square feet. Full House listed in its Schedules that the value of the Costa Mesa Property is $5,000,000 and the outstanding amount owing on the property was $2,640,000. However, as of January 17, 2011, Full House valued the Costa Mesa Property at $3,261,000. Debtor's Opposition to Motion for Relief from the Automatic Stay (Docket No. 131) at 4.

2. Escondido Property consists of two office buildings totaling 28,770 square feet. Full House alleged in its Schedules that the value of the Escondido Property was $5,000,000 and the outstanding amount owing on the property was $3,423,000. Full House subsequently valued the Escondido Property at $2,225,000 based upon an offer allegedly received from an unrelated third party

[471 B.R. 584]

to purchase the Escondido Property. Debtor's Opposition to Motion for Relief from the Automatic Stay (Docket No. 131) at 5.

3. Indian Trail Property, a property that includes a 32–room hotel and restaurant, a single family residence and vacant land. Full House alleged in its Schedules that the value of the Indian Trail Property was $5,000,000 and the outstanding amount owing was $2,937,000. This property was sold for $3,150,000 pursuant to § 363(b).

Prior to the Petition Date, U.S. Bank made three loans to Full House: a loan on the Costa Mesa Property, a First Loan on the Escondido Property and a Second Loan on the Escondido Property, in the aggregate principal amount of $6,392,500. As stipulated in the Amendment to Stipulation for Order (1) Authorizing Debtor's Use of Cash Collateral; and (2) Adequate Protection to U.S. Bank National Association, filed on January 26, 2010 (Docket No. 79), and approved by this court on June 19, 2010 (Docket No. 96), the parties agreed that all pre-petition collateral would secure all of Full House's obligations to U.S. Bank. As of the Petition Date, Full House's obligations to U.S. Bank totaled $6,665,178.67. As...

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