In re Brutsche

• Decision Date: 15 October 2013
• Docket Number: No. 11–13326.,11–13326.
• Citation: 500 B.R. 62
• Parties: In re Ralph Leo BRUTSCHE, Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

500 B.R. 62

In re Ralph Leo BRUTSCHE, Debtor.

No. 11–13326.

United States Bankruptcy Court, D. New Mexico.

Oct. 15, 2013.

Aletheia Vadin Pamela Allen, Arland & Associates LLC, Albuquerque, NM, William J. Arland, III, Mark L. Ish, Santa Fe, NM, Eric Nicholas Ortiz, Eric N. Ortiz Esq. LLC, William D. Winter, Albuquerque, NM for Debtor.

Patricia A. Bradley, Puccini & Meagle, P.A., Dean B. Cross, Law Office of George “Dave” Giddens, PC, Thomas D. Walker, George D. Giddens, Jr., Albuquerque, NM, Denise J. Trujillo, George Giddens, PC, Albuquerque, NM, for Trustee.

Leonard K Martinez–Metzgar, Albuquerque, NM, for U.S. Trustee.

MEMORANDUM OPINION

ROBERT H. JACOBVITZ, Bankruptcy Judge.

THIS MATTER came before the Court on the Trustee's Motion to Approve Compromise of Controversy under Bankruptcy Rule 9019 (“Motion to Approve Settlement”). See Docket No. 393. The Court held a final evidentiary hearing on the Motion to Approve Settlement on July 11, 12, and 30, 2013 and took the matter under advisement. For the reasons described below, the Court finds that the Trustee's Motion is well taken and should be granted. This Memorandum Opinion constitutes findings of fact and conclusions of law as may be required by Fed.R.Bankr.P. 7052 and 9014(c).

PROCEDURAL HISTORY

The Debtor filed a voluntary petition under Chapter 11 on July 22, 2011 (the “Petition Date”). On or about December 22, 2010, creditor GL ¹ filed a foreclosure action in the First Judicial District Court, Santa Fe County, New Mexico, styled Liberman, et al. v. Brustche et al., Cause No. D 101 CV 201004408 (“Foreclosure Action”). In the Foreclosure Action, GL and Los Alamos National Bank (“LANB”) sought to foreclose their respective mortgages against certain lots owned by the Debtor, and the Debtor filed a lender liability crossclaim against LANB.

On October 17, 2011 and October 20, 2011, LANB and GL, respectively, filed motions for relief from the automatic stay to permit them to continue to prosecute the Foreclosure Action (together, the “Stay Relief Motions”). On October 26, 2011, the Debtor filed an adversary proceeding (Adv. No. 11–1187) against LANB to avoid certain payments the Debtor made to LANB as fraudulent transfers (“Fraudulent Transfer Action”). The Debtor also filed an adversary proceeding against the Nature Conservancy on December 15, 2011 (“Nature Conservancy Action”), claiming breach of a donation agreement under which the Debtor was to receive marketable tax credits.

In December 2011, the Honorable James S. Starzynski, who was then presiding, conducted a 5–day evidentiary hearing on the Stay Relief Motions. On February 16, 2012, Judge Starzynski granted relief from the stay to permit both GL and LANB to prosecute the Foreclosure Action and to sell the mortgaged property if permitted by the state court. Several months later, the bankruptcy case was converted from Chapter 11 to Chapter 7. Yvette Gonzales was appointed as the Chapter 7 trustee (“Trustee”). Ms. Gonzales was substituted for the Debtor in the Fraudulent Transfer Action, the Nature Conservancy Action, and the Foreclosure Action. Thereafter, GL foreclosed its mortgage on the Debtor's partially developed and undeveloped lots.

The Trustee filed her Motion to Approve Settlement on March 7, 2013. The only party who objected was the Debtor's wife, Janice Brutsche.

FINDINGS OF FACT

The Debtor is an experienced residential subdivision developer who has worked in the real estate business for over fifty years. During his career, the Debtor has developed more than 1300 lots. When he commenced his Chapter 11 case, the Debtor was developing, in phases, a high end subdivision in a mountainous area northeast of Santa Fe, New Mexico known as Santa Fe Summit. Individual lots are large, secluded, and cost from $300,000 to over $1,500,000.

On the Petition Date, the Debtor owned thirty-one “fully developed” lots, meaning all plats had been approved and filed, all infrastructure had been installed, and utilities were available. He owned eighteen “partially developed” lots for which plats had been approved and filed but the infrastructure work had not been completed. He also owned forty-nine “undeveloped” lots which were not platted and for which no infrastructure had been installed. GL held a first mortgage on the partially developed and the undeveloped lots. LANB held a second mortgage behind GL on the partially developed lots and a first mortgage on the fully developed lots. The Debtor or his non-filing spouse own several other lots free and clear of liens. The development also contains a number of lots which were sold to third parties over the past twenty years; some have houses, others do not.

The Debtor had a longstanding banking relationship with LANB, which financed his development of residential subdivisions. For many years, LANB provided the Debtor a revolving line of credit with a maturity date of one year after execution of a note, and renewal of the note each year when it matured. The loans helped the Debtor complete infrastructure and fund operations. As the Debtor completed infrastructure, the value of the collateral was expected to increase.

On August 15, 2006, LANB renewed a revolving line of credit (“RLOC”) and increased the Debtor's credit line from $6.5 million to $10 million. A note evidencing the debt—which matured on August 15, 2007—was secured by a Line of Credit Mortgage encumbering the fully and partially developed lots in the Santa Fe Summit.

A Construction Loan Agreement associated with the note and mortgage provides for partial releases of lots from the mortgage lien to facilitate the sale of lots and payments on the RLOC. LANB honored lot release requests upon payment of the applicable lot release price until it declared a default and accelerated the then outstanding renewal note. The Construction Loan Agreement states: “[t]his Agreement may not be amended or modified by oral agreement. No amendment or modification of this Agreement is effective unless made in writing and executed by you and me.”

LANB extended and renewed the RLOC note on August 15, 2007 for one year. Around that time, a deep recession began in the United States. The recession negatively affected residential construction,including the Debtor's development of Santa Fe Summit. Lot sales slowed, and the Debtor began experiencing cash flow problems.

In early 2008, the Debtor entered into a purchase agreement with Donald L. Bud Hudgins, Jr. whereby Hudgins agreed to acquire the unsold portions of Santa Fe Summit. Mr. Hudgins needed financing from LANB to complete the purchase. On or about June 26, 2008, LANB executed a loan commitment to Mr. Hudgins for the intended purchase of the Santa Fe Summit properties for $15 million. The commitment specified that the funds would be used to purchase 53 developed and partially developed lots in Santa Fe Summit. It also provided that LANB would fund the lower of the appraised value or 75% of the purchase price. Loan closing was contingent upon an appraisal acceptable to LANB. LANB ordered an appraisal. The appraiser valued the Santa Fe Summit property as of November 12, 2008.

As a condition to providing financing to Mr. Hudgins, LANB required the Debtor to curtail sales of Santa Fe Summit lots to preserve its collateral position for the new loan. The Debtor chose to discontinue marketing and sale efforts so that Mr. Hudgins could obtain the necessary financing from LANB. However, he continued constructing infrastructure on the properties to satisfy closing condition. For reasons unknown to the Court, the sale to Mr. Hudgins did not close. There is no evidence that the sale fell through as a result any wrongdoing on the part of LANB.

On July 15, 2008—prior to the maturity of the 2007 RLOC Note—LANB modified and renewed the Debtor's RLOC note. The modified note reduced the credit limit to approximately $9.6 million. The stated maturity date of this note was August 15, 2009. On August 15, 2008, Debtor executed another renewal RLOC note on the same terms. It is unclear why the second note was executed a month later.

On January 30, 2009, the Debtor met with LANB's president, William Enloe, to discuss financing options that would enable him to reinstate a marketing program and regain sales momentum. The Debtor testified that LANB informed him that in June, 2008 the FDIC had instructed LANB to terminate his revolving line of credit. The Debtor testified that if LANB had informed him back in June, 2008 that it would be terminating his line of credit, he could have salvaged his development project. He testified that he then had the money to pay off GL and prevent foreclosure, and that he could have either forced Mr. Hudgins to close or resumed an aggressive marketing strategy to sell the property to someone else.

On February 5, 2009, the Debtor wrote to Mr. Enloe to “memorialize” what he asserts were Mr. Enloe's representations to him at the January 30, 2009 meeting concerning LANB's willingness to furnish additional financing. The letter states that LANB expressed the willingness to: (1) convert an outstanding $9.6 million RLOC note to an interest—only term loan of three to five years with reductions in principal coming from lot sales; (2) make an additional $4.2 million term loan to allow the Debtor to pay off the GL first mortgage on certain properties also pledged to LANB; and (3) establish a new $1.5 million RLOC to cover operating expenses and marketing costs (the “New Loan Package” or the “New Loans”).

On or about March 24, 2009, the Debtor and his attorney met with LANB representatives. The Debtor testified that Mr. Enloe again assured him that a renewal of his existing loan would not be a problem and confirmed that the New Loan Package would consist of the three components outlined above. The Debtor testified that Mr. Enloe told him that LANB would need a new appraisal of the properties to support the New Loans. LANB never signed any writing stating that it...