In re I-5 Investors, Inc., Bankruptcy No. 682-07009

• Decision Date: 16 April 1982
• Docket Number: Bankruptcy No. 682-07009,Adv. No. 682-7047.
• Citation: 25 BR 346
• Parties: In re I-5 INVESTORS, INC., Debtor. COLUMBIA MORTGAGE CO., INC., Plaintiff, v. I-5 INVESTORS, INC., Defendant and Third Party Plaintiff, v. UNION LABOR LIFE INS. CO., Third Party Defendant.
• Court: U.S. Bankruptcy Court — District of Oregon

25 B.R. 346 (1982)

In re I-5 INVESTORS, INC., Debtor.

COLUMBIA MORTGAGE CO., INC., Plaintiff, v. I-5 INVESTORS, INC., Defendant and Third Party Plaintiff, v. UNION LABOR LIFE INS. CO., Third Party Defendant.

Bankruptcy No. 682-07009, Adv. No. 682-7047.

United States Bankruptcy Court, D. Oregon.

April 16, 1982.

Carlton Warren, Portland, Or., for plaintiff.

Lawrence Cooley, Eugene, Or., for defendant and third party plaintiff.

MEMORANDUM OPINION

C.E. LUCKEY, Bankruptcy Judge.

Before the Court are an adversary proceeding commenced by Columbia Mortgage Co., Inc., (Columbia), seeking relief from the automatic stay alleging also that the Chapter 11 case should be dismissed as a filing not in good faith, and motions to dismiss filed in the Chapter 11 case by lien claimants Builder's Electric, Inc., J.I. Johnston Construction Co., Chase Company Mechanical Contractors, Inc., and C. Anderson Griffith as a partner in Springfield Investments, by virtue of asserted ownership of real property claimed by the debtor, who had joined in the motion of Builder's Electric, Inc., seeking dismissal.

The evidence and arguments presented to the Court apply to both the complaint seeking relief from the automatic stay and the motions to dismiss and this Opinion will therefore address the issues raised by each and provide basis for disposition thereof.

Before 1979, A.W. McFarland obtained an option on approximately 19 acres of undeveloped commercial real estate in Springfield, Oregon, bordered by Interstate Freeway 5 which in general serves as a dividing line between the cities of Eugene and Springfield. McFarland was the president and principal of Allied Commercial Realty Co., and Allied Real Estate Securities, Inc. In September, 1979, Allied Real Estate Securities, Inc., took conveyance of the property from the former owner, James McClory.

In his ventures, McFarland joined with one Donald E. Cooper who was also president of Chandalar Realty, Inc. In concert, by formation of many limited partnerships, Cooper and McFarland and their agents induced investment in their real estate development enterprises and those of other corporations in numerous cities and locations throughout Oregon. Approximately a year before the filing of this Chapter 11 proceeding, Cooper and McFarland had an accounting of their individual and corporate interests, resulting in Cooper receiving for his interest a grant from the McFarland interests relating to property in or near Tigard, Oregon, and McFarland and his interests received a grant from Cooper of Cooper's and Chandalar's interests in the remaining 6.1 acres of the property which had been acquired and remained from the original 19 acre option, and has been and will be referred to in these proceedings as the Gateway Loop properties, the subject of this case.

To finance the purchase of the Gateway Loop property, McFarland had generally operated as Allied Commercial Realty Co., and had formed limited partnerships, with the McFarland organizations as general partner. Involved in the scheme were "lease backs", and options back to McFarland or his organizations. In addition, money was obtained from "investors" who were offered undivided interests in the land, or parcels thereof being developed, and undivided interests in the buildings being or to be constructed, without formalized limited partnerships with the usual provisions providing for McFarland's remaining in operational control, and a representation that the offered interests in tangible property would not be recorded until permanent financing was obtained.

It was acknowledged that the people who were led to believe they were acquiring percentage interests in land or buildings now have no recorded interest therein. They have what a witness, Michael J. Safley, whose connection will hereafter appear, very knowledgeable in real estate transactions and ownership interests, has described as "invisible interests" and "thin air".

On the Gateway Loop property, McFarland, as Allied Commercial Realty Co., obtained loans from mortgage companies, involving also banks and insurance companies generally on floating interest terms involving an interest rate fixed above the prime rate charged by one of Oregon's large banking institutions. Several buildings have been built on the property, including a restaurant, a building leased as a furniture store, a vacant office building, and a building occupied by what is known as 3-M and a building partially leased by Lane County Labor Temple Benevolent Association, Inc., referred to as the "Union Building". The latter building and land alloted to it are subject to a trust deed to Columbia, which instituted a non-judicial foreclosure and on September 1, 1982, gave notice of sale for January 14, 1982.

On January 7, 1982, the present debtor, I-5 Investors, Inc., (I-5), an Oregon corporation chartered December 22, 1981, filed this Chapter 11 proceeding as grantee by bargain and sale deed of the land from the McFarland interests which was also signed by Cooper, with the acknowledged purpose of staying the foreclosure sale.

As above related, Columbia filed a proceeding seeking modification of the automatic stay to enable sale, and seeking dismissal of the proceedings on the ground that the creation of I-5 for the purpose of instituting the Chapter 11 proceedings under the facts constitute a "bad faith" filing. Lien claimants against the same building for labor and materials also have filed motions to dismiss the proceedings.

Preliminary to the transfer to the debtor, a long scenario led to the present posture of the case.

Michael J. Safley is an active real estate broker and investor in the Eugene-Springfield area who has clients interested in making realty oriented investments. He testified that he was contacted in late November, 1981 by a client who asked his advice about a potential investment in the Gateway Loop property, and that he made a preliminary investigation which led him to advise his client that there were too many problems to justify investment by a "passive investor". In December, 1981, Safley shortly thereafter considered trying to acquire the "thin air" or "invisible" interests of those limited partners or others styled "investors" who had advanced funds to McFarland for the project. Safley in connection with such activity contacted the Oregon Corporation Commissioner to explore some form of snydication of the outstanding interests in the property. The Corporation Commissioner had been receiving complaints from persons who had not been receiving contemplated return from their investments, and foresaw substantial burden and problems of snydication, alluding to the fact that some of the investors resided outside the State of Oregon. McFarland's attorney had suggested the consideration of McFarland's corporations instituting a Chapter 11 proceeding, but it was not proceeding because of McFarland's financial inability to generate the funds necessary for the filing. Out of the conferences between Safley and the Corporation Commissioner and his staff it was concluded that if the Gateway Loop interests could be acquired by a corporation to be formed by Safley, and the problems and assets of that property isolated from the problems, assets and liabilities of McFarland's and his organizations' other interests, Safley might proceed. On December 17, 1981, the Corporation Commissioner's memorandum from his staff member, Tom Higashi, reflects a telephone conversation with Stephen Philpott, who was acting as Safley's attorney, reflecting that Safley and hired another attorney to file a Chapter 11 bankruptcy proceeding, Owen McCullen, (misnamed as McCullum in the memo) in the event that McFarland and Allied would deed the properties. The memo reflected concern over whether the procedure would be proper without Allied going into Chapter 11 — "can assets and investors be isolated this way — he (McCullen) said `yes'". McFarland's attorney was contacted and thereafter a transfer occurred by bargain and sale deed which contained among its provisions the following (Exhibit 14):

"STATUTORY BARGAIN AND SALE DEED AND ASSIGNMENT

"ALLIED REAL ESTATE SECURITIES, INC., an Oregon corporation, ALLIED COMMERCIAL REALTY CO., an Oregon corporation, and A.W. McFARLAND an individual and DONALD E. COOPER, an individual (herein collectively referred to as Grantor), convey to I-5 INVESTORS, INC., an Oregon Corporation, Grantee, the following described real property:

"See Exhibit `A\' attached hereto and by this reference incorporated herein.

"The true consideration for this conveyance is $-0-, together with other promises given by Grantee.

"Grantee acknowledges that various persons have claims against Grantors which may or may not constitute unrecorded interests in the described property. Nothing contained herein shall be deemed to classify or quantify any of such claims.

"Grantee does not hereby assume or agree to pay any of said claims or purchase any of said interests. Neither does Grantee assume or agree to pay any liens, encumbrances or other obligations secured by the described property or any portion thereof, nor any claims, suits, actions or liabilities of any kind whatsoever arising from Grantor\'s activities with respect to the described property.

"Grantors hereby assign to Grantee any and all claims, rights, remedies and causes of suit or action held by the Grantors, and each of them, against any one or more persons or entities arising from the mortgage, encumbrance, transfer, sale, conveyance and/or lease of any interest in all or any portion of the described property by any one or more of the Grantors, including without limitation, any claims, rights and/or remedies held by Allied Real Estate Securities, Inc., against First Northwest Mortgage Co., an Oregon corporation, and/or Springfield Investments, a General Partnership, and/or any of their successors in interest relating in whole or in part to any portion of the

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