In re Kadlubek Family Revocable Living Trust

• Decision Date: 11 February 2016
• Docket Number: No. 15–10736–t11,15–10736–t11
• Citation: 545 B.R. 660
• Parties: In re: Kadlubek Family Revocable Living Trust, Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

545 B.R. 660

In re: Kadlubek Family Revocable Living Trust, Debtor.

No. 15–10736–t11

United States Bankruptcy Court, D. New Mexico.

Signed February 11, 2016

James A. Askew, Edward Alexander Mazel, Daniel Andrew White, Askew & Mazel, LLC, Jacqueline Ortiz, Sutin Thayer & Browne, Albuquerque, NM, for Debtor.

MEMORANDUM OPINION

Hon. David T. Thuma

, United States Bankruptcy Judge

Before the Court is a secured creditor's motion for relief from the automatic stay, sought so it can continue its pre-petition foreclosure action on the debtor's strip shopping center in Albuquerque, New Mexico. The Court held an evidentiary hearing on the motion on January 13, 2016. For the reasons set forth below, the Court rules that the motion should be denied without prejudice, so the Debtor can attempt to confirm its plan of reorganization/liquidation.

I. FINDINGS OF FACT

The Court finds the following facts:¹

Debtor is a trust that owns residential, mixed use, and commercial real estate. The settlor and beneficiary of the trust is Joseph Kadlubek, an 84–year old widower. The trustees are Mr. Kadlubek's daughters, Gwen Gomez and Vaune Kadlubek. The net income from the trust corpus is used to support Mr. Kadlubek.

Debtor's assets are worth between $3,000,000 and $3,500,000. Its debts total about $2,000,000.

The property at issue is a small "strip" shopping center with a street address of 4605–4615 Menaul Blvd. NE, Albuquerque, NM 87110 (the "Property"). The Property has seven units fronting Menaul Boulevard and one in the rear of the building. The trust leases the units to tenants such as restaurants, salons, insurance brokers, tax preparers, or accountants. The Property is managed by Roger Cox and Associates, a local property management company.

Pineda REO, LLC ("Pineda") holds a promissory note signed by the Debtor, evidencing a debt of about $1.6 million.² The note, which is secured by a first mortgage on the Property, matured in October 2013 and remains unpaid. Despite the fact that the note matured and is now payable in full, the Debtor has been making monthly payments of about $5,120 throughout the bankruptcy case.

Pineda filed a collection and foreclosure action in state court in June 2014. Progress in the foreclosure action prompted the Debtor's March 25, 2015 bankruptcy filing.

The Property is worth substantially less than the debt to Pineda. Estimates of Property's current value range from about $750,000 to about $925,000.³

The Property is being adequately maintained and insured. In general, the real estate market in Albuquerque for commercial properties like the Property is stable. A major concern about the Property is the tenant occupancy rate. As of the date of the hearing, five units were occupied, compared to six on the petition date. More importantly, a major tenant (a restaurant owned by Jennifer James, a chef of some local renown), has moved out or is leaving shortly. Loss of tenants has an adverse effect on value, and Pineda is rightly concerned that its collateral has lost value post-petition.

The Debtor and Roger Cox are taking reasonable steps to re-tenant the Property. In addition, the Debtor's broker, Colliers International, is marketing the Property appropriately for sale.

Pineda's representative testified that, if the automatic stay were lifted, he did not know how much Pineda would credit bid for the Property at a foreclosure sale. According to the representative, Pineda likely would make a decision on a credit bid amount shortly before the sale. Debtor is worried that, as in many foreclosure sales, Pineda's bid amount could be substantially less than the Debtor could realize if it retained control over the re-tenanting and marketing of the Property, and was able to sell it in a commercially reasonable manner. Thus, this case primarily is a fight over who gets to liquidate the Property. Pineda does not have confidence that the Debtor will do enough to attract and retain tenants, adversely affecting value, nor that the Debtor will sell the Property timely. For its part, Debtor does not have confidence Pineda would bid fair market value at a special master's sale of the Property. The lower the sales price, the higher Pineda's deficiency claim and the lower the value of trust assets available to beneficiaries.

No matter what happens, Pineda is highly likely to be paid in full. The real question is how much of the estate will be left for Mr. Kadlubek and his heirs after Pineda and other creditors have been paid.

As of the date of the hearing Debtor was collecting about $5,870 per month in rent from the Property. This amount will drop to about $4,000 a month once the Jennifer James restaurant leaves. In addition, Debtor owns unencumbered real estate in Santa Barbara, California, which is worth about $1,600,000. Starting in April 2016, Debtor expects to receive $7,900 in monthly rental income from the Santa Barbara property, so Debtor's monthly income will be at least $12,000 until it finds new tenants for the Property. Further, Debtor's disclosure statement estimates monthly income of $19,000 per month starting about a year after plan confirmation. That figure may be realistic, but the Court has no evidence confirming its accuracy.

Debtor filed a plan on January 19, 2016, after the evidentiary hearing. In the plan Debtor proposes to treat Pineda's claim as follows:⁴

• The loan would be re-amortized over 20 years, with a five year balloon;

• Interest rate of 4.5%;

• An initial payment of $50,000 and monthly payments of about $10,000;

• New liens on the debtor's unencumbered property, to the extent needed to fully secure the debt;

• The debtor can sell any encumbered parcel, including the Property, free and clear of Pineda's lien, with the lien to attach to the proceeds;

• The Debtor could deed the Property to Pineda at any time, and get a credit for the value of the Property, as determined by agreement or by an independent appraisal obtained by the Debtor.

• Debtor would retain control over the re-tenanting and marketing of the Property and its other real estate.

A final hearing on confirmation of the plan is scheduled for March 3, 2016.

II. DISCUSSION

Pineda argues it is entitled to stay relief under 11 U.S.C. § 362(d)(2)

,⁵ which provides:

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling modifying, or conditioning such stay—

...

(2) with respect to a stay of an act against property under subsection (a) of this section, if—

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effective reorganization.

A. No Equity.

Pineda has the burden of proving that there is no equity in the Property. § 362(g)(1)

. At the hearing Debtor's co-trustee Gwen Gomez admitted the lack of equity. One can quibble about the value of the Property but there is no dispute it is worth substantially less than Pineda's debt. Pineda has carried its burden of proof.

B. Necessary to Effective Reorganization.

If a creditor establishes a lack of equity in a subject property, the debtor has the burden of showing that the property is necessary to an effective reorganization. § 362(g)(2)

. Any analysis of § 362(d)(2)(B) begins with the Supreme Court's dicta in United Sav. Assn. of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 376, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) : "What [necessary to an effective reorganization] requires is not merely a showing that if there is conceivably to be an effective reorganization, this property will be needed for it; but that the property is essential for an effective reorganization that is in prospect. This means ... that there must be a ‘reasonable possibility of a successful reorganization within a reasonable time." 484 U.S. at 376, 108 S.Ct. 626. Although the Timbers case turned on § 362(d)(1), the Supreme Court explained that § 362(d)(2) prevents a creditor from suffering an "inordinate and extortionate delay." Id.

From this dicta, courts have found two separate but "intermingled" requirements in § 362(d)(2)

cases. See generally In re Panther Mountain, 438 B.R. 169, 180–81 (Bankr.E.D.Ark.2010). First, Debtor must make a showing that the property is necessary . 438 B.R. at 180. In addition, "the necessity of the property is only important to the extent that it exists simultaneously with a reasonable possibility of reorganization." Id. at 180–81. Under this second requirement, the Debtor must show there is a "reasonable possibility of successful reorganization within a reasonable time." Timbers, 484 U.S. at 375, 108 S.Ct. 626 ; In re Dublin Properties, 12 B.R. 77, 80 (Bankr.E.D.Pa.1981).

1. Is the Property Necessary? Property is necessary if it furthers "the interests of the estate through rehabilitation or liquidation." In re Keller, 45 B.R. 469, 472 (Bankr.N.D.Iowa 1984)

. In re Koopmans, 22 B.R. 395, 407 (Bankr.D.Utah 1982), an early case addressing this element of § 362(d)(2), stated:

The property may be important to the liquidation of other property, as for example a warehouse or refrigerator which, although overencumbered, may be needed to store inventory or groceries pending sale. The property standing alone may have no equity, but when sold as a package, may bring a better price for other assets, as for example, workings for watches yet to be assembled, or contiguous parcels of real property. Or the property may be sold for the direct benefit of junior lienors and the indirect benefit of unsecured creditors. Indeed, it may have no equity but may deserve the protection of the stay because, in order to continue operations, its value has been appropriated to supply adequate protection for others or pledged to secure postpetition credit.

See also In re Commonwealth Renewable Energy, Inc., 540 B.R. 173, 194 (Bankr.W.D.Pa.2015)

(citing Koopmans ); In re Harper Development, Inc. , 2002 WL 32114481, at *3 (Bankr.E.D.Ark.2002) (quoting Koopmans ).⁶

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