In re Rogers Dev. Corp., Bankruptcy No. 79-01532

• Decision Date: 14 February 1980
• Docket Number: Adv. No. 79-0003.,79-01533,Bankruptcy No. 79-01532
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re ROGERS DEVELOPMENT CORP. and Beaverdam Farms, Inc., Debtors. HERITAGE SAVINGS & LOAN ASSOCIATION and Henry Pollard, IV, Substitute Trustee, Plaintiffs, v. ROGERS DEVELOPMENT CORP. and Beaverdam Farms, Inc., Defendants.

2 B.R. 679 (1980)

In re ROGERS DEVELOPMENT CORP. and Beaverdam Farms, Inc., Debtors HERITAGE SAVINGS & LOAN ASSOCIATION and Henry Pollard, IV, Substitute Trustee, Plaintiffs, v. ROGERS DEVELOPMENT CORP. and Beaverdam Farms, Inc., Defendants.

Bankruptcy Nos. 79-01532, 79-01533, Adv. No. 79-0003.

United States Bankruptcy Court, E.D. Virginia.

February 14, 1980.

Daniel M. McCormack, Richmond, Va., for debtors/defendants.

Donald W. Lemons, Richmond, Va., for plaintiffs.

SUMMARY

BLACKWELL N. SHELLEY, Bankruptcy Judge.

This proceeding involved whether relief from the automatic stay pursuant to § 362 of the Bankruptcy Code should be granted to a secured first mortgage lender in order to foreclose on a large parcel of real estate owned by Debtors in the business of selling and developing real estate. Section 362(d) allows for the granting of the relief from stay if either the debtor cannot provide adequate protection to the creditor or there is no equity in the property for the debtor and the property is not necessary to an effective reorganization. In order to make the determination under § 362(d) the Court decided that the standard of valuation for purposes of this proceeding was at or near the fair market value. In determining whether there was adequate protection, the Court decided that an equity cushion of approximately 15% to 20% was sufficient adequate protection to the creditor; and although the Debtors had no equity in the property, since the property was the only asset of the Debtors and their business was the buying, developing and selling of real estate, it was, therefore, necessary to an effective reorganization. The Court thus denied relief under § 362(d) with leave to the creditor to refile its complaint at any time.

MEMORANDUM OPINION

BLACKWELL N. SHELLEY, Bankruptcy Judge.

On November 1, 1979, the Debtors filed their petition for relief pursuant to Chapter 11 of the Bankruptcy Code. As a result, the automatic stay provisions of Bankruptcy Code § 362 (11 U.S.C. § 362) became applicable. On November 9, 1979, the Plaintiffs commenced this adversary proceeding by filing two complaints, one against Rogers Development Corp. (Rogers) and one against Beaverdam Farms, Inc. (Beaverdam) in which complaints the Plaintiffs sought relief pursuant to Bankruptcy Code § 362(d)(1) and (2) from the automatic stay. In accordance with the requirements of Bankruptcy Code § 362(e), a preliminary hearing was held on December 6, 1979. At the preliminary hearing a motion was made and subsequently granted that consolidated these two adversary proceedings into this proceeding now before the Court. At the conclusion of the preliminary hearing after hearing evidence ore tenus and oral arguments of counsel, the Court requested the parties to submit simultaneous briefs. The briefs were received prior to the final hearing that was held on December 27, 1979 at which the Court heard further evidence ore tenus and further oral arguments of counsel. At the end of said hearing additional briefs were requested to be submitted by January 16, 1980. Said briefs having been submitted and upon consideration of the foregoing, the Court renders the following opinion.

STATEMENT OF THE CASE

The pertinent facts as established by the pleadings, stipulations and the evidence at the hearings are as follows. Rogers and Beaverdam are Virginia corporations which were incorporated on January 18, 1972 and May 17, 1971, respectively. Rogers and Beaverdam (hereinafter referred to as the Debtors) are engaged in the real estate development and home construction business in the Richmond metropolitan area.

In approximately mid 1976 the Debtors formulated a plan for a development of an 89.7, more or less, acre parcel of unimproved property located in Hanover County, Virginia (hereinafter referred to as the Property). The Property was to be developed for single and multi-family dwellings and was to be called The Villages of Beaverdam Park. Rogers owns an undivided 75% interest in the fee simple title to the Property and Beaverdam owns a 25% undivided interest. Pursuant to the loan commitments dated October 26, 1976 made by Heritage Savings & Loan Association (Heritage) to the Debtors, Heritage committed to make a $520,000 acquisition and development loan and a $360,000 line of credit construction loan. These loans were closed simultaneously on December 30, 1976. The notes evidencing these loans were attached to the complaints as exhibits and were introduced into evidence by the Plaintiffs at the preliminary hearing as Plaintiffs' exhibits 2 and 4, respectively. Both of these notes were secured by deeds of trust also dated December 30, 1976. The acquisition and development loan deed of trust (Plaintiffs' exhibit 3) was recorded as a first lien against the Property and the construction loan deed of trust was recorded as a second lien against the property.¹ In early 1977 the Debtors secured the requisite zoning and other administrative approvals from Hanover County, Virginia and development of the Property commenced. Originally it had been planned that the first phase of development would result in the construction of a 76-lot subdivision on 24 acres. Subsequently, however, it was agreed by Heritage and the Debtors that development would proceed first with the construction of 48 single-family residences or 48 "cluster" or "flag" lots, situated on approximately 10 acres. This is the plan of development that was, in fact, followed, and of the 48 home sites that were to be developed 29 were successfully completed and sold. At the present time there are 13 vacant lots with street access and curbs and 6 lots with partially completed residences under construction. The remainder of the Property is undeveloped.

On April 1, 1978 the Debtors entered into an agreement with its other creditors including suppliers, materialmen and laborers who were due payments of debts incurred in connection with the construction of the improvements. This creditors' agreement was introduced into evidence in Plaintiffs' exhibit 8. Under the creditors' agreement the creditors accepted notes for the amount of not only their past due debts, but also for certain additional credit to be made available to the Debtors in the future. The obligation represented by the creditors' agreement is secured by a third deed of trust against the Property. This deed of trust was also introduced into evidence in Plaintiffs' exhibit 8.

Further financial difficulties ensued. In approximately May 1978 the Debtors went into default under the acquisition and development loan. Notwithstanding the default on the acquisition and development loan, advances were made by Heritage under the construction loan and construction at the Property site continued and homes were completed and sold. In approximately July 1979 they went into default on the construction loan. As of the date of the preliminary hearing, the Plaintiffs took the position that the total indebtedness of the Debtors to Heritage was $548,188.41. This amount includes total principal and interest, late charges, appraisal fee, and legal fees. This indebtedness the Plaintiffs contend is increasing as a result of interest continuing to accrue at the rate of approximately $63,000 per year. The Debtors, only for purposes of this proceeding, have accepted the validity of Heritage's figures.

Since the execution of the creditors' agreement (Plaintiffs' exhibit 8), the Debtors have incurred new and additional debts in connection with the construction of homes at the Property. These debts are owed to many of the same creditors who participated in the creditors' agreement and many of these creditors have now filed mechanic's liens totalling $60,301.70 on the Property to which improvements have been added.

The Debtors have admitted only for purposes of this proceeding that their liabilities exceed their assets. This admission would indicate all indebtedness to exceed approximately $1,100,000.

Aside from general background information concerning the Debtors and their relationship with Heritage, the main thrust of both the Debtors' and the Plaintiffs' evidence at the preliminary hearing concerned the present fair market value of the Property. The Plaintiffs introduced their evidence as to value through the testimony of Joseph B. Call, III, who qualified as an expert real estate appraiser who does business in the Richmond area. Mr. Call is the appraiser that Heritage had previously employed in November of 1976 to appraise the Property when the loan commitments were made by Heritage. Mr. Call testified that in his opinion the current fair market value of the Property was $704,200. Ronald E. Martin, also qualified as an expert appraiser of real estate and an appraiser in the Richmond area, testified on behalf of the Debtors that in his opinion the Property had a fair market value of $801,000. The Debtors also introduced testimony of a Mr. Phillip N. Duhamel which indicated that Mr. Duhamel's company, Hanover Craftsman, Incorporated, was currently interested in purchasing some of the Property of the Debtors. The final witness to testify for the Debtors was William D. Bayliss, Esquire. Mr. Bayliss is a member of the creditors' committee appointed by the United States Trustee and was speaking for four of the seven creditors represented on the committee. Mr. Bayliss stated that the creditors' committee strongly opposed the action of Heritage in this proceeding and that the majority of the creditors' committee regards the Property as being essential to the successful reorganization of the Debtors.

CONCLUSIONS OF LAW

Bankruptcy Code § 362(a) stays any act to enforce a lien against the property of a debtor. Section 362(d) and (g) set forth the grounds for relief from the stay, the procedural aspects of requests for relief, and the allocation of the burden of proof, as follows:

"(d) On request of a party in interest and after notice and a hearing, the court shall

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