In re Skyline Ridge, LLC

Decision Date10 June 2020
Docket NumberCase No. 4:18-bk-01908-BMW
PartiesIn re: SKYLINE RIDGE, LLC, Debtor(s).
CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Arizona

Chapter 11

RULING AND ORDER REGARDING PLAN CONFIRMATION

This matter came before the Court pursuant to the Debtor's 2nd Amended Plan of Reorganization Dated September 27, 2018 (DE 166)1 filed by Skyline Ridge, LLC ("Skyline" or the "Debtor") on September 27, 2018, as amended, modified, and restated by the Debtor's Second Amended, Modified, and Restated Plan of Reorganization (TE 21),2 the Non-Adverse Modification re: Class 13, Class 14 & All Disputed Claims (DE 312), the Notice of Non-Adverse Modification of Plan Regarding Interest Accrual Date on Unsecured Claims (DE 582), and various stipulations3 (collectively, the "Debtor's Plan"); the competing Cinco Plan of Reorganization Dated September 18, 2018 (TE 23) filed by Cinco Soldados, LLC ("Cinco") on September 25, 2018, as amended and modified by the First Modified Cinco Plan ofReorganization Dated September 18, 2018 (DE 588) and various stipulations4 (collectively, "Cinco's Plan"); Creditor David Parri's Objection to Confirmation of Debtor's Second Amended Plan of Reorganization (DE 281; see also DE 402); Creditors Earth's Healing, Inc., Vicky Puchi-Saavedra and Eduardo Saavedra's Objection to Confirmation of Debtor's Second Amended Plan of Reorganization (DE 288; see also DE 403); Trudy A. Nowak's Objection to Debtor's 2nd Amended Plan of Reorganization Dated September 27, 2018 (DE 292); Cinco's Objection to Confirmation of Debtor's Plan (DE 298); Sami Zarifi 14, LLC's Objection to Cinco Soldados, LLC's Plan and Support of Skyline Ridge, LLC's Plan (DE 290), Elevens [LLC's] Objection to the Cinco Soldados Plan of Reorganization (DE 296); the Rallis Creditor Group's5 Objection to the Cinco Soldado's Plan of Reorganization (DE 299); [The Debtor's] Objection to the Competing Plan of Reorganization Proposed by Cinco Soldados, LLC (DE 300); and all filings related thereto.

A contested confirmation hearing was conducted on December 17 and 18, 2019, January 16 and 23, 2020, and February 6, 2020, at which time the parties presented evidence. Testimony was provided by Ahmad Zarifi ("Mr. Zarifi"), the sole member and manager of the Debtor; James S. Bradley ("Mr. Bradley"), an expert witness in the area of real estate valuation; Christopher G. Linscott ("Mr. Linscott"), the accountant for the Debtor, an expert witness in the field of accounting and as to feasibility of the Debtor's Plan, and the proposed disbursing agent under both plans; Benjamin A. Alev ("Mr. Alev"), the managing member of creditor Elevens,LLC ("Elevens"); Ted M. Fotinos ("Mr. Fotinos"), the designated decision-maker for creditor Fotinos Properties, L.L.C. ("Fotinos"); John Rallis ("Mr. Rallis"), the agent of the Rallis Creditor Group; Trudy A. Nowak ("Ms. Nowak"), the chapter 7 trustee for the estate of creditor RL Ventures, LLC ("RL Ventures");6 Vicky Puchi-Saavedra ("Ms. Puchi-Saavedra"), a creditor and the president of creditor Earth's Healing, Inc. ("Earth's Healing"); David Parri ("Mr. Parri"), a creditor; Paula Stachowski ("Ms. Stachowski"), a creditor;7 Samuel Zarifi ("Mr. S. Zarifi"), a son of Mr. Zarifi, the owner of the Debtor's proposed post-confirmation financier Will Power Properties, LLC ("Will Power"), and the owner of insider creditor Sami Zarifi 14, LLC ("Sami Zarifi 14"); Christopher H. Sheafe ("Mr. Sheafe"), the manager and majority member of Cinco; E. Michael Carlier ("Mr. Carlier"), an original member of Cinco; David A. McEvoy ("Mr. McEvoy"), a former attorney for Cinco; Nicole T. Harrigan ("Ms. Harrigan"), an accountant for Cinco; and Terri Kresha, a resident of Cinco's subdivision.

The Debtor, Cinco, Fotinos, and certain general unsecured creditors8 submitted post-trial briefs on March 2, 2020. (DE 583; DE 584; DE 589). Closing arguments were presented on April 9, 2020, at the conclusion of which the Court took this matter under advisement.

Based on the pleadings, arguments of counsel, testimony offered, exhibits entered into evidence,9 and the entire record before the Court, the Court now issues its ruling.

I. Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(L). This is a contested matter governed by Federal Rule of Bankruptcy Procedure 9014. The following constitute the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, made applicable to contested matters by Federal Rules ofBankruptcy Procedure 9014(c) and 7052.

II. Background

The Debtor is an Arizona limited liability company that was formed by Mr. Zarifi in 1994. (DE 420 at ¶ 16). Mr. Zarifi has been the sole member and manager of the Debtor since approximately 2013. (DE 420 at ¶ 2; 12/18/2019 Trial Tr. 80:17-23). During the pendency of this case, the Debtor has been in the business of holding and selling real estate in Tucson, Arizona.

Cinco is an Arizona limited liability company that was formed by Mr. Sheafe and his former wife, as co-trustees of the Sheafe Living Trust UA Dated February 29, 1984 (the "Sheafe Trust"), Mr. Zarifi, Mr. Carlier, Raul Pina ("Mr. Pina"), and Wajdi El-Ghotme ("Mr. El-Ghotme") in July 2006 for investment purposes, specifically to acquire and develop approximately 158 acres of land on the east side of Tucson (the "Rancho Soldados Property") for a purchase price of approximately $11 million. (TE 87 at §§ 1.5, 2.18, 3.1.1; DE 420 at ¶ 26; see also DE 563 at ¶¶ 10, 13).

Prior to the formation of Cinco, Mr. Sheafe, Mr. Carlier, and Mr. Pina had engaged in business dealings with one another. (12/18/2019 Trial Tr. 17:17-18:14, 18:21-23). Mr. Carlier, who brought together the original members of Cinco, brought Mr. Zarifi and Mr. El-Ghotme in as financial investors. (DE 452 at ¶ 10; DE 563 at ¶ 10; 12/17/2019 Trial Tr. 209:12-17). Neither Mr. Zarifi nor Mr. El-Ghotme, who are related, had any prior business dealings with Mr. Sheafe or Mr. Pina prior to the formation of Cinco. (1/16/2020 Trial Tr. 86:2-4; 2/6/2020 Trial Tr. 126:21-127:8). Mr. Sheafe and Mr. Zarifi are sophisticated businessmen, and Mr. Zarifi was individually represented by counsel at the time of Cinco's formation. (See 12/17/2019 Trial Tr. 214:2-21; 1/16/2020 Trial Tr. 148:9-10; DE 420; DE 563).

Cinco purchased the Rancho Soldados Property in 2006 at the height of the real estate boom in Tucson. (DE 420 at ¶ 26; DE 563 at ¶ 18). Cinco's purchase of the Rancho Soldados Property was funded by a $6 million loan from Alliance Bank (the "Bank Loan" and the "Bank," respectively) secured by a first-position deed of trust on the Rancho Soldados Property, a $4 million loan from the Debtor (the "Skyline Loan") secured by a second-position deed of truston the Rancho Soldados Property, and cash from Cinco's members. (DE 420 at ¶ 28; 1/16/2020 Trial Tr. 10:18-11:23; TE 87 at §§ 3.2.1-3.2.2).

In order to preserve certain zoning entitlements, Cinco had to record a plat of the Rancho Soldados Property within one year, which deadline was met. (DE 452 at ¶ 8; DE 563 at ¶ 12; 12/18/2019 Trial Tr. 36:7-19, 37:5-14; 2/6/2020 Trial Tr. 146:12-13). To date, the infrastructure for the Rancho Soldados Property has been partially, but not fully completed. (See 2/6/2020 Trial Tr. 84:10-22, 86:1-4).

Currently, Mr. Zarifi and Mr. Sheafe are the sole members of Cinco. (1/16/2020 Trial Tr. 40:20-21). Mr. Zarifi holds a 43.53% interest in Cinco, Mr. Sheafe holds a 56.47% interest in Cinco, and Mr. Sheafe is and has always been the manager of Cinco. (DE 563 at ¶ 11; 1/16/2020 Trial Tr. 41:11-24; TE 106; see also TE 87 at § 1.7).

The Debtor, Cinco, Mr. Zarifi, Mr. Sheafe, and/or their affiliates have been involved in litigation for a number of years. There are unresolved disputes regarding, among other things, how much is owed by Cinco to the Debtor on the Skyline Loan.

III. The Bankruptcy

On March 1, 2018 (the "Petition Date"), the Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code,10 and the Debtor has continued as the debtor-in-possession. (See DE 1). The Debtor filed for bankruptcy in order to prevent its largest secured creditor, The Northern Trust Company ("Northern Trust"), from foreclosing on the majority of the Debtor's assets. (1/16/2020 Trial Tr. 49:13-19; DE 420 at ¶¶ 22-24).

As of the Petition Date, the Debtor's assets consisted primarily of real property, litigation claims, and notes receivable, with the Debtor valuing its total assets in an amount in excess of $12 million. (DE 72).

The Debtor scheduled secured debt in an amount not less than $2.5 million and insider and non-insider unsecured debt in an amount not less than $466,000. (See DE 31; DE 73; DE 265). A number of unsecured proofs of claim were also filed, which proofs of claim the Debtordisputes, and which underlying claims are contingent and unliquidated.11

On June 29, 2018, the Debtor filed its first plan of reorganization, and on July 12, 2018, the Debtor filed its first disclosure statement. (DE 114; DE 118).

On September 20, 2018, the Court terminated the Debtor's exclusivity period for cause. (DE 160). Shortly thereafter, Cinco filed Cinco's Plan and an accompanying disclosure statement. (TE 24; TE 23).

In December 2018, the Court approved the Debtor's Disclosure Statement Dated November 29, 2018 for Debtor's Plan of Reorganization Dated September 27, 2018 (the "Debtor's Disclosure Statement") (DE 218) and Cinco's Notice of Submission of Amended Disclosure Statement for Cinco Plan of Reorganization Dated September 18, 2018 ("Cinco's Disclosure Statement") (DE 217), and set the competing plans for contested confirmation hearings. (DE 221; DE 223).

During the pendency of this case, the Debtor sold several parcels of real property and used a portion of the net sale proceeds to pay certain secured debts, with the remainder being deposited into the Debtor's debtor-in-possession account. (DE 534 at § II.5; see also TE 20; DE 573)....

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