In re Zachman Homes, Inc.
| Decision Date | 30 November 1984 |
| Docket Number | Bankruptcy No. 4-83-1799. |
| Citation | 47 BR 496 |
| Parties | In re ZACHMAN HOMES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
John F. Markert, West St. Paul, Minn., for debtor.
Daniel Biersdorf, of Estes, Parsinen & Levy, Minneapolis, Minn., for Builders Finance and David C. Bell Investment.
Louis W. Brenner, of Brenner, Workinger & Thompson, Minneapolis, Minn., for Lyman Lumber and Sunrise Elec.
Irving Brand, and Rebecca Palmer, of Maslon, Edelman, Borman & Brand, Minneapolis, Minn., for Secured Creditors Mechanics Lien Claimants.
Gregory Pulles, of Mackall, Crounse & Moore, Minneapolis, Minn., for Unsecured Creditors' Committee.
A hearing was held before the undersigned on August 14, 15, 16, 17, 20 and 21 on Motion of the Mechanic's Lien Committee in the above bankruptcy case to determine the validity, priority and extent of mechanic's liens.
The Debtor, Zachman Homes, Inc., (Zachman) is a developer/builder of residential housing units. Zachman filed for Chapter 11 protection on November 2, 1983. At the date of filing its bankruptcy petition, the Debtor had approximately 50 housing units in various stages of construction. To facilitate completion of these unfinished units, the Court established, via its order of December 29, 1983, and amended order of May 9, 1984, a procedure whereby the Debtor could complete and sell the housing units. The proceeds of sale of the units were first to be distributed to materialmen and laborers who provided work and materials after the date of the bankruptcy petition. Funds then were to go to the Debtor to cover its construction and selling costs. The remainder of the sale proceeds were deposited in an escrow fund for payment of pre-bankruptcy petition mechanic's liens and other encumbrances.
This procedure established by the Court also provided that the construction lender (D.C. Bell and/or B.T. Investors, Inc.) would receive from the closing proceeds the balance owing the lender on its construction mortgage with the Debtor. This amount due the mortgagee, (the principal and interest to the date of the sale), was payable to the mortgagee subject to the proviso that the Court at a later date would determine the relative priority of the construction mortgage in relation to various prepetition mechanic's lien holders.
For each housing unit sold, the Court's order further provided that the mortgagee and the Debtor were to escrow a sum of money to be applied toward the construction mortgagee's attorney's fees, to which the mortgagee claims an entitlement under the terms of its mortgage with the Debtor. The propriety of these fees was to be determined at a later date.
Several of the parties concerned filed standing objections to the procedure established by the Court in order to preserve their relative rights and to seek a final Court determination of the respective claims of the parties to the escrowed funds. The hearings held on the above dates dealt with several issues:
1. The relative priority of the construction mortgagee vis-a-vis the prepetition mechanic's lienholders.
2. The issue of the amount and validity of Lyman Lumber liens.
3. As to each parcel, the validity of all liens.
4. As to each parcel, the relative priority of all liens vis-a-vis the construction mortgage.
The principal parties in this case reached an agreement whereby the hearings on the above-mentioned dates were intended to constitute sample cases to determine the relative rights of the parties and perhaps obviate the need for further extended hearings on the remaining parcels. To facilitate this, the parties agreed to have these four cases, represented by at least one closed housing unit in each of the Debtor's four housing developments, heard by the Court. To that end, for purposes of this Order, each sample parcel will be treated separately.
First, however, it should be noted that certain facts have been stipulated to and applied to all four parcels. Those facts are the following:
1. Zachman Homes, Inc., was the owner of the land in each subdivision in question at all times relevant herein.
2. Zachman Homes was mortgagor on each construction loan at all relevant times.
3. Zachman and lender Bell agreed that Zachman would pay Bell's attorney's fees incurred by Bell in protecting and collecting its money and position under the construction loan mortgage.
4. Zachman contracted with each mechanic's lien claimant to provide labor and materials for completion of the improvements on all premises either directly or through subcontractor Westwood Development.
5. Bell and B.T. properly perfected their construction mortgage loans on each subject parcel as of a certain date.
In order to achieve a better understanding of the general nature of Zachman's business, the process by which a subdivision is developed should be delineated.
Regardless of whether the street has been installed or is being worked on, Zachman often started the house construction itself. Sometime prior to the actual erection of the structure itself, the actual physical boundaries of the house itself are staked and graded into a relatively flat area known as a house pad.
At or about the time the final utilities are being installed and the house pad has been installed, Zachman then goes to the construction mortgagee to obtain mortgaged funds for construction of the house. On the day the mortgage is to be recorded on each individual lot, Guarantee Title Company takes photographs of the projected housing lot. Apparently after the mortgage has been placed on the property, the exact corners of the building itself are staked out by Hedlund Engineering.
With those common facts in mind, examination of each individual parcel is appropriate.
(Mortgage filed June 6, 1983)
The sample property in Lake Eden East is a condominium building with five closed units. The legal description of the closed units is as follows:
All these units are in Eden Prairie, Hennepin County, Minnesota. The construction mortgage of D.C. Bell was perfected through filing on June 6, 1983, in relation to these parcels.
The Debtor purchased the property underlying what later became known as Lake Eden East from the First National Bank of St. Paul in 1982. Lake Eden East is itself an entire development, not a replat of other larger developments as is the Debtor's normal course of business. The development itself is one block entitled "Block 1", divided into eight lots, upon each of which lots an eight-plex condominium building is built or was to be built. The Lake Eden East development is a planned-unit development, whereby the builder develops an area of land as a single entity according to a specified plan, such area containing planned unit residential developments. The builder presents the city with the completed project plan which the city must approve prior to any type of platting of the subdivision or construction thereon.
To accomplish this, Zachman contracted with Westwood Planning and Engineering Company on or about June 24, 1982, for Westwood to provide professional services to Zachman. Westwood's services consisted primarily of two separate functions. The first function was that of engineer of the platted subdivision. The engineering services were essentially in three phases, the first phase of which was preparation and drafting of the site itself and designing the site. These services included developing a site grading plan, preparing site grading specifications and relevant documents, and preparation of a FHA development plan. The second phase of Westwood's function was to prepare a utilities and street design. This phase...
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