Opinion
Bankruptcy Case No. 02-OO112
July 2, 2002
ORDER
ORDER
On June 14, 2002, the Court heard argument on the creditor, Family Finance Company's ("Family Finance") two motions: 1) Motion for Relief from Stay in order to Complete a Judicial Foreclosure Sale and 2) Motion to convert to Chapter 7 or in the Alternative to Appoint a Trustee. After hearing argument from counsel, the Court granted Family Finance's Motion for Relief from Stay in order to Complete a Judicial Foreclosure Sale. Although the Court found a basis to grant Family Finance's Motion to Convert to Chapter 7 it denied the motion and instead granted the Motion in the Alternative to Appoint a Trustee. For the reasons discussed more fully herein, the Court memorializes the basis for its decision.
I. FACTS
On or about September 9, 1996, the debtor, Mrs. Isabel Borja and her two daughters obtained a loan from Family Finance, secured by a mortgage on a piece of property, Lot 29 Umatac (the "property"). Thereafter, the debtor and her daughters fell behind on making the payments on the note, and Family Finance filed suit to foreclose on the mortgage on the real property. The debtor and her daughters, Rosemarie: B. Mendiola and Annie B. Reyes, who were held jointly and severally liable, ignored the action and did not answer the complaint. On April 10, 2001, Family Finance secured a Judgment of Foreclosure and Order of Sale. The debtor moved to vacate the judgment when a marshal's sale was ordered. When that was unsuccessful, the debtor appealed. The appeal was dismissed on February 12, 2002, and Family Finance renewed its efforts to foreclose on the property. On April 9, 2002, the debtor filed the present Chapter 11 bankruptcy petition to stay the marshal's sale. At that time, the debtor listed the amount due and owing Family Finance as $825,000.00. The debtor listed the estate as basically consisting of four unimproved pieces of real property, one of which is Lot 29.
See Family Finance Company, Inc. v. Isabel A. Boria, Rosemarie B. Mendiola and Annie B. Reyes, Superior Court Civil Case No. 1831-00.
II. ANALYSIS
Family Finance moved this Court for Relief From the Stay in Order to Complete the Judicial Foreclosure Sale and to Convert the Chapter 11 filing to a Chapter 7 or in the Alternative to Appoint a Trustee.
A. Motion for Relief from Stay
Pursuant to § 362(d)(2) of the Bankruptcy Code, Family Finance must show two things before the Court may grant the relief requested. First, Family Finance must prove that the debtor does not have equity in the property. Second, it must show that the property is not necessary to an effective reorganization.
With respect to the first prong, the burden of proof is on Family Finance to show that the debtor has no equity in the property. See 11 U.S.C. § 362 (g). "Equity" as used in section 362(d)(2) is judicially defined as the difference between the property value and the total amount of liens against it. Stewart v. Gurley, 745 F.2d 1194, 1195 (9th Cir. 1984). The debtors' Schedule A lists the Umatac property's current market value at $1,000,000.00. Schedule D lists the secured debt of Family Finance as $825,000.00.
In support of its motion Family Finance offers a May 1, 2002, Consulting Report (the "report"), prepared by W. Nicholas Captain ("Mr. Captain"), employed at the Captain Company. According to Mr. Captain, the probable sale price for the property is estimated at $220,000.00. Mr. Captain stated in his report that he based his estimate on an analysis of peak sales and the subsequent decline in market conditions. The report was drafted after Mr. Captain completed the following tasks: 1) Completed inspection of subject property; 2) Completed interviews with knowledgeable market participants; 3) Researched government records; 4) Considered comparable property sales; 5) Relied on knowledge of Guam real estate market; and 6) Completed preliminary direct market analysis.
Because the value of the property is somewhat dependent upon who performs the analysis, the Court can only endeavor to make a reasonable determination based upon the evidence submitted. See La Jolla Mortg. Fund v. Rancho El Cajon Associates, 18 B.R. 283,288 (Bankr. S.D. Cal. 1982) (The "valuation process is not an exact science and the Court must consider estimates and approximations founded upon opinions and assumptions."). Based upon what has been presented to the Court and the Court's own understanding of the depreciation in the real estate market, it seems clear that the debtor lacks equity in the property since the estimated selling price of the property is $220,000.00 and the debt to Family Finance is $825,000.00. Moreover, the Court notes that it has reviewed Mr. Captain's work in the past and finds him to be knowledgeable about Guam property valuations and appraisals. Accordingly, the Court finds that Family Finance has satisfied the first prong of § 362(d)(2).
Once a creditor demonstrates the debtor's lack of equity in the collateral, the burden shifts to the debtor to show that the collateral is necessary for a plan of reorganization that is in prospect within reasonable time, in order to preclude lifting of stay. 11 U.S.C.A. § 362(d)(2), (g)(2). The test to be applied by the Court in determining whether the debtor's property under consideration is necessary to its successful reorganization is set forth in the Supreme Court's decision inUnited Savings Association of Texas v. Timbers of Inwood Forest Assoc., Inc., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). Therein, the Supreme Court determined that it was not enough for the debtor to show that there will conceivable be an effective reorganization on the horizon, but rather that the property is essential for an effective reorganization that is in prospect. Id. at 375-76, 108 S.Ct. at 632. That is, that the debtor must show it has a realistic potential to reorganize its affairs in the reasonably foreseeable and determinable future. Id.
Family Finance argues that the property is not needed for any realistic reorganization planned within a reasonable time as the debtor has not appraised the property or even begun efforts to market the property. It would appear that at least as of May 3, 2002, the debtor had not begun any effort to actually sell any property. This is evidenced by counsel's own admission, in Debtor's Motion to Enlarge Time filed on May 3, 2002, wherein an extension of time to file a Chapter 11 plan was requested because:
Counsel has had a difficult time creating a plan. Ms. Borja has a lot of land but little income and little cash. Counsel and his client must determine the best way to restructure her affairs, probably by selling property.
The Court agrees with Family Finance. The debtor has not shown she has a realistic potential to reorganize her affairs in the reasonably foreseeable and determinable future or that she has taken steps in that regard. See United Savings Association of Texas, 484 U.S. 365, 108 S.Ct. 626. In addition, at the June 14, 2002 hearing, the Court asked debtor's counsel whether reorganization was possible without the Umatac property, to which counsel replied affirmatively. Based on counsel's representation, the Court finds that the Umatac property is not necessary for any realistic reorganization planned within a reasonable time. The Court finds Family Finance has waited long enough and should be able to proceed to collect on its judgment against the debtor. Accordingly, the Court grants Family Finance's Motion for Relief from Stay.
B. Motion to Convert to Chapter 7 or in the Alternative Appoint a Trustee.
Family Finance also requests this Court to convert the debtor's Chapter 11 to a Chapter 7 case or in the alternative appoint a trustee. Under Bankruptcy Code 11 U.S.C. § 1112 (b), the bankruptcy court is given wide discretion to convert a case to Chapter 7, or to dismiss, whichever is in the best interest of creditors and the estate, for cause, including —
(1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation;
(2) inability to effectuate plan . . .
11 U.S.C. § 1112 (b); see also In re Koerner, 800 F.2d 1358, 1367 (5th Cir. 1986). Family Finance urges the Court to convert the matter to a Chapter 7 arguing that the value of the debtor's real estate has been declining and will be further eroded by administrative costs, real estate taxes and attorney's fees. The debtor's retirement income is not sufficient to pay the costs associated with property taxes, debtor's attorney fees at $175.00 an hour, much less a plan of reorganization which calls for surveys and an extended marketing plan.
Additionally, Family Finance states that it will not vote in favor of any plan to reorganize. To effectuate a plan of reorganization, the proponent must obtain the consent of at least two-thirds, in amount, and more than one-half in number, as stated in 11 U.S.C. § 1126 (c), of at least one class of impaired claims in accordance with 11 U.S.C. § 1129 (a)(10). Since the undersecured portion of Family Finance's claim is approximately 95% of the total amount of unsecured claims, and Family Finance undersecured claims cannot be separately classified, Family Finance claims the debtor will be unable to obtain the requisite consent of the undersecured creditors.
In this instance, the Court finds that there may very well be cause for conversion. However, given the Court's order herein which permits Family Finance to proceed with its foreclosure on the Umatac property, the diminution of the estate is less likely. And, with Family Finance realizing some of its loss, Family Finance may be more inclined to agree to a plan depending upon the amount realized from the foreclosure. Morever, the Court understands from the pleadings and counsel's admissions that the debtor and Family Finance's relationship has been filled with mistrust and acrimony. With those factors in mind, the Court will give the benefit of doubt to the debtor, and will deny Family Finance's motion to convert the matter to a Chapter 7 at this time. Instead, the Court grants Family Finance's alternative motion to appoint a trustee to see if a neural party can draft a plan that is acceptable to both parties. See 11 U.S.C. § 1104 (a)(2) (the appointment of a trustee if it "is in the interests of creditors . . . Thereafter, if a plan is not possible, the trustee can move accordingly.
III. CONCLUSION
The Court finds that the debtor does not have equity in the property in question and that the property is not necessary to effectuate a plan of reorganization with in a reasonable time. Accordingly, the Court grants Family Finance's Motion for Relief from Stay in order to Complete a Judicial Foreclosure Sale. This Order applies only to Lot No. 29, Umatac with the following limitations:
1) A marshal's sale of Lot 29, Umatac, maybe conducted after due notice in accordance with the Judgment of Foreclosure and Order of Sale entered in Family Finance Company, Inc. v. Isabel A. Boija. Rosemarie B. Mendiola and Annie B. Reyes. Superior Court Civil Case No. 1831-00, after which a certificate of sale shall be recorded and Family Finance shall promptly move the Superior Court for an order or decree confirming the sale.
2) Family Finance may apply for an award of costs and additional attorneys fees incurred in post-judgment proceedings, on appeal, and in connection with the sale and confirmation proceedings.
3) Upon confirmation of sale, the Marshal of the Superior Court is authorized to pay over to Family Finance, from the proceeds of sale, the total sum adjudged to be due and owing to Family Finance plus any additional costs and attorneys fees awarded in the foreclosure action, together with legal interest from entry of the Judgment and Order at the rate of six percent (6%) per annum.
4) If a surplus remains after the above payments, the surplus shall be paid to the debtor in possession, or the Trustee if one is appointed. If a deficiency results, Family Finance may apply for a deficiency judgment against defendant, Isabel A. Boija, Rosemarie B. Mendiola and Annie B. Reyes, jointly and severally, following further proceedings in the Superior Court as prescribed by law. However, no execution of other remedies shall be had against the debtor or her estate.
5) Except as expressly provided in this Order, the Stay shall remain in full force and effect.
In addition, the Court finds that the appointment of a disinterested trustee may facilitate a possible settlement such that not all of the debtor's property would have to be liquidated to pay off the creditors.
IT IS FURTHER ORDERED that the parties will confer and agree to designate an individual to serve as trustee in this matter by July 19, 2002. If the parties cannot agree upon the designation of a trustee, each party shall file by July 19, 2002, their respective recommendations as to the individual they believe should serve in this capacity. Thereafter, the Court shall appoint the trustee.