Opinion
ORDER ON MOTION FOR RELIEF FROM STAY
PETER W. BOWIE, Chief Bankruptcy Judge
Western Sunset, LLC (debtor) filed its Chapter 11 petition on November 4, 2009. On December 3, debtor filed a Status Conference Report, reflecting that the debtor is "a real estate acquisition and development company owned by" the Gabriel P. Castano Trust and the Linda S. Castano Trust. Gabriel Castano is the managing member. According to the Report, debtor owns a number of pieces of property, some as sole owner, and some as a tenant in common with the Beryl Tilton Trust, the RST Trust, and the Dean and Dina Tilton Family Trust.
The debtor stated that in addition to certain residential and commercial properties, the debtor owns the land on which Discovery Valley Equestrian LLC facility (Equestrian Center) was and is being built. The debtor stated it was 95% complete, and would stable and care for horses. It is this facility which is at issue in this motion.
The Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(G).
Temecula Valley Bank made two loans to debtor to develop the Equestrian Center. The senior loan was a long term loan in the principal amount of $2,490,000. On the same date in December 2007 debtor executed a promissory note on the junior loan in the principal amount of $1,494,000. It was to be a short-term loan and would be paid off by the Small Business Administration upon the happening of certain events. Those events did not occur and Temecula Valley Bank still held both notes when the bank was taken over by the regulators. FDIC subsequently sold most of the bank's assets to First-Citizens Bank & Trust in or around July 2009.
According to the debtor in its Report, the bankruptcy petition was precipitated by an impending foreclosure sale by Zions First National Bank, which holds the senior lien on 433-443 E. Mission Road in San Marcos, CA. First-Citizens has a junior lien on the same property as additional collateral on its loan.
First-Citizens states by declaration that at the time of filing the petition, the senior lien was current, and the balance owing was $2,424,430.35, plus $9,433.15 in interest. The junior lien had matured and was all due and payable in the amount of $1,499,916.15. The last payment was made July 10, 2009. Since the filing of the petition debtor has continued to make the payments on the senior debt, which remains current, but no payments have been made on the junior lien.
First-Citizens and debtor disagree on the value of First-Citizens' collateral, but both agree there is no equity in the collateral properties for the debtor. Mr. Castano stated in his declaration in opposition that it would take an additional $175,000-$200,000 to complete construction of the Equestrian Center, and that work stopped on the facility in July, 2009, when the last disbursement from the junior loan was made to subcontractors on the project. Mr. Castano's declaration also states that in late August 2009 he "was told that the Junior Loan was due and payable upon maturity and [he] was further told by Mrs. Loiacono of First-Citizens, that [he] would need to obtain financing from another lender."
On February 8, 2010 debtor filed another Status Conference Report. Debtor reiterated its stated intention to employ insider Tilton Realty "as its listing agent for the sale and lease of the properties." Although debtor stated in the December report that it was "actively marketing the properties for lease or sale", and that it expected to have leases in place by January 1, 2010, there has been no application to employ Tilton or any other broker in this case. Debtor concluded its February report by stating:
10. Debtor and its counsel are continuing efforts to modify the current loans with First Citizens Bank and Zions Bank. Debtor is also looking into retaining, with court approval, a company specializing in commercial loan modifications.
11. Debtor [sic] intends to continue the marketing of the properties for sale or lease and anticipates filing its plan of reorganization by mid-March.
Debtor's next Status Conference Report was filed April 4, 2010. In it, debtor discussed the status of each of its properties. Regarding those that make up the Equestrian Center, debtor reported that the senior lien of First-Citizens remained current, while the junior was in arrears. The properties were all rented, yielding $16,332 total per month. Debtor stated: "Debtor would like to complete the Equestrian Center to maximize the income from a sale of this property. Debtor will have to borrow money to do so and is hoping to work with First Citizens to accomplish this." Debtor then stated: "Debtor is preparing applications for employment of Tilton Realty as its listing agent for the sale and lease of the properties." Debtor advised that it had received undistributed loan funds of approximately $70,000, which it used to cure arrears on one property "and is still seeking to come to an agreement with secured creditors Zions (443 E. Mission) and First Citizens (Discovery Equestrian Center) as to payments from the balance of the Vibra Bank funds." Finally, debtor stated:
5. Debtor [sic] intends to continue marketing of the properties for sale or lease and anticipates filing its plan of reorganization following determination of the motion for relief from stay filed by Zions Bank and the opening of escrow on the 1440 Descanso property later this month.
Zions had filed their motion for relief on March 5, alleging debtor had made no payments since filing the petition in November. Zions and debtor entered into an interim adequate protection order for four months effective April 26, 2010.
Since debtor has acknowledged there is no equity in the collateral pledged to First-Citizens, the remaining issue is whether the property is necessary to the debtor's reorganization. As the Supreme Court stated in United Savings Ass'n of Texas v. Timbers of Inwood Forest Associates, Ltd. , 484 U.S. 365, 375-76 (1988):
Once the movant under § 362(d)(2) establishes that he is an undersecured creditor, it is the burden of the debtor to establish that the collateral at issue is "necessary to an effective reorganization." See § 362(g). What this 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, as many lower courts, including the en banc court in this case, have properly said, that there must be "a reasonable possibility of a successful reorganization within a reasonable time." [Citation omitted.] The cases are numerous in which § 362(d)(2) relief has been provided within less than a year from the filing of the bankruptcy petition. And while the bankruptcy courts demand less detailed showings during the four months in which the debtor is given the exclusive right to put together a plan, see 11 U.S.C. §§ 1121(b), (c)(2), even within that period lack of any realistic prospect of effective reorganization will require § 362(d)(2) relief. (Emphasis in original.)
With the foregoing burden in mind, the Court finds and concludes that the debtor has made no showing of how the property is necessary for an effective reorganization. As noted, the case was filed November 4. No broker has been employed to lease or sell any property in which the estate has an interest, despite multiple representations of intentions to do so. Instead, certain of the properties continue without tenants and others have tenants in default for nonpayment of rent for months.
The debtor's operating reports show a negative balance, even after infusion of roughly $70,000 in funds released by Vibra Bank. Zions Bank sought relief from stay for nonpayment on the debt to it post-petition. While that has been addressed by an adequate protection order on an interim basis, it supports the argument that debtor cannot meet its current debt load, much less cure or pay prepetition debt from operating revenue. That is exacerbated by the continuing default on the junior lien owed First-Citizens.
The Court is mindful that debtor has kept the first position loan of First-Citizens current, apparently through the use of cash collateral, although debtor has never sought authority to use cash collateral. As noted, debtor owns the land under the Equestrian Center and receives rent from the entity operating it. Debtor has not provided any information on the amount of the revenue the Center generates for its operator, or other terms of the lease aside from the monthly rent the debtor receives. Whether the lease is a current market lease is unknown.
As noted, work ceased on the Equestrian Center in July, 2009. More funding is necessary to complete the facility, but the debtor has not indicated any has been found. Debtor was told in August, 2009 it would have to find another lender, yet throughout the life of this case the debtor has stated it continues to try to work with First-Citizens to arrange the financing. So far as the Court is aware, nothing has come of whatever efforts debtor has made along those lines in the many months that have elapsed since the need was recognized in July or August, 2009.
Conclusion
First-Citizens has established there is no equity for debtor in the collateral pledged to secure the debts owed to First-Citizens. Debtor has acknowledged there is no equity. Many months have gone by without any observable progress toward an effective reorganization in this case. To the contrary, it appears the debtor's financial hole has gotten deeper. No proposed plan of reorganization has been filed. While debtor has made noises about employing a broker to lease and/or sell properties, no application has been submitted to the Court. The Court recognizes that the City of San Marcos, as a junior lien creditor opposes relief, in part because it may jeopardize the Conditional Use Permit that allows the Equestrian Center to operate. Neither the debtor nor the city have proposed any alternative, much less a viable one. Accordingly, for the reasons set out above, the Court finds that debtor has failed to meet its burden of showing that debtor has a reasonable prospect of an effective reorganization within a reasonable period of time as to which the subject properties are necessary.
THEREFORE, First-Citizens is granted relief from the automatic stay of 11 U.S.C. § 362(a) to pursue enforcement of its rights against the collateral pledged to it on its junior lien, only. The senior lien is current, and while there may be a technical breach because of the breach on the junior lien, that is not sufficient to warrant relief on the senior lien.
IT IS SO ORDERED.