FILED MAR 10 2020 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
In re: BAP Nos. CC-19-1166-GTaL CC-19-1167-GTaL TERRY LEE FLEMING, SR., (Consolidated Appeals)
Debtor. Bk. No. 6:17-bk-19513-MW
HAVASU LAKESHORE INVESTMENTS, LLC,
Appellant,
v. MEMORANDUM* TERRY LEE FLEMING, SR.; HAVASU LANDING, LLC,
Appellees.
Argued and Submitted on January 30, 2020 at Pasadena, California
Filed – March 10, 2020
Appeal from the United States Bankruptcy Court
* This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value. See 9th Cir. BAP Rule 8024-1. for the Central District of California
Honorable Mark S. Wallace, Bankruptcy Judge, Presiding
Appearances: Martin A. Eliopulos of Higgs Fletcher & Mack LLP argued for Appellant; Michael B. Reynolds of Snell & Wilmer LLP argued for Appellee Havasu Landing, LLC; James Edward Till of LimNexus LLP argued for Appellee Terry Lee Fleming, Sr.
Before: GAN, TAYLOR, and LAFFERTY, Bankruptcy Judges.
INTRODUCTION
Secured creditor Havasu Lakeshore Investments, LLC (“HLI”)
appeals from an order confirming the chapter 111 plan proposed by debtor
Terry Lee Fleming, Sr. (“Debtor”) and co-proponent, Havasu Landing, LLC
(“Landing”). In confirming the plan, the bankruptcy court determined that
HLI would receive the indubitable equivalent of its approximately $5.4
million secured claim through: (1) a cash payment of $500,000 on the
effective date; (2) transfer of 49 units of real property from Landing,
consisting of 46 lots and 3 finished home sites (the “Landing Property”),
valued by the bankruptcy court at $3,694,000; and (3) five annual payments
of $241,124.54 with interest at 5%.
1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2 HLI argues that the court erred in valuing the Landing Property by
adopting a methodology which failed to account for the necessary costs
and time to sell the lots. As a result, HLI contends that the plan does not
provide it with the indubitable equivalent of its secured claim. HLI also
argues that the bankruptcy court erred in determining that the plan was
feasible without any evidence that Debtor could make the annual
payments.
On review of the bankruptcy court’s decision, we decline to require
any specific valuation methodology for purposes of determining
indubitable equivalence. However, plan treatment consisting of cash
payments in addition to the transfer of real property at the bankruptcy
court’s valuation does not provide HLI with the indubitable equivalent of
its secured claim under § 1129(b)(2)(A)(iii). We also agree that the
bankruptcy court’s finding that the plan was feasible was not supported by
evidence in the record. Accordingly, we VACATE the order confirming the
Plan and REMAND to the bankruptcy court for further proceedings
consistent with this decision.
FACTS
A. Prepetition Events
In 2003, Debtor invested in a real estate project with HLI, involving
an 80-acre manufactured home park called Vista Del Lago, located in Lake
Havasu, California. Sometime after 2009, Vista Del Lago defaulted on a
3 loan and appeared to be headed toward bankruptcy.
While acting as an agent of HLI, Debtor purchased the defaulted loan
and acquired Vista Del Lago through foreclosure. After the foreclosure,
Debtor became involved in litigation against HLI and various individuals
associated with the project which culminated in a February 2015 California
state court judgment for constructive fraud and punitive damages against
Debtor and in favor of HLI in the amount of $3,659,343.
Debtor formed Landing in 2010 and was its sole member until after
the judgment was entered in 2015. At the time of the judgment, Landing
owned Vista Del Lago and other real property in Lake Havasu. Within
weeks of the judgment, Debtor transferred a 55% interest in Landing and
the managing member position to his son, Terry Fleming, Jr.
After obtaining the judgment, HLI began efforts to collect. It recorded
an abstract of the judgment in Orange and Riverside counties and obtained
a charging order on Debtor’s membership interest in Landing. HLI also
obtained a debtor’s examination lien and a turnover order directing Debtor
to immediately deliver all funds held in the name of the Terry L. Fleming
Sr. Family Trust, which were approximately $3.1 million in 2015. After
learning that Debtor had named his daughter as successor trustee of the
trust, HLI obtained a similar debtor’s examination lien and turnover order
against Debtor’s daughter.
4 B. The Bankruptcy Case
1. Debtor’s Assets and HLI’s Claim
In November 2017, Debtor filed a chapter 11 petition. His amended
schedules indicated total assets of $5,931,985.78, held personally or in his
trust, which included his personal residence in Orange County, a rental
property in Riverside County, a 45% membership interest in Landing, a
9.25% equity interest in HLI, and approximately $1.6 million in cash and
cash equivalents. Debtor also scheduled approximately $600,000 in
retainers held by various professionals.
As of the petition date, HLI’s claim, including pre-petition interest
and attorneys’ fees, was approximately $4.7 million. HLI asserted that its
claim was secured by nearly all of Debtor’s property and by property held
in Debtor’s trust.
In March 2018, Debtor filed a motion to allow his counsel to draw
down its retainer on a monthly basis. Although Debtor disputed the extent
of HLI’s lien on the retainer funds, he argued that HLI had a nearly 34%
equity cushion based on the value of its other collateral.2 The court agreed
and determined that even if HLI had a security interest on the retainer, its
secured claim was adequately protected because the fair market value of
2 Debtor subsequently filed an adversary proceeding contesting the extent and validity of HLI’s asserted liens on property held by the Terry Lee Fleming Sr. Family Trust. As of the petition date, the trust held Debtor’s residence, the rental property, and approximately $1.38 million in cash and cash equivalents.
5 HLI’s other collateral was in excess of $7 million.
In December 2018, HLI filed a motion for adequate protection and for
a super-priority administrative expense claim. HLI asserted that while its
claim had increased to approximately $5.2 million due to accrued post-
petition interest, the value of Debtor’s assets had diminished to
approximately $5.1 million. HLI argued that Debtor’s use of cash and
counsel’s drawdown of the retainer, combined with new estimates of value
in Debtor’s Plan and disclosure statement, left HLI’s claim without
adequate protection.
Debtor objected and argued that the court made factual findings of
value in its decision on the drawdown order and that HLI had not offered
any new evidence of diminished property values. Debtor also submitted a
declaration stating that as of January 2018, the fair market value of HLI’s
asserted collateral was approximately $6.8 million. The court denied the
motion.
2. Debtor’s Plan and HLI’s Objection
In November 2018, Debtor filed his Second Amended Plan (“Plan”)
which proposed to pay all claims in full over a five-year period. The Plan
proposed to pay HLI’s claim through: (1) an effective date payment of
$500,000; (2) transfer of the Landing Property, which Debtor valued at
$3,753,100; and (3) five annual payments, with interest at 5%, equal to the
remaining balance of HLI’s secured claim after the cash payment and
6 transfer of Landing Property. The Plan stated that the credit to be applied
for the Landing Property would be determined by the court and that “[f]or
the avoidance of doubt, no lien is being stripped by virtue of the Plan.”
With the exception of HLI, all voting creditors accepted the plan. HLI
objected to confirmation and argued that the value of the Landing Property
did not account for necessary holding costs or the time required to sell all
of the lots, which HLI argued could be as long as 24 years. HLI stated that
it had ceased operations in 2010 and was insolvent, so requiring it to pay
taxes, management fees, and HOA dues for the Landing Property would
not be fair and equitable. HLI argued that it would not receive the
indubitable equivalent of its claim because the Plan shifted the risk of
selling the Landing Property to HLI without assurance that it would
recover the full amount of its claims. HLI also objected that the Plan was
not feasible and was not proposed in good faith.
3. Confirmation of the Plan
In April 2019, the bankruptcy court held an evidentiary hearing on
confirmation of Debtor’s Plan and heard expert testimony regarding the
value of the Landing Property.
HLI’s expert, Mr. Detling, developed two financial projection models
which used a discounted cash flow (“DCF”) methodology. Mr. Detling
used the Debtor’s proposed retail value of $65,000 for each of the 46
undeveloped lots, but assumed that they would take between 12 and 24
7 years to sell. He applied discount rates of 14% and 20% and concluded that
the present value of the Landing Property was between $443,743 and
$1,384,628.
Debtor’s expert, Mr. Vanderley, developed a “net aggregate value”
model which used the retail value of $65,000 for each undeveloped lot and
then deducted estimated sales costs and holding costs for the typical sales
cycle. Mr. Vanderley explained that the typical sales cycle, as it pertained to
any individual lot, would be in the range of six to nine months. Under the
“net aggregate value” method, Mr. Vanderley initially concluded that the
value of the Landing Property was between $3,123,000 and $3,166,000.
Mr. Vanderley also prepared a model using a DCF methodology.
Unlike Mr. Detling, he projected that all of the lots could be sold within five
years. Using discount rates of 5.6% and 10.9%, he concluded that the value
of the Landing Property was between $2,924,000 and $3,227,000. However,
Mr. Vanderley testified that the DCF method was inferior to the “net
aggregate value” method because it relied on too many unknown
variables.
In a supplemental declaration, Mr. Vanderley updated his models to
correct a formula error and to adjust the retail price of the 46 undeveloped
lots to $71,500, based on current prices provided by Terry Fleming, Jr.
Using the retail price of $71,500, Mr. Vanderley concluded that the total
value of the Landing Property was between $3,694,000 and $3,737,000
8 using the “net aggregate value” method, and between $3,182,000 and
$3,515,000 using the DCF method.
The bankruptcy court did not find Mr. Detling’s testimony credible
and rejected his valuations. The court instead adopted the lower of
Mr. Vanderley’s “net aggregate values,” which used the retail price of
$71,500 and assumed a nine-month sales cycle. The court determined the
total value of the 46 lots and 3 finished home sites to be $3,694,000.
In confirming the Plan, the bankruptcy court rejected HLI’s argument
that transfer of the Landing Property unfairly shifted risk without some
form of adequate protection such as an “equity cushion.” The court stated:
The conveyance of real property to HLI under the Plan is performance itself, not a promise of future performance, so adequate protection is not applicable. There is no need for protection to be provided against the risk that promised future performance will not occur because such promised performance has already occurred. Similarly, the concept of an “equity cushion” has no place because HLI will own all the equity in the conveyed real property itself.
However, because Debtor challenged the validity and extent of HLI’s
security interests in the pending adversary proceeding, the court required
the Plan to provide for a springing lien on Debtor’s residence and the rental
property, to ensure the remaining balance of the claim would be secured in
the event that Debtor was successful.
9 Based on the value of the Landing Property and the accrued interest
on the HLI claim, the court also required the five annual payments to be
increased from $191,784 to $241,124.54. HLI timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(L). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
Did the bankruptcy court err in determining that the Plan provided
HLI with the indubitable equivalent of its claim?
Did the bankruptcy court err in determining that the Plan was
feasible?
STANDARDS OF REVIEW
We review the bankruptcy court’s decision to confirm a chapter 11
plan for an abuse of discretion. Marshall v. Marshall (In re Marshall), 721 F.3d
1032, 1045 (9th Cir. 2013). A bankruptcy court abuses its discretion if it
applies the wrong legal standard, misapplies the correct legal standard, or
if its factual findings are illogical, implausible, or without support in the
record. Traffic School.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir.
2011).
A bankruptcy court’s determination of property value is a question of
fact which we review for clear error. Arnold & Baker Farms v. United States
(In re Arnold & Baker Farms), 85 F.3d 1415, 1421 (9th Cir. 1996). Factual
10 findings are clearly erroneous if they are illogical, implausible, or without
support in the record. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th
Cir. 2010). The ultimate conclusion of indubitable equivalence is a question
of law which we review de novo. In re Arnold & Baker Farms, 85 F.3d at
1421. De novo review requires that we consider the matter as if no decision
had been previously rendered. Kashikar v. Turnstile Capital Mgmt., LLC (In re
Kashikar), 567 B.R. 160, 164 (9th Cir. BAP 2017).
We review a bankruptcy court’s finding of feasibility for abuse of
discretion. First S. Nat’l Bank v. Sunnyslope Hous. Ltd. P’ship (In re Sunnyslope
Hous. Ltd. P’ship), 859 F.3d 637, 647 (9th Cir. 2017), as amended (June 23,
2017), cert. denied, 138 S. Ct. 648 (2018).
DISCUSSION
HLI’s primary argument on appeal is that the Plan does not provide
HLI with the indubitable equivalent of its secured claim because the
bankruptcy court erred in valuing the Landing Property. HLI argues that
the court should not have adopted Mr. Vanderley’s values derived from
the “net aggregate” method and instead should have adopted
Mr. Vanderley’s values derived from the DCF method.
Valuations of property are factual findings to which we apply a
deferential standard of review. In re Arnold & Baker Farms, 85 F.3d at 1421.
This deference extends to the bankruptcy court’s choice of valuation
methodology. Taffi v. United States (In re Taffi), 96 F.3d 1190, 1193 (9th Cir.
11 1996) (en banc) (recognizing various methods to establish value but leaving
the determination to the trial court); Estate of Simplot v. C.I.R., 249 F.3d 1191,
1197 (9th Cir. 2001); Seravalli v. United States, 845 F.2d 1571, 1575 (Fed. Cir.
1988) (“[C]ourts necessarily must have considerable discretion to select a
method of valuation that is most appropriate in the light of the facts of the
particular case. It may be a single method or some combination of different
methods.”).
HLI argues that the BAP has mandated the use of DCF methodology
when there is no immediate market for the sale of real property. We
disagree. In Arnold & Baker Farms, we noted that bankruptcy courts had
recognized three procedures for valuing land to be surrendered:
(1) liquidation value; (2) market value; and (3) fair value. 177 B.R. 648, 656
(9th Cir. BAP 1994). We stated that the “fair value” method was an
acceptable valuation procedure under the circumstances of that case, but
we did not require any specific method for valuing property to be
transferred as the indubitable equivalent of a secured claim. Id. at 657.
The choice of valuation methodology should be based on the facts of
each case and is within the bankruptcy court’s sound discretion. Regardless
of how the bankruptcy court determines the value of property to be
transferred to a secured creditor, it must also determine whether a
proposed transfer is the indubitable equivalent of the creditor’s secured
claim. In re Arnold & Baker Farms, 85 F.3d at 1421 (“[T]he finding of a trial
12 court of a particular value of real property . . . will not necessarily
determine whether the creditor will receive the indubitable equivalent of
its secured claim.”).
We decline to require any specific valuation methodology for
indubitable equivalence and we do not determine whether the valuation
here was clearly erroneous because, as we conclude below, transfer of the
Landing Property for a dollar-for-dollar reduction of HLI’s claim does not
provide HLI with the indubitable equivalent of its secured claim.
A. The Plan Cannot Be Confirmed Under § 1129(b)
A bankruptcy court can confirm a plan over a creditor’s objection
only if the plan does not discriminate unfairly and is fair and equitable
with respect to each class of claims that has not accepted the plan.
§ 1129(b)(1). To be “fair and equitable” with regard to secured claims, the
plan must provide:
(I) (I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and
(II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such
13 holder's interest in the estate's interest in such property;
(ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (I) or (iii) of this subparagraph; or
(iii) for the realization by such holders of the indubitable equivalent of such claims.
§ 1129(b)(2)(A).
Treatment under any of the three clauses in § 1129(b)(2)(A) requires
payment in full of the allowed secured claim. 7 COLLIER ON BANKRUPTCY
¶ 1129.04 [2] (Alan N. Resnick & Henry J. Sommer, eds. 16th ed. rev. 2019).
The bankruptcy court confirmed the Plan as providing HLI with the
indubitable equivalent of its secured claim under § 1129(b)(2)(A)(iii).
The Ninth Circuit has held that if a plan proposes to provide a
creditor with the indubitable equivalent of its claim through a partial
transfer of collateral, such transfer must compensate the creditor and “must
insure the safety of or prevent jeopardy to the principal.” In re Arnold &
Baker Farms, 85 F.3d at 1422. In such a case, the creditor has no recourse
against its remaining collateral in the event that a sale of the property does
not yield proceeds equal to the bankruptcy court’s valuation. Id. The
14 transfer is therefore not “completely compensatory.” Id. (citing In re Murel
Holding Corp., 75 F.2d 941, 942 (2d Cir. 1935)). The Circuit held that “[t]o the
extent a debtor seeks to alter the collateral securing a creditor’s loan,
providing the ‘indubitable equivalent’ requires that the substitute collateral
not increase the creditor’s risk exposure.” Id.
The bankruptcy court noted that unlike the transfer of collateral in
Arnold & Baker Farms, the real property transferred under Debtor’s Plan is
not collateral and not estate property. The Plan also specifically provides
that no liens are affected. The bankruptcy court essentially considered the
property transfer as payment and reduced the remaining claim by its
determined value. The bankruptcy court then considered whether the
remaining amount of HLI’s claim would be adequately secured by the
remaining collateral and required springing liens in the event that Debtor
prevailed in the adversary proceeding.
The Plan does not ensure full payment of HLI’s secured claim
because it does not provide compensation for the necessary time to sell the
Landing Property and it unfairly shifts the risk of selling the Landing
Property to HLI. As a result, the Plan does not satisfy the indubitable
equivalent standard of § 1129(b)(2)(A)(iii).
Although Arnold & Baker Farms involved a partial surrender of
collateral, the fundamental issue in that case is that deeming a claim
satisfied through a transfer of property necessarily limits the creditor’s
15 ability to look to its other collateral to satisfy any remaining portion of the
claim in the event that the property is ultimately sold for less than the
appraised value. The creditor is “forced to assume the risk of receiving less
on the sale without being able to look to the remaining undistributed
collateral for security.” In re Arnold & Baker Farms, 85 F.3d at 1422.
The present case presents the same concern as Arnold & Baker Farms.
Despite the Plan provision that no liens are affected, by deeming the
transfer to satisfy a portion of the claim, HLI is forced to assume the risk
that sales of the Landing Property will not yield the appraised value. HLI
will be unable to look to its other collateral for any shortfall.
“Experience has taught us that determining the value of real property
at any given time is not an exact science.” Id. at 1421. If the court’s
valuation of the Landing Property is not accurate or if the market for the
Landing Property does not behave as predicted over the next five years,
HLI may not recover the value fixed by characterizing the transfer as
“payment.”3
At the time of confirmation, HLI’s claim was fully secured by
collateral valued at approximately $7,000,000. Under the Plan, HLI is forced
to assume the risk that proceeds from the Landing Property might be less
3 Although HLI also clearly has the benefit of potential increased property values, the downside risk makes it less than “indubitable” that HLI will receive the value of its secured claim.
16 than the court’s valuation, without any recourse against its collateral if
sales proceeds prove inadequate. The Plan provision that HLI retains its
liens is illusory because by deeming the claim partially satisfied, HLI can
only look to its collateral to satisfy the remainder of its claim after the
property transfer.
Of particular concern, the Plan also fails to adequately compensate
HLI for the necessary time to sell the Landing Property. Mr. Vanderley
valued the Landing Property based on a six- to nine-month sales cycle for
any individual lot, but also projected that it would take approximately five
years for HLI to sell all 49 units transferred under the Plan. Thus, his
valuation “as of the date of transfer” was not equivalent to a cash payment
on that date because it ignored his own testimony regarding the
anticipated market absorption.
If the Plan instead proposed that Landing would sell the lots and
Debtor would make deferred cash payments from his Landing
distributions, Debtor would be required to compensate HLI with interest in
order to satisfy § 1129(b)(2)(A)(I) and Landing would pay the carrying
costs. Interest is necessary to provide the secured creditor with the value,
as of the effective date, of its allowed secured claim. Transfer of the
Landing Lots as “payment,” does not compensate HLI for the
approximately five years needed to sell the lots, a time period established
by Debtor’s own expert.
17 B. The Bankruptcy Court Abused Its Discretion By Finding The Plan Feasible
Section 1129(a)(11) requires that the bankruptcy court find that
confirmation is not likely to be followed by liquidation or the need for
further financial reorganization. To demonstrate that a plan is feasible
under § 1129(a)(11), a debtor must show a “reasonable probability” of
success. Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352, 1364 (9th
Cir. 1986). The Debtor does not have to prove that success is inevitable and
a “relatively low threshold of proof will satisfy” as long as evidence
supports a finding of feasibility. Computer Task Grp., Inc., v. Brotby (In re
Brotby), 303 B.R. 177, 191 (9th Cir. BAP 2003).
HLI argues that the bankruptcy court erred in finding the Plan
feasible because Debtor’s financial projections contain computational errors
and do not provide evidence that Debtor has a reasonable probability of
making the increased annual payments. We agree.
The court determined that the Plan was feasible based on the
financial projections attached to the Debtor’s declaration in support of
confirmation. Those projections seem to indicate that Debtor has sufficient
funds to make the five annual payments of $191,784 and possibly even the
increased payments required by the court. However, the financial
projections contain clear mathematical errors, including a failure to account
for the first annual payment in the cumulative balance for the 12 months
ending in December 2019, and erroneous total annual personal expenses
18 for Debtor in the remaining four years. When the errors are corrected,
Debtor’s projections evidence an inability to make annual payments at
either the proposed amount of $191,784 or the required amount of $241,124.
There is no evidence in the record to support Debtor’s ability to make the
annual Plan payments to HLI, and therefore the court’s finding of
feasibility constitutes an abuse of discretion.
CONCLUSION
Debtor’s Plan does not provide HLI with the indubitable equivalent
of its secured claim and is not feasible on the record before us. For the
reasons set forth above, we VACATE the bankruptcy court’s order
confirming the plan and REMAND for further proceedings consistent with
this decision.