In Re Anthem Communities/RBG, LLC
ORDER DENYING COMPASS BANK’S MOTION TO RECONSIDER DENIAL OF STAY RELIEF MOTION
The Debtor is a limited liability company, formed for the purpose of developing, constructing, and marketing a luxury residential development, with 48 residences. The Debtor has completed substantially all of the development’s infrastructure and common areas and sold 29 fully-constructed residences. It has sold five vacant lots to another developer. Of the remaining 14 residences, which are only partially constructed, three are subject to a first deed of trust held by Wells Fargo Bank, N.A. and the remaining 11 units are subject to a first deed of trust held by Compass Bank (“Compass” оr the “Bank”). The Court
In its Motion for Reconsideration, the Bank asserts that the Court erred when it denied its motion for relief from stay on the basis that the Bank had failed to establish its prima facie case under both 11 U.S.C. § 362(d)(1) and (2). 1 According to the Bank, it was error for the Court to enter judgment sua sponte against the Bank, at the close of all the evidence, when the Debtor did not make a motion for the entry of judgment at the close of the Bank’s case. In other words, the Bank contends that, if the respondent fails to request a directed verdict or motion for a judgment at the close of the movant’s case and instead presents evidence in defense, the respondent is deemed to have waived any argument, and the court is prohibited from ruling, that the movant failed to meet its prima facie case. Alternatively, the Bank argues that it did present sufficient evidence to carry its burden and the Court erred by ignoring certain evidence. For the reasons set forth below, the Court denies the Bank’s Motion for Reconsideration.
I. THE APPLICABLE BURDEN OF PROOF
A. General Principles
The Bank asserted that it was entitled to relief from stay to exercise its rights against its collateral under both Section 362(d)(1) and (2). 2 To succeed on its Section 362(d)(2) claim, it had to establish that the Debtor had no equity in this property and that the property was not necessary to an effective reorganization. To obtain relief under Section 362(d)(1), the Bank had to demonstrate “cause” for granting relief, which it asserted existed in this case because its interests were inadequately protected due to the lack of an equity cushion in the property. Thus, valuation evidence played a key role in determining both claims for relief. The Court found thе valuation evidence offered by both sides to be lacking. Its ruling was based in large part on the applicable burden of proof and/or the burden of going forward with evidence.
In a hearing on a motion for relief from stay, the party requesting relief has the burden of proving a lack of equity and the debtor has the burden of proof on all other issues in stay relief matters. 11 U.S.C. § 362(g). This allocation of the burden is straightforward to apply in the context of a Section 362(d)(2) claim. The creditor must establish the lack of equity and then the burden shifts to the debtor to establish that the proрerty is necessary for an effective reorganization. The burden is
By distinguishing between the ultimate burden of persuasion and the initial burden of going forward, this apparent contradiction vanishes. “[A] party can bear the initial burden of going forward even if it does not bear the ultimate burden of persuasion. If it fails to carry its initial burden, the Court will dismiss its application without requiring the party that bears the ultimate burden of persuasion to offer any evidence.”
In re Elmira Litho, Inc.,
How does the creditor satisfy its initial burden of going forward with evidence of lack of adequate protection? The Supreme Court has defined the secured creditor’s right to adequate protection as including “the right... to have the security applied in payment of the debt upon completion of the reorganization; and that that interest is not adequately protected if the security is depreciating during the term of the stay.”
United Sav. Ass’n v. Timbers of Inwood Forest Assocs., Ltd.,
The erosion may be shown through evidence of declining property values, the increasing amount of the secured debt through interest accruals or otherwise, the non-payment of taxes or other senior liens, failure to insure the property, failure to maintain the property, or other factors that may jeopardize the creditor’s present position. It may be necessary to show a combination of these factors and/or to show that the circumstances as a whole are sufficient to jeopardize the creditor’s interest in the property. For example, evidence of non-payment alone may not be sufficient if the collateral is a publicly-traded security that has a demonstrated track record of appreciation in value. The secured creditor’s initial burden also requires that it show that the threatened harm is attributable to the stay. If the debtor farmer suffered a croр failure due to weather conditions in the year before the bankruptcy filing, but the post-petition crop is not jeopardized and crop prices remain stable, then the erosion of the creditor’s position is not attributable to the stay.
In the present case, the Bank’s valuation evidence was insufficient to meet its burden of going forward in four respects: (a) its appraisal testimony was wholly unreliable; (b) it was based on a lump sum, “as is” valuation; (c) it demonstrated no decline in value; and (d) it did not quantify the impact of future interest accruals and senior liens.
a. Unreliable Appraisal Testimony
Thе Bank introduced valuation evidence through the written appraisals and testimony of Mr. Acheson, a self-employed residential appraiser. His testimony was honest, forthright, and given in good faith, but he lacked the expertise to render this valuation. He admitted that he had never valued a partially-developed project as a whole before. He rendered the opinion that the project, as-is, was worth $3,443,500, but admitted that he found no comparables on which he could rely and that he did not use either a cost or income approach to value the project. He took an estimated retail value, valuing each unit separately on an as-completed basis and then aggregated these values, subtracted the aggregate cost of completion estimates supplied by the Debtor, subtracted a six percent marketing cost, and then subtracted $930,000, which he explained was the cost of hiring a contractor to complete construction. He could not explain how he arrived at that amount or whether this was a valid deduction, given that it was a cost that the Bank would incur if it foreclosed, but not one the Debtor would incur as the developer itself. He then factored in an estimated cost of borrowing which assumed that all costs of completion would be borrowed up front and that all units would not be sold for five or six months.
b. Lump Sum and “As-is” Valuation
The Bank’s loan documentation revealed that the Bank had made eight separate loans, which presently aggregate $3,555,431.71. Each loan is collateralized by either one or two residential units. These loans were not cross-collateralized. The Bank’s representative testified as to the outstanding balanсe of each separate loan. The Bank’s appraiser, however, gave only a lump sum valuation for the 11 units as a whole and testified that he could not breakdown this figure. Since these loans were not cross-collateralized, it was imperative that the Bank introduce evidence as to the value of the specific collateral securing each of the eight loans. In the interest of justice, the Court brought this issue to the attention of the Bank during the course of trial and offered to let it put on additional evidence, which the Bank declined.
The Bank argued that the Court must value the project on an “as is” basis, as opposed to an “as-completed” value, relying on
In re Swedeland, Dev. Group, Inc.,
In this matter, all of the Compass units are more than one-half сompleted and many are 80 to 90 percent completed. No one disputed that the property would increase in value more than the cost of completion if construction was completed. The project was sufficiently complete that the Bank’s own appraiser felt that he could arrive at an as-completed value. While the appraiser found no comparables for valuing the project “as-is” as a whole, his appraisals were prepared based on an “as-
Nevertheless, even if an “as-is” valuation was appropriate, the Bank failed to present evidence of the “as-is” computation on a per unit, per loan basis. In its closing arguments, the Bank attempted to argue how the Court could arrive at such a valuation, using the as-completed value and multiplying it by the applicable percentage of completion for each unit. In other words, if Unit A is 80% сomplete, it argued that the Court should multiply its as-completed value by 80%. In its Motion for Reconsideration, the Bank argues that “there is authority” for this formulaic approach, but it declined to recite any such authority or to produce any such evidence. It argued further that the computations which it passed out at closing, utilizing this formula, were not new evidence, but simple mathematical computations. While simple math supplied in a demonstrative chart at closing may not be a matter of new evidence, the propriety of utilizing a particular formula for valuation purposes is a matter of new evidence. In response to the Court’s own questioning, Mr. Acheson testified that he could not breakdown his own “as-is” lump sum valuation into separate “as-is” unit valuations. If the Bank’s own appraiser cannot do it, it cannot be a matter of “simple math.” Certainly, the Bank cannot introduce new valuation evidence in its closing arguments. Arguments of counsel cannot take the place of evidence lacking in the record.
Texas Dept. of Community Affairs v. Burdine,
c. No Decline in Value
Nothing in either the testimony or the appraisals offered by the Bank demonstrated a threatened decline in the value of the property. The Bank’s appraiser testified that the market for these units has “slowed down some,” that a larger number of homes is on the market now, and consequently he did not believe that the large percentage of appreciation in value reflected in the past year would continue. Instead he expects that the market will achieve “equilibrium” and that prices will stabilize. In the appraisals themselves, however, he stated that, throughout the Denver metro area, including the subject market area, the mаrket appears to be ■experiencing a “slow increase in values.” He also said, “[t]he average appreciation within the metro area during the past 12 months based on median sales prices has been approximately 13.8 percent. The overall economic activity within the metro area appears to be steady with a low unemployment rate and a stable general population.” Thus, while he does not project large appreciation in the near future, he is projecting a slow increase in values. Several memoranda of the Bank’s representatives admitted into evidence also reflect the Bank’s belief that this project has enjoyed substantial appreciation in value.
d. Interest Accruals, Real Property Taxes & Mechanic’s Liens
Decline in value is only one way to show that the stay is eroding a secured creditor’s position. Future interest accruals, property taxes and mechanic’s hens are relevant to the extent that they demonstrate a post-petition erosion of the creditor’s secured claim. If hidden liens and/or lack of equity existed pre-petition, then they do not reflect erosion that is attributable to the stay. In this case, the Bank demonstrated that a relatively small amount of mechanic’s liens and unpaid real property taxes exist. These hidden, senior liens existed pre-petition. The Bank did not show that the continuation of the stay will cause further liens or unpaid taxes, with the exception of post-petition interest accruing on the real property taxes ahead of the Bank’s position. The amount of thеse taxes and related interest, however, is de minimus.
In regard to the accrual of post-petition interest, the Court agrees with the Bank that this is a relevant factor only if there is equity in the property. Section 506(b) provides for the allowance of post-petition interest only to the extent that the secured creditor is oversecured. If there is no equity in the Debtor’s property, then the Bank is not entitled to adequate protection to cover future interest accruals. If there is equity, then post-petition interest is one factor for the Court to consider in determining whether the stay is eroding the secured creditor’s interest.
The Bank argues that because it has established a lack of equity, it is not entitled to accrue post-petition interest and, therefore, evidence of interest accruals is irrelevant. For the reasons stated above, the Court finds that the Bank failed to establish a lack of equity. Thus, evidence of future interest accruals has some bearing on the issue of lack of adequate protection and whether the secured creditor’s interest is eroding. In its oral ruling on the motion for relief from stay, however, the Court stated that the Bank had failed to introduce any evidence regarding
Although there is evidence now brought to the Court’s attention of the accrual of future interest, which may be some evidence of a decline or erosion in the Bank’s position, the Court finds it to be insufficient by itself to satisfy its burden of going forward with evidence of “cause.” The Bank has not addressed in any fashion to what extent the proposed payment by the Debtor of at least $835,000 from the sale of Unit 344 in the very near future alleviates some of the erosion that will occur due to the accrual of future interest. More importantly, it has not shown how the accrual of interest will or will not be offset by the future increases in the value of the property discussed above.
C. Failure to Satisfy Initial Burden
In regard to its Section 362(d)(2) claim, the Bank failed to establish a lack of equity due to the deficiencies noted above in subsections (a) and (b). In its Motion for Reconsideration, the Bank notes some of the deficiencies in the valuation testimony given by the Debtor’s principal and contends that the Court erred in its calculations of equity. Assuming for the sake of argument that the Bank established a lack of equity, the Bank is still not entitled to relief. The Court found that the рroperty is necessary for an effective reorganization and the Bank has not challenged this finding in its Motion for Reconsideration.
Thus, disposition of this matter hinges on whether the Bank satisfied its initial burden under Section 362(d)(1). This burden required the Bank to demonstrate an erosion or threatened erosion of its secured position in order to shift the burden to the Debtor. As noted in subsection (c) above, the Bank offered no evidence of a decline or threatened decline in value. As noted in subsection (d), the Bank did establish the rate of future interest accruals, in the event thаt there is equity and it also showed a relatively modest amount of unpaid taxes and mechanic’s liens filed against the units. It did not, however, show how these factors have caused or will cause an erosion of its secured position that is attributable to the automatic stay. Taken as a whole, the Bank’s evidence failed to satisfy its initial burden of establishing “cause.”
II. WAIVER BY THE DEBTOR
In its Motion for Reconsideration, the Bank argues that the Debtor waived any argument that the Bank failed to satisfy its prima facie case by presenting evidence in defense before making a motion for a judgment. It cites I Tiller,
Wigmore on Evidence
§ 108 (1983) as its only authority for this proposition. This section
As noted in the Debtor’s Response, the former Rule 41(b) of the Federal Rules of Civil Procedure, made applicable by Bankruptcy Rule 7041 provided that:
After the plaintiff ... has completed the presentation of his evidence, the defendant ... may move for dismissal.... The court as trier of the facts may then determine them and render judgment against the plaintiff or may decline to render any judgment until the close of all the evidence.
Thus, former Rule 41(b) required a motion for a directed verdict to be made at the conclusion of the plaintiffs case. The consequence of failing to make a timely motion, however, was that the defendant was deеmed to have waived the right to make a Rule 41(b) motion and the right to challenge the denial of a Rule 41(b) motion on appeal.
In re Scialdone,
No. 87-02338-N,
The Federal Rules of Civil Procedure were amended in 1991 to, among other things, eliminate this aspect of Rule 41(b) and to adopt in its place Fed.R.Civ.P. Rule 52(c), which now provides:
If during a trial without a jury a party has been fully heard on an issue and the court finds against the party on that issue, the court may enter judgment as a matter of law against that party with respect to a claim or defense that cannot under the controlling law be maintained or defeated without a favorable finding on that issue or the court may decline to enter any judgment until the close of all the evidence.
The new rule does not contain language requiring a motion at the close of the plaintiffs evidence. Again, the Bank has not provided any authority to support its waiver argument. The 1983 edition of Wigmore certainly does not address the 1991 change in the rules.
III. SUA SPONTE POWER OF THE COURT
Finally, the Bank argues that the Court cannot render a judgment
sua sponte
based on the movant’s failure to satisfy its initial burden. The Bank is correct that this places the Court in the unfortunate role of advocating a party’s position. While it may be unfortunate, the Bank refers this Court to no authority supporting its position that the Court cannot act
sua sponte.
In the cases cited in Section I above which dismissed the stay relief motion on the basis that the movant failed to meet its burden of going forward, there was no mention of a motion by the debtor for a judgment at the conclusion of the creditor’s case and, thus, those courts most likely acted
sua sponte.
Fed. R.Civ.P. Rule 52(c) expressly allows the
court
tо enter judgment as a matter of law once a party has been fully heard on its claims/defenses. It allows the court to do so at “half time” or at the close of all the evidence. Unlike the former rule, it does not mention the need for the defendant to move for dismissal. In a different factual context, the Fifth Circuit has expressly ruled that the trial court may properly
If the Court was unable to act
sua sponte,
then it could be forcеd to rule in favor of a creditor who seeks relief from stay, but presents
no
evidence. Without evidence, the creditor would lose its claim for relief under Section 362(d)(2), but under Compass’ reasoning, it would automatically win its Section 362(d)(1) claim, unless the debtor made a motion for a directed verdict or established adequate protection. Other courts have been unwilling to follow Compass’ reasoning. In
In re Tursi,
IV. CONCLUSION
For the foregoing reasons, the Court finds that the Bank failed to satisfy its initial burden under both Section 362(d)(1) and (2). It was not improper for thе Court to act sua sponte in rendering a judgment against the Bank on this basis after the conclusion of all the evidence. Accordingly, the Bank’s Motion for Reconsideration is denied. The automatic stay remains in effect with respect to the subject property.
Notes
. The Motion for Reconsideration does not raise issues regarding the Court's denial of the requests for abstention or to excuse turnover by the receiver and, thus, those issues are not addressed herein.
. Unless otherwise specified, all references to "Sections” are to sections in Title 11, United States Code.