Dean J Zanetos

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Case 8:05-bk-48272-TA Doc 66 Filed 07/14/06 Entered O7/IFTOG TOSS 7E Pest
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8 UNITED STATES BANKRUPTCY COURT
9 CENTRAL DISTRICT OF CALIFORNIA
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Case No: SA 05-48272 TA
11 In re
Chapter 11
12]| DEAN J. ZANETOS,
13 AMENDED MEMORANDUM OF DECISION
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15 Date: June 21, 2006
Time: 10:00 a.m.
16 Debtor(s). Place: Courtroom 5B
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Creditor Wayne Hagendorf (“Hagendorf”) filed a motion under 11 U.S.C. §506 to value the
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a9 || real property and improvements commonly known as 3170 Hollyridge Drive, Hollywood, CA.

21 (“the property”). The property is the Debtor’s residence and is also the primary asset of the estate.

221! The Debtor has filed this adversary proceeding under 11 U.S.C. §547 to recover as alleged
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preferences certain monies levied upon by Hagendorf and the judgment lien Hagendorf recorded
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os against the property on or near June 17, 2005. In addition to the valuation motion, Hagendorf has

2¢|| filed in this adversary proceeding his Motion for Judgment on Partial Findings. The valuation

27{| motion and the Motion for Judgment on Partial Findings are all directed to establishing that the

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AUTHENTICATED / PY
U.S. GOVERNMENT
INFORMATION
GPO

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1 elements of a preference, i.c., that the Debtor was insolvent when the transfer was made (June 17,

2 2005) and that the defendant Hagendorf would receive more by reason of the transfer than would
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be enjoyed in a hypothetical liquidation, are absent in this case. See 11 U.S.C. §547(b)(3) and
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5 (b)(5), respectively. Hagendorf’s valuation motion is also directed to the issue of valuation as it

6 || might arise in context of confirmation of a plan, i.e. that the plan be “fair and equitable” with

71 respect to any dissenting class of secured or unsecured creditors (See 11 U.S.C.§1129(b)(2)(A) and

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(B)) or that the “best interests test” is satisfied as to any dissenting class, i.e. that at least as much is
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obtained under the plan as would be received in a liquidation. See 11 U.S.C. §1129(a)(7)(A)GI).
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41 In order to fully respond to the various purposes of these motions it is necessary for the

12 Court to render valuations on at least two and perhaps three different dates. Those dates are the

13) date of the transfers, June 17, 2005, the date of the petition, September 7, 2005, and possibly the

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effective date of the plan, which would be approximately end of August, 2006, although the Court
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‘ is inclined to follow the teaching of cases such as In re Tenna Corp., 801 F. 2d 819 (6" Cir. 1986)
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17|| _ to the effect that the debtor must bear the burden of any post petition decline as concerns his

18 solvency. This would make the relevant dates June 17, 2005 and September 7, 2005. Since

13 |! confirmation might involve the issue of returns to creditors aside from whether the Debtor was
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ever “solvent”, the Court will also render a finding of value as of the date of this opinion as the
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- closest possible date to the date of any hypothetical recovery in a Chapter 7 liquidation for the

23 || “best interests of creditors” test.

24 The Court has reviewed the reports of the three appraisers and each of their testimonies.
°°! The Court found that all three were competent as experts and has judged that each of them was
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earnest and forthright in their opinions. Although there is a discrepancy between their respective
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opinions of the property’s value, the magnitude of discrepancy between the opinions of Messrs.
Freedman as of April, 2006 and Foster as of October, 2005 1s still within tolerable range. The
Court is very mindful that throughout 2004 and well into 2005 there was a precipitous rise in real
property values throughout Southern California, which began to cool in late 2005 and has leveled
off in 2006. Therefore, for example, the discrepancy between the Freedman valuation as of April
12, 2006 at $1,072,000 and the Foster valuation as of October 16, 2005 at $1,100,000 is within a
2.5 percent range. The discrepancy might still be within a similar range depending on how much
one rolls back, if at all, for the intervening approximate 6 months between the April report and the
petition date, This may in tum depend upon when one believes the “cool down” started. However,
for reasons explained below, the Court believes the discrepancy between the two appraisals when
adjusted for the date of the petition is still relatively small. The facts of this case require the Court
to extrapolate from the data its valuations at dates close to, but not precisely on, any of the report
dates.

Debtor argues that his appraiser was more careful to make adjustments for certain lack of
amenities in the subject as compared to the comparables. Debtor’s appraiser also had the
advantage of actually viewing the interior of the subject property. While this may be true there was
also one item of data that Mr. Freedman did not choose to include in his June 2, 2005 appraisal,
which omission the court found troubling. This was comparison sale #3 from his April 12 report,
commonly known as 3204 Beachwood Drive, Los Angeles. According to the report the closing
date was July 1, 2005, only 13 days after the target date of June 17. This property is reportedly
only .39 miles from the subject. The adjusted sale price on comparable sale #3, taking into account

all of the adjustments Mr. Freedman thought appropriate, came out at $1,098,000. The Court

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heard Mr. Freedman’s testimony that he chose not to include this data because of some arbitrary
cutoff date which allegedly was appropriate in performing retrospective appraisals. The Court did
not find this limitation either logical or persuasive. The Court, in contrast, found this the single
closest sale in terms of proximity of date to any of the comparables.

Certainly Mr. Freedman was correct that one must still average the values from all of the
comparables, which if done, he says, boosts his opinion as of June 2, 2005 to an admitted
$920,000. While Mr. Freedman does not tell us how the revised averaging was conducted, the
Court notes that from Mr. Freedman’s April 12 report he had assigned a 40% weighting to this
comparable #3 because it was among the “least adjusted” and of “the most similar overall view-
type...” See page 6 of 18, page bottom, April 12 report. The Court concludes from this that Mr.
Freedman found 3204 Beachwood a very similar property. If one performs an averaging
recalculation using the same 40% weighting to 3204 Beachwood, and then retains the other two
most weighted comparables from the June 2 report (i.e. 3133 Hollyridge, $976,220 adjusted and
2887 Hollyridge, $887,336 adjusted } at Mr. Freedman’s assigned weight of 30% each, (but one
discards those other comparables described as “secondary” and “tertiary’”’) the resulting valuation
by the Court’s calculation is $998,266 as of June 2, 2005. The Court is also mindful that the target
date is actually June 17, not June 2. Therefore, this two week period is not insignificant since this
June period was still during the peak of the hot increases and bidding wars, and before the cool
down had started. The Court notes that the majority of comparable sales from the June report, as
well as the comparables from the April report, sold at or above listing. Therefore, even if the

Court gives minimal credence to the opinions of the other two appraisers there is reason enough to

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adjust Mr. Freedman’s earlier valuation using his own numbers and analysis. The Court finds
that the property as of June 17, 2005 had a fair market value of $1,000,000.

Now the Court must also find a value as of the petition date, September 7, 2005. The
closest valuation date is that of Mr. Foster at October 16, 2005 in the amount of $1,100,000. The
difference between his valuation and that of Mr. Freedman as of April, 2006 is only $28,000. This
is so close as to be statistically insignificant and is persuasive as an indication of value on the
petition date unless one believes there was a significant upward change in the value trend between
September, 2005 and April, 2006 and that this is somehow reflected in Mr, Freedman’s April
report. There is no evidence before the Court that there was any decrease in values between these
two dates. There is some indication from Mr. Pohls’ opinion that values were still rising in early
2006. The Court also notes that the nearly adjacent property, 3132 Hollyridge, was a bona fide sale
at $1,695,000 in 2006. If this price is adjusted downward by a 10% view premium as Mr.
Freedman suggested, and an $80,000 adjustment downward for site and a pool as Mr. Foster’s
report suggests, this would yield a comparable at about $1,450,000. However, the Court notes that
the comparable sales chosen by Mr. Freedman for his April report were all dated in either July or
early November of 2005, dates closer to the petition date than to his report date. The Court gave
some weight to the Pohls valuation for purposes of value as of the petition date, but notes that his
valuation date of May 6, 2006 at $1,350,000, was the highest of all the valuations but separated by
eight months from the Foster valuation. However, if one makes some downward adjustment in
respect of the still rising market in the eight months since the petition date, say of 15% (half of the
supposed annual rate of 30% appreciation for 2005) then all three appraisers are at virtually the

same number in September, 2005. Since Mr. Freedman relied upon comparable sales from

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1 November and July, 2005, the Court feels comfortable in concluding no adjustment is needed in

. Mr. Freedman’s number for the period between the Freedman April 12 report and the Foster
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October 16 report. With these thoughts in mind we have for October, 2005 the following: Foster -
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$1,100,000; Freedman - $1,072,000; and Pohls - $1,147,500 (adjusted downward for half a year’s

6 || appreciation). The opinions of the three appraisers were nearly identical for all practical purposes.

q The arithmetic average is $1,106,500. Therefore, because the target date was actually about five

° weeks earlier and the Freedman and Foster valuations should be slightly more weighted given their
. relative proximity to the target date, the Court finds that the fair market value of the property as
41 of September 7, 2005 was $1,075,000.
12 Lastly, the Court is asked to find a value to coincide with a probable effective date of the
13 Debtor’s plan. The closest valuation date is that of Mr. Pohls, May 6, 2006, but the Court found
" his to be the most cursory of the three analyses. On the other hand, his comparable sales were all
- in either late 2005 or early 2006, closer in time to the present than were Mr. Freedman’s

17 comparable sales from his April report. The court will utilize the Pohls report and valuation at

18 $1,350,000, and the adjusted sales price of 3132 Hollyridge in 2006 ($1,455,500) primarily as a

+9 general indication that price increases may have slowed from the petition date but valuations have
°° certainly not collapsed. The Court finds that the fair market value at present of the property is
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39 at least $1,100,000.

23 There remains under the Motion for Judgment on Partial Findings the problem of

24 evaluating whether the Debtor was solvent within the meaning of 11 U.S.C. §547 as of the date of

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the transfer, June 17, 2005. Very little evidence is presented on any issue other than the property
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and the argument about the appropriate amount of exemptions. However, assuming that the
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secured debt against the property is/was indeed $612,000, as Debtor now claims, and assuming that
the remaining debt is/was $404,406 as the schedules show, this would amount to a total of
$1,016,406 in debt. Against this must be weighed $112,916 [or is it $124,9167] in personal
property shown on the schedules and $1,000,000 in real property as determined herein, less
$98,996 of claimed exemptions, for a total adjusted asset value of $1,025,920. This analysis
suggests that the Debtor was solvent at the time of the transfer within the meaning of 11
U.S.C.§547. Hagendorf has overcome the presumption of 11 U.S.C. §547(f} and these will be the
findings of the Court. This leaves the Debtor unable to prove one of the elements of his preference
action, and so judgment is appropriate for Hagendorf.

In order to deal with the issue of whether creditors would get at least as much under the
plan as under a hypothetical liquidation, the so-called “best interests of creditors” test, the Court
believes for unsecured creditors it is appropriate to make an 8% adjustment, at least, for costs of
sale of the property. This means that an $88,000 adjustment would be appropriate from the present
fair market value of the property [$1,012,000], but this would not affect Hagendorf since his lien is
not avoidable as a preference and he is a fully secured creditor with respect to the property by
reason of his judgment hen.

Consequently, any plan not consented to by Hagendorf must provide for his payment in full
to pass muster To the extent that the property is not to be sold but payment is to be made over
time, an appropriate adjustment upward on account of interest must also be made so that
Hagendorf receives not less than the present value of his current lien on the property [See 11
U.S.C. §1129(b)(2)(A)G)C) and (11)] or he must otherwise receive the “indubitable equivalent” of

his interest in the property. See §1129(b)(2)(A)(iii)

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Regarding unsecured creditors, even after the $88,000 is deducted from the present value of
the property for costs of sale it appears that the adjusted value of all assets [$1,025,914] is still
greater than all debt [$1,016,406], which strongly suggests that unsecured creditors would also
need to be paid in full under the plan unless they vote for other treatment. See, 11 U.S.C. §
1129(a)(7). It is possible that a greater adjustment for liquidation costs in Chapter 7 is appropriate,

which combined with accrued administrative costs might slightly change this result. However, that

is beyond the scope of this opinion.

Counsel for Hagendorf is directed to prepare an order and findings consistent with this

opinion.

pateD: JUL 44 2006

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Bere Cttee_|

HONORABLE THEODOR C. ALBERT
United States Bankruptcy Judge

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1 NOTICE OF ENTRY OF JUDGMENT OR ORDER

AND CERTIFICATE OF MAILING

TO ALL PARTIES IN INTEREST LISTED BELOW:

6 |/You are hereby notified that a judgment or order entitled: AMENDED MEMORANDUM OF

? IDECISION was entered on J UL 1 4 2006

T hereby certify that I mailed a true copy of the order or judgment to the persons

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and entities listed below on J UL 1 4 2006

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11
Jayne T. Kaplan

12 |The Law Offices of Jayne T. Kaplan
1112 Fair Oaks Avenue
13 |lSouth Pasadena, CA 91030

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Christopher L. Blank

15 }Christopher L. Blank, Attorney at Law, PC
4675 MacArthur Court, Suite 550

16 |Newport Beach, CA 92660

a Richard J. Radcliffe

18 |Beth Kuttler

Reich Radcliffe, LLP

4675 MacArthur Court, Suite 550
29 Newport Beach, CA 92660

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22 IDATED JUL 14 2006 Kt, .

24 Clerk! *
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