Mountain Highlands, LLC

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
Mountain Highlands, LLC,
Debtor. 	No. 11 - 06-10011 - SA
MEMORANDUM OPINION IN SUPPORT OF ORDER DENYING CONFIRMATION
OF DEBTOR IN POSSESSION’S RESTATED PLAN OF REORGANIZATION
Debtor in possession Mountain Highlands, LLC (“Debtor” or
“Mountain Highlands”) filed its Restatement of Debtor’s Plan of
Reorganization Dated April 4, 2006 (“Plan”) (doc 63), as modified
by the Debtor’s First Modification to the Restated Plan of
Reorganization Dated April 4, 2006 (doc 88) and the Second
Modification to the Restated Plan of Reorganization Dated April
4, 2006 (doc 92). 	Signature Capital Funding, Inc. (“Signature”)
filed its objections (doc 86). 	The modified plan and objections
thereto came before the Court for an evidentiary hearing on
confirmation. 	Having considered the evidence and the arguments
of counsel, the Court finds that the Plan should not be
confirmed.
Background
Debtor in possession (“Debtor”) is a New Mexico limited
liability company whose managing member is The Shepard’s Group,
Inc., a Nevada corporation. 	Robert M. Janes is a director, vice
president and chief operating officer of Shepard’s Group, and the
designated representative of Debtor. 	Debtor owns the property
that is the basis for the proposed reorganization. 	The property,
generally called Castle Creek Ranch, has several components:
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1 Although some of the history of the property appeared in
the pleadings or the testimony, the Court has also relied on the
opinion in Magnolia Mountain Limited Partnership v. Ski Rio
Partners, Ltd., 139 N.M. 288, 131 P.2d 675 (Ct. App. 2005) for
clarifying background.
Page 2 of 	27
approximately 2,757 acres of land (called Castle Creek Ranch in
the appraisals, a usage which the Court adopts in this memorandum
opinion) located in the Rio Costilla Recreational Area of the
Sangre de Cristo mountains of Taos County, New Mexico; the
SilverTree Lodge, a 21,725 square foot set of buildings located
on the site; the Stonebridge Inn, 7,272 square foot building also
located on the site; approximately 108.73 acre feet of water
rights; part of a power line and the right of way for that power
line; and various pieces of equipment that were part of the now
defunct Rio Ski operation which previously operated on the site.
Water, sewer, electric and telephone service is available to the
site generally; those services have not been delivered to each of
the proposed lots. 	The electricity comes by way of a power line
from Kit Carson Electric Cooperative (“KCEC”) which currently
ends about one mile into the lower end of the real property.
Ignoring the earliest chapter 11 history of this property
in its incarnation as a ski resort (marketed as “Ski Rio”), this
chapter 11 case has its roots in the 1998 sale of the property by
Magnolia Mountain Partners, Ltd. (“Magnolia”) to Ski Rio
Partners, Ltd. (“Ski Rio”) for $400,000. 1 	Ski Rio’s general
partner was JNC Properties, LLC, and JNC’s manager in turn was
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2 Mountain Highlands, having purchased the property, was
named by Ski Rio in a third-party complaint. 	Mountain Highlands
was subsequently dismissed from the litigation.
Page 3 of 	27
John Lau. 	Ski Rio executed a promissory note for $400,000 and a
mortgage on the property to Magnolia. 	In October 2000 Signature
loaned $1,000,000.00 to Ski Rio at 12% interest (with a default
rate of 18%), secured by a deed of trust, security agreement and
financing statement on most of the property. 	Signature exhibit
11. 	The original term of the loan was six months, and it was
renewed several times. 	The $1,000,000 was intended as operating
capital for other purposes, not a development loan, and in any
event was not used to pay the $400,000 promissory note, which
went into default sometime no later than early 2003. 	In February
2003 Magnolia initiated a foreclosure action in the Eighth
Judicial District Court, Taos County, New Mexico (“State Court”)
against Ski Rio. 	Ski Rio failed to answer the complaint and so
was defaulted in May 2003. 	At the foreclosure sale in June 2003
Magnolia purchased the property. 	In early August Magnolia then
sold the property to Mountain Highlands. 	At almost the same time
Ski Rio moved to set aside the foreclosure judgment and sale, but
the State Court, after initially granting the motion,
subsequently denied it. 2 	Ski Rio appealed the denial of the
motion to the New Mexico Court of Appeals, which affirmed the
denial in a decision issued in December 2005. 	Magnolia Mountain
Limited Partnership v. Ski Rio Partners, Ltd., cited in note 1.
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3 In 2003, Mountain Highlands also filed its own action
against Ski Rio Partners and others, claiming slander of title,
among other things. 	Mountain Highlands, LLC v. Ski Rio Partners,
Ltd., CV 2003-73, Eighth Judicial District Court, Taos County,
New Mexico, which was still pending when the petition was filed.
Statement of Financial Affairs, question 4 (doc 10).
Page 4 of 	27
That decision became final when Ski Rio did not apply for a writ
of certiorari to the New Mexico Supreme Court. 	The final
judgment in effect cleared the title for Mountain Highlands of
the claims of Ski Rio, JNC Properties and John Lau. 3
In the meantime in December 2003 Signature had initiated its
own foreclosure action in the State Court, naming among other
defendants the parties described above. 	Signature filed a motion
for summary judgment which the State Court denied. 	However, in
December 2005, the State Court granted Signature’s motion to
reconsider its denial of the motion for summary judgment, and
entered a judgment and a decree of foreclosure and order of sale.
Signature exhibit 1. 	In doing so, the State Court did not rule
on other pending pleadings. 	Id. 	Debtor, surprised to learn of
the entry of the judgment and faced with an eminent foreclosure
sale, filed its chapter 11 petition on January 5, 2006.
The Plan proposes to complete development of the real
property (which includes implementing a swap of a sliver of the
property in order to resolve an ongoing dispute) and to sell it.
A relatively small portion of the land consists of about 36 acres
platted into parcels of .27 acre to 3.1 acres. 	The remaining
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4 The second modification (doc 92) entirely superseded the
first modification (doc 88). 	The first and second modifications
explicitly refer back to the original plan (doc 21, filed April
4, 2006) and not to the restated (amended) plan (doc 63), but
they match the amended plan and not the original plan; e.g.,
there is no section 6.3.2.2 in the original plan. 	The Court will
treat the modifications as amending the (restated) Plan, as
Debtor intended.
5 Debtor has now filed a motion for approval of a §363(f)
sale of the property. 	Doc 106. 	The Court is making its decision
based on the record and the facts as presented at the evidentiary
hearing, without regard to more recent developments, including
the proposed sale as well as the overall tightening of the credit
markets.
6 Section 1129(a)(11) provides as follows:
Confirmation of the plan is not likely to be followed
by the liquidation, or the need for further financial
reorganization, of the debtor or any successor to the
debtor under the plan, unless such liquidation or
reorganization is proposed in the plan.
Page 5 of 	27
2706 acres have been divided into parcels ranging in size from
about 40 acres to 170 acres, and a few much smaller ones.
Signature exhibit 3. 	Originally Debtor intended to obtain
partial releases from the mortgage lien for the various lots; the
second modification (doc 92) deleted that part of the Plan. 4 	The
Plan now provides that Debtor will pay Signature’s claim in equal
annual instalments over seven years if not sooner. 5
Analysis
FEASIBILITY
Among the requirements for confirmation is that the plan be
feasible. 	§1129(a)(11). 6 	The test for feasibility is whether
the Plan and its projections are supported by evidence that shows
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Page 6 of 	27
that all of the requisite payments more likely than not can and
will be made.
In determining whether a plan is feasible, the
bankruptcy court has an obligation to scrutinize the
plan carefully to determine whether it offers a
reasonable prospect of success and is workable.
Travelers Insurance Company v. Pikes Peak Water Company (In re
Pikes Peak Water Company), 779 F.2d 1456, 1460 (10 th Cir. 1985).
(Citations and internal punctuation omitted.) 	Put more precisely
in the context of this case, “[w]hat is important is that the
trier of fact have evidence on which to base its finding that it
is more likely than not that Debtor will be able to make all
payments required by the Confirmed Plan.” 	F.H Partners, L.P. v.
Investment Co. of the Southwest, Inc. (In re Investment Co. of
the Southwest), 341 B.R. 298, 315 (10 th Cir. BAP 2006) (“ICSW”).
In ICSW, the BAP ruled that an amortization schedule and sales
history that failed to show how sufficient funds would be
generated to pay secured creditors did not support the finding of
feasibility. 	Id. at 316-17. 	Although that particular case
involved partial releases to permit individual lot sales, a
feature that Debtor has specifically deleted from this Plan, ICSW
does require a substantiated prediction of where the funds will
come from to timely make the requisite payments.
The Court finds that the Plan does not meet the feasibility
test. 	What Debtor established was that it might well make the
first plan payment due to Signature. 	It did not establish with
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7 ¶¶6.3.2.3 and 6.3.3.1(D)(3) provide for delivery of about
.75 acre of land to David Hendricks, a partial lien release to
make that possible, etc. 	The non-confirmation of the Plan moots
consideration of those provisions.
Page 7 of 	27
any certainty where the remainder of the payments to Signature
and the operating expenses would come from.
The unmodified Plan (doc 63) provided that Signature would
be selling off parcels of its land, ¶7.7, with the aid of
compelled partial releases, ¶6.3.2.1(D), and using the income
generated to make debt service. 	¶6.3.2.1(C). 	Proceeds from the
sale of water rights would also be used to pay down the Signature
debt. 	¶6.3.2.2. 	However, the provisions for compelled partial
lien releases provided by 	¶6.3.2.1(D) were deleted from the Plan
by the second modification (doc 92), which provides for merely
consensual partial releases from Signature and which also
addressed partial lien releases as might be needed for the sale
of water rights. 	Thus what remains to fund the plan, other than
a sale of so much land and/or water rights that would pay
Signature’s claim in full, is Debtor’s promise that its affiliate
Pepper Highlands, LLC (“Pepper”) will make the debt service to
Signature and pay all the other expenses. 7 	Plan, ¶7.9.
Pepper is one of several entities formed by Robert Janes and
others, each specific to a particular development project in
various parts of the western United States. 	Examples include
Pepper, which owns real property in Cotati, California and is
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Page 8 of 	27
developing residential lots in Petaluma, California; and Desert
Highlands, LLC, developing residential lots in Elephant Butte,
New Mexico (Rancho del Lago II). 	In each of these, with the
exception of the Helaman Group, Mr. Janes is the vice-president
and chief operating officer. 	According to the testimony, the
various related companies use their separately owned assets
together in order to synergize the development efforts of each
company. 	For example, Shepard’s Highlands has obtained heavy
construction equipment which Mr. Janes testified would be used to
put in roads and other infrastructure to Debtor’s property.
Mr. Janes testified that among the various affiliates was a
significant collection of assets, and that the affiliates were
prepared to commit their resources to make this project work.
Mr. Janes specifically stated that Pepper and Shepard’s Highlands
would be sources of funding for the reorganized Debtor. 	That
incentive of increasing the wealth of the various owners of all
the affiliates was offered as another badge of feasibility.
However, what the Plan actually proposes is only that Pepper will
commit itself in writing to fund the Plan. 	And there are several
problems even with this commitment.
To begin with, Pepper itself has not yet committed to do
anything (even though Mr. Janes is the vice-president and chief
operating officer of its managing member). 	The Plan says that
Pepper is only required to commit itself after the Plan has been
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8 Presumably this means that Pepper need not commit itself
until the Effective Date, defined in the Plan as “the first day
of the first month next following the expiration of sixty days
after the date upon which an Order confirming this Plan becomes
final.” 	Plan, ¶1.1.15. 	Assuming no appeal of an order
confirming the Plan (a less than assured contingency), and
assuming a confirmation ordered in the middle of a given month,
the Effective Date would not occur until about 2 1/2 months after
confirmation.
9 At closing Debtor’s counsel stated that Debtor
contemplated Pepper executing an instrument satisfactory to
Signature. 	Given the parties’ contentious relationship, that
would be a remarkable feat to accomplish.
Page 9 of 	27
confirmed 8. 	Plan, ¶7.9. 	The form of documents that Pepper will
execute will be subject to notice and hearing. 	In other words,
rather than make clear in the course of confirmation exactly what
Pepper is willing to commit to do, in the form of documents that
would be examined and perhaps contested by Signature and other
creditors as part of the confirmation process, the Plan leaves
that critical issue to be resolved after confirmation,
effectively making the issue a condition subsequent to
confirmation. 	Quite simply, that is a formula that invites
litigation and almost guaranties that there will not be an
effective confirmation for many months thereafter, if ever. 9
Instead, those documents should have been included with the
Plan or put into the Plan so they could have been subject to
objection and approval. 	Then Pepper’s obligation would have been
clear. 	And, for that matter, there was no reason that Pepper
could or should not have executed the documents beforehand
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10 To be sure, Mr. Janes testified that Pepper intended to
be operating for several years. 	However, with only seven lots in
inventory, even as high-end as they may be, one wonders how long
the selling period would be.
11 The Court is not going so far as to suggest that
combining a dispute over the form of documents and the likely
relatively short life of Pepper’s project in California could
lead to Pepper effectively never making or even committing itself
to make any payments under the Plan.
Page 10 of 	27
(subject to modification if needed as a result of the
confirmation hearing), with the only contingency being
confirmation.
Even assuming Pepper had bound itself to fund the Plan, it
is not at all clear what comfort creditors might take from that
commitment. 	Nothing in ¶7.9 obligates Pepper to pledge its
assets to assure payment. 	And as Signature argued, it appears
possible or even likely that the Pepper development will be
finished and its inventory of lots sold out within two years. 10
Thus, unless Pepper were willing to secure its obligations with
the proceeds of the lot sales, say in the form of a certificate
of deposit or some other collateral, the creditors could be
forgiven for wondering whether Pepper’s commitment practically is
for no more than a year or two. 11
Alternatively, Debtor could have established a business plan
that would result in sufficient sales of its assets to meet its
debt obligations. 	It did not do that either. 	It withdrew
(perhaps wisely) its proposal for partial lien releases that
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Page 11 of 	27
would allow it to make debt service through the sale of its
inventory. 	Doc 92. 	That essentially left it in the position of
having to obtain a sale of such a large amount of its inventory,
or a moderate amount of its inventory for such a good price, that
it could with some confidence persuade or coerce Signature into
granting partial lien releases or the release of the mortgage
altogether. 	Although there was testimony from Mr. Janes about
Debtor’s development plans and appraisals and testimony from Mr.
Jordan about property values, Debtor never submitted a business
or marketing plan for the property that would show how Debtor
intended to accomplish that goal. 	In fact, Mr. Janes candidly
testified, among other things, that he did not know what the
marketing expenses would be or what amounts Debtor would need to
borrow during implementation of the Plan.
Debtor also suggested that it could borrow the funds to
continue to make Plan payments. 	Debtor showed that affiliates
and particularly one of the owners Dave Johnson, had obtained
several loans from Premier Mortgage Northwest out of Spokane,
Washington. 	And Mr. Janes testified that loans were relatively
easy to get when collateral was available, and that Pepper had
been able to shop around and obtain a loan at a lower interest
rate than Premier was willing to loan at. 	His testimony was
reinforced by that of Patrick McDermott, a broker for Premier,
who testified that Premier had mostly made residential loans but
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Page 12 of 	27
was starting to do more commercial loans. 	Mr. Janes also
testified that most (non-consumer) lending now was asset based.
Mr. Janes’ assessment of the lending market for commercial real
estate development was not challenged by Signature. 	On the other
hand, Mr. McDermott testified that Premier would never lend
behind Signature. 	Debtor has not even applied to Premier for a
loan, and Mr. Janes testified that he did not know what the
expenses would be to obtain a loan, what amount might be
borrowed, and who might do the lending. 	Premier currently has no
loans out to any of the affiliated companies, and in fact its
current lending is all to Mr. Johnson, who appears to be using
the affiliates and their assets to guaranty repayment of his
personal loans. 	The Court concludes that there is no assurance
whatever, or even a serious possibility, that Premier would loan
on this project.
In closing argument Debtor characterized the first payment
as the litmus test for feasibility. 	It is not.
While courts often do not require projections for the
same period over which a long-term plan spans, a debtor
must still sustain its burden to somehow prove it will
be able to perform all obligations it is assuming under
the plan.
ICSW, 341 B.R. at 311. 	Thus, Debtor needed to show that, for the
life of the Plan, it or its related entities had the resources to
continue to make the required payments for debt service to
Signature and for ongoing expenses, and that the related entities
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12 The calculation is set out in the opinion below, in note
19 and the text accompanying the note.
13 Mr. Janes also testified that KCEC requires upgrading of
the power line and right of way before taking it over, the cost
of that may be as much as $175,000, Sheperd’s Highlands has said
it will make that payment but Sheperd’s Highlands is not willing
to be bound to foot that bill.
Page 13 of 	27
would make those payments if Debtor could not. 	Debtor did not
make that showing.
In fact, there is some question about whether Debtor has
available to it the resources to make that first payment. 	Mr.
Janes testified under cross examination that Pepper and Shepard’s
Highlands together did not have the $700,000 which Signature’s
counsel suggested was needed. 	The Court has calculated the
Debtor needed to have a minimum of about $654,000 to make the
payments due upon confirmation, and likely higher. 12 	Debtor put
the number at $536,000. 	Debtor exhibit L. 	And these sums do not
take into account the approximately $200,000 that Debtor will
need to have available to operate for the first year following
confirmation. 13 	There was little evidence about what Shepard’s
Highlands could actually contribute. 	In consequence the Court
finds that there is insufficient evidence of Debtor’s ability to
come up with the first payment plus the first year of
postconfirmation operating expenses (a total of approximately
$850,000), although the Court concedes that the issue is a close
one.
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14 Ironically, one expenditure Debtor has never made is even
a single payment to Signature since it purchased the property in
2003.
15 The Court is not suggesting that Debtor and its
affiliates do not have every intention of making the project
successful. 	However, what Debtor presented was more of an
opportunity for an investor with patience, deep pockets and an
appetite for risk. 	That is not the standard for confirming a
plan.
Page 14 of 	27
Debtor also argued that past expenditures are a good
indicator of feasibility. 14 	But it is probably more accurate to
say that past expenditures are a strong indicator of a debtor’s
commitment to the project, which is at best only partially
probative of feasibility. 	The history of chapter 11 and
bankruptcy generally is heavily populated with companies and
individuals whose hopes and dreams far outlasted their money.
The purpose of section 1129(a)(11) is to prevent
confirmation of visionary schemes which promises
creditors and equity security holders more under a
proposed plan than the debtor can possibly attain after
confirmation.
Pikes Peak, 779 F.2d at 1460. 	(Quotation marks and citation
omitted.) 	At the end of the day, the harsh light of the
feasibility test discloses a Plan that may or may not assure the
first year’s payments but certainly assures little else. 15
CRAMDOWN UNDER §1129(b)(2)(A)
Debtor’s strategy appears to have been to show that
Signature’s interest was so adequately protected after the first
payment was made, and especially if the second annual payment was
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Page 15 of 	27
made, that Debtor would then be afforded the time to do what it
needed to get the lots sold. 	That raises the issue of whether
Signature’s interest was adequately protected pursuant to
§1129(b)(2)(A) since Signature voted against the Plan.
Adequate protection of a creditor’s interest in property of
the estate should not be confused with the separate requirement
that a plan be feasible; a plan must meet both requirements to be
confirmable. 	Nevertheless, the provisions are related in that
plan provisions that fully protect a creditor’s interest may
allow a debtor more leeway in performing a plan. 	See Pikes Peak,
779 F.2d at 1459 (plan provided that three years from
confirmation date, reorganized debtor would have paid secured
creditor in full, or have gotten current on loan, or would have
made other financing arrangements satisfactory to Travelers,
failing which debtor would agree to modification of stay to
permit creditor to foreclose on assets worth $3,500,000 to pay
accrued debt of $2,887,000; creditor held adequately protected
and plan confirmed). 	In this case, of course, the Court has
already ruled that the Plan has not been shown to be feasible.
Whether Signature’s interest in the Debtor’s property is
adequately protected is determined in part by the amount of the
debt. 	That has been an ongoing issue in this case which the
parties have not (yet) fully litigated in this court. 	The
December 1, 2005 state court judgment declared the debt to be
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16 The Rules of Civil Procedure for New Mexico state courts
are modeled on the Federal Rules of Civil Procedure.
Page 16 of 	27
$1,476,552.25 but did not adjudicate the cross claim and did not
have Rule 54(b) language making it a final judgment. 16 	Signature
exhibit 1. 	The Plan provided for a return to the State Court in
order to obtain a “final non-appealable” judgment or decision.
¶6.3.2.1(C)(2) (Signature judgment), ¶6.3.3.1 (Magnolia Mountain
judgment) and ¶9.8. 	However, other parts of the Plan, including
the provisions cited in the previous sentence, also speak of
“final” judgments or orders: ¶1.1.12 (final confirmation order),
¶6.1.12 (final orders on administrative expenses),
¶¶6.3.2.1(C)(1) and (2) (final state court judgment on Signature
debt) and ¶¶6.3.3.1(C)(1) and (2) (final state court judgment on
Magnolia Mountain debt). 	Judging by the comments of Debtor’s
counsel during closing arguments, Debtor apparently expected, and
led Signature to expect, a quick final ruling from the State
Court which would be treated as settling the issue, without an
appeal, regardless of conflicting language in the Plan. 	The
parties have subsequently informed the Court that the State Court
“finalized” its judgment without adjudicating the remaining
issues and without Rule 54 language, and that that judgment is
now on appeal.
This Court needs a number to work with. 	Since the State
Court has made at least an initial adjudication of the debt, the
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17 The Court has cursorily reviewed these exhibits. 	They
raise some questions. 	For example, in Signature exhibit 5, Mr.
Clarke of Cuddy, Kennedy, Albetta &Ives, LLP appears to bill
almost exclusively in increments of one hour; and the firm of
Barlow Garsek & Simon, LLP apparently bills in quarter-hour
increments. 	Signature exhibit 6. 	Should the issue of how much
Signature is entitled to collect in attorney fees need to be more
particularized in the future, Debtor (and any other party in
interest) is not precluded from objecting to the fees. 	In the
meantime, the numbers proffered by Signature appear to be close
enough for purposes of this decision.
18 That subsection provides as follows:
Interest shall be allowed on judgments and decrees for
(continued...)
Page 17 of 	27
Court will start with the $1,476,552.25 and go from there.
Throughout these proceedings, including the confirmation hearing,
Signature has used the judgment figure – $1,476,552.25 – plus
varying additional numbers representing interest at various
rates, attorney fees, and other costs. 	E.g., Signature exhibits
4, 9 and 10.
To bring that number up to date, Signature put into evidence
redacted copies of bills for attorney fees and costs, Signature
exhibits 5-8 17 , and calculations of the total debt owed as of
about March 2007 based on post judgment interest rates of 18%
(default rate), Signature exhibit 9 ($1,994,512.26), and of 12%
(non-default rate), Signature exhibit 10 ($1,878,977.10). 	Since
the loan was in default when the foreclosure action was initiated
and the judgment rendered, that rate should apply to accruing
post petition interest. 	N.M.S.A. §56-8-4(A)(1) (2007 Repl.
Pamp.) 18 	See Century Bank v. Hymans, 120 N.M. 684, 692-94, 905
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18 (...continued)
the payment of money from entry and shall be calculated
at the rate of eight and three-quarters percent per
year, unless...the judgment is rendered on a written
instrument having a different rate of interest, in
which case interest shall be computed at a rate no
higher than specified in the instrument;...
19 In addition to the $580,000, the Plan calls for payments
upon confirmation of approximately $74,000 to two other
creditors. 	Debtor exhibit L. 	These figures do not take into
account sums due to Debtor’s chapter 11 counsel; Mr. Janes
testified that he did not know what that figure was. 	In
consequence, the total of $654,000 may be understated by tens of
(continued...)
Page 18 of 	27
P.2d 722, 730-32 (Ct. App. 1995)(variable rate in promissory note
underlying judgment required judgment interest rate to be
recalculated each year). 	The 18% rate is not unconscionably
high. 	See First National Bank in Albuquerque v. Energy Equities
Inc., 91 N.M. 11, 17, 569 P.2d 421, 427 (Ct. App. 1977) (court
required to award interest at default rate of 10% rather than
nondefault rate of 7.5%). 	Thus the Court will treat the
Signature debt as approximately $2 million for purposes of
assessing adequate protection.
Debtor’s approach, as clarified in closing argument,
basically was to provide an initial pay down of about $211,000
(1/7 of the state court judgment number) plus all accrued
interest, and 1/7 of the accrued attorney fees. 	Using Signature
exhibit 9, the interest would be approximately $346,000 and 1/7
of the attorney fees would be (approximately $164,000 ÷ 7 =)
$23,500. 	Together those figures total approximately $580,000. 19
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19 (...continued)
thousands of dollars.
Page 19 of 	27
Were that sum paid to Signature on confirmation, Signature would
be left with a debt of ($1,266,000 + attorney fees of at least
$141,000 =) $1,407,000, plus accruing interest. 	(Again, all of
these figures are calculated as of the date of the confirmation
hearing; they presumably would need to be updated by the time of
any payment or deposit following confirmation.)
To begin with, Debtor’s water rights cannot be treated as
securing repayment of Signature’s claim for adequate protection
purposes. 	Debtor’s Schedule D explicitly states that Signature’s
claim is secured by “all real property except Silvertree and
water rights”. 	Doc 10. 	And the second modification clearly
reserves Debtor’s rights to contest Signature’s claim to the
water rights. 	Signature rightly argues that Debtor cannot have
it both ways: Debtor may not hold the water rights up as securing
repayment of Signature’s claim and then try to snatch them away
once it has confirmed its Plan. 	Debtor is thus left with its
land and improvements (exclusive of Silvertree), coupled with the
proposed stream of payments, as adequate protection for cramdown
purposes.
Debtor’s testimony about the value of the land and the
improvements was anchored in three appraisals produced by George
Jordan. 	Debtor exhibits A (2,757 acres of land), B (Stonebridge
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20 Magnolia has a first lien on Silvertree. 	Schedule D (doc
10).
21 The value for Silvertree was $1,000,000 on the same
assumptions.
Page 20 of 	27
Inn) and C (Silvertree Lodge). 	However, since Signature’s deed
of trust does not cover Silvertree 20 , the most relevant
appraisals are for the raw land comprising Canyon Creek Ranch
(Exhibit A) and Stonebridge Inn (Exhibit B).
The Canyon Creek Ranch land was valued, as of April 2006, at
$5,650,000, assuming a marketing/absorption period of three
years; Stonebridge was valued at $400,00 on the same
assumptions. 21 	These figures are quite artificial; on
instructions from either Debtor or Premier Mortgage, the
appraisals made the extraordinary assumption that the lots were
completely developed and the improvements completely refurbished
and updated. 	Exhibits A, B and C at iii. 	The appraisals stated
that as of April 2006, were the properties ready for sale,
including all utilities in place for the real estate and the
lodge and inn completely renovated and updated to current market
standards, and were financing readily available, and were a
professional development and marketing program in place, then
each of the properties would have the “hypothetical market value”
stated. 	Id. 	Whatever may have been the reasons for this
approach originally, it resulted in appraisals of considerably
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22 Because the Court is not using the “hypothetical market
value” figures, the Court does not need to address the
shortcomings of those parts of the appraisals, such as the unduly
short absorption rates, the competition from other developments
in Angel Fire, Red River, Taos and Jemez, where the development
financing would come from, the lack of stoves in the Stonebridgge
rooms when they are renovated, the challenge of marketing the
renovated Stonebridge rooms for the (so far) unheard of price of
$150 per square foot (about $45,000 per unit), etc.
23 The Court found Mr. Jordan’s testimony about any added
value from the power line quite unclear; that is, it is still not
clear to the Court whether Mr. Jordan’s figure of $1,800,000 took
into account the existence of the power line and right of way, or
whether perhaps another $180,000 or so of value should be added
to the $1,800,000 to arrive at a more accurate figure. 	Thus
Debtor has not met its burden of persuasion of this specific item
and the Court has adopted the value of $1,800,000 with the power
line in place as is. 	Should there be further hearings in which
this issue again arises, either party may want to supplement the
record.
24 The analogous value for the land only for Silvertree is
$40,000. 	Exhibit C at 30. 	Mr. Jordan also testified that he did
not analyze what the Silvertree current value would be. 	While
the Court does not accept the “hypothetical market value as if
complete” appraisal figures (one of the standards required by the
client and not necessarily one that Mr. Jordan would have
employed if not so instructed), the Court finds that Mr. Jordan’s
testimony was straightforward and credible.
Page 21 of 	27
diminished value for determining the value of the properties “as
is”. 22
In consequence, the more useful portions of the appraisals
are contained in the feasibility and cost analyses. 	For the
Canyon Creek lots, the value of “the land in its native state” 23 ,
Debtor exhibit A at 32, or “as if vacant and without any
improvements or approvals” (emphasis in text deleted), id. at 38,
is $1,800,000. 24 	Mr. Jordan testified that although there were
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25 The Plan also requires Signature to release its lien on
the land which constitutes the right of way for the power line.
During closing argument, Signature stated it did not oppose such
a release, but wanted something unspecified in return. 	Debtor
agreed to do that. 	Because of the (understandable) lack of
detail about what that swap would be, the Court has not analyzed
that transaction for this opinion.
Page 22 of 	27
improvements on the property beyond its “native state”
(improvements in this sentence defined as roads, platted lots,
utilities and water), he did not have an opinion of their value.
The analogous value for the land only for Stonebridge is
$120,000. 	Exhibit B at 30. 	Mr. Jordan candidly testified that
he had no idea what the current value was of the Stonebridge
improvements (which would need to be considerably “improved” to
make then saleable). 	Should Debtor make the first payment upon
confirmation, Signature’s interest in the Canyon Creek Ranch
land, up to a value of $1,407,000, would be adequately protected
by an equity cushion of about ($1,920,000 - 1,407,000 = $513,000
÷ $1,407,000 =) 36%. 	This meets the standard of
§1129(b)(2)(A)(iii). 	Compare Pikes Peak, 779 F.2d at 1459 and
1461 ($3,500,000 value securing $2,887,000 debt [constituting
equity cushion after three years of approximately 21%] is both
adequate protection and an indubitable equivalent for purposes of
§1129(b)(2)(A)(iii)). 25
DEBTOR’S COMPLIANCE WITH BANKRUPTCY CODE
Signature also raised Debtor’s inaccurate statements of post
petition debt and debt payments as a basis for denying
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Page 23 of 	27
confirmation. 	The Court agrees. 	In the course of this chapter
11 case, Debtor’s affiliates have paid roughly $284,000 to
$293,000 of the estate’s post petition expenses, without Debtor
having disclosed either the debts or the payments. 	For example,
the December 2006 monthly operating report (“MOR”) shows
postpetition liabilities of about $169,000, but Mr. Janes
admitted that if affiliates’ advances of about $240,000 from one
affiliate and a smaller amount from another one were taken into
account, the postpetition liability figure would be about
$462,000. 	Those expenses and payments should have appeared in
both the MORs and the amended disclosure statement (doc 64).
Because they did not, the 	MORs and the disclosure statement were
materially erroneous. 	In consequence, the disclosure statement
should never have been approved and is now disapproved, and the
Plan cannot be approved for failure to comply with §1129(a)(2).
In re Prudential Energy, 58 B.R. 857, 867 (Bankr. S.D.N.Y. 1986)
(confirmation denied); In re Crowthers McCall Patterns, Inc., 120
BR 279, 299-300 (Bankr. S.D.N.Y. 1990) (disclosure statement
liquidation value of $35 million was too low; confirmation denied
but DIP authorized to notice higher value of $71-$81 million to
voters and to resolicit); In re Applegate Property, Ltd., 133
B.R. 827, 831-32 (Bankr. W.D. Tx. 1991) (disclosure statement
failed to disclose acquisition of claims by insider; DIP allowed
to amend and resolicit). 	Prudential Energy states that the
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Page 24 of 	27
sufficiency or accuracy of the disclosure statement can be
addressed at confirmation, 58 B.R. at 866 n. 5, and Applegate
Property points out that it is not sufficient that the correct
information could have been gleaned from other parts of file; it
needs to be in the disclosure statement. 	133 B.R. at 831.
The evidence did not suggest that anyone connected with
either Debtor or any of the affiliates intended any deception.
In fact, given Mr. Janes’ testimony of how closely related are
the management and the use of all the affiliates’ assets, the
Court concludes that Debtor and its affiliates acted in good
faith in using whatever assets were available to pay the expenses
as they arose, just as they were doing prior to the filing of the
petition. 	Debtor’s balance sheets, Debtor exhibit M, reflect
that practice. 	Nevertheless, what may be perfectly acceptable
outside of bankruptcy can lose its legitimacy once a petition is
filed. 	As one learned commentator has noted, transparency,
accountability and integrity are the three overarching values of
the bankruptcy process. 	Leif Clark, Dicta: Conflicts of
Interest, ABI Journal, Vol 21, No. 3 (April 2002), at 37. 	A
material misstatement of post petition expenses and payments
violates the principle of transparency, regardless of the
parties’ intent. 	The Plan cannot be confirmed.
The Court has other concerns as well. 	For example, the Plan
provides that a creditor whose claim has not been listed by
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Page 25 of 	27
Debtor must file a proof of claim by the Effective Date or the
claim will be barred. 	¶9.1. 	Similarly, a creditor with a
scheduled claim is limited to that claim if the creditor fails to
file a proof of claim for a different amount by the Effective
Date. 	Id. 	There is no further provision for notice. 	That
provision might constitute the minimum notice required by the
Code. 	Cf. Sheftelman v. Standard Metals Corp., 839 F.2d 1383,
1386-87 (10 th Cir. 1987) (notice requirements for creditors
before approval of plan of reorganization), citing Reliable
Electric Co., Inc. v. Olson Const. Co., 726 F.2d 620 (10 th Cir.
1984). 	Nevertheless, it is a departure from what has been the
practice in this district of providing significantly more
targeted notice to the claim holder. 	Cf. Clerk’s Practice and
Procedure Guide, ¶5.1.17 (Objections to claims) (2 nd ed. October
1, 1996). 	Thus, although this provision by itself would probably
not be the basis for not confirming the Plan, it suggests a
philosophy on the part of Debtor to ensure the least amount of
payment even to creditors holding legitimate claims against the
estate.
Conclusion
Clearly Debtor’s strategy in proposing this Plan was to meet
the standards for confirmation with the absolute minimum
commitment of resources. 	The strategy itself is not a reason for
not confirming the Plan, since confirmation negotiations and the
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26 This ruling moots Debtor’s request for a ruling on what
amount Debtor needs to deposit pursuant to the Plan for the first
payment of the Signature claim. 	Doc 123; Signature objection –
doc 129. 	The Court will enter an order so ruling.
Page 26 of 	27
confirmation process are fundamentally a tug of war among
competing interests. 	On the other hand, that strategy increases
the risk of failure for a debtor that miscalculates. 	That is
what has happened here. 	Like a slalom skier who makes (at
least) one of his turns too close to the gate and thereby
eliminates himself from the race, Debtor’s plan, even with the
written and oral modifications, cuts the confirmation
requirements far too finely to fairly meet them.
For the reasons set forth above, the Court finds that the
Plan does not meet the requirements of the Code, and therefore it
cannot be confirmed. 26 	The Court will enter an order denying
confirmation, and setting a status conference within a short
period of time to hear from the parties about how this case
should further proceed.
Honorable James S. Starzynski
United States Bankruptcy Judge
date entered on docket: 	December 14, 2007
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Page 27 of 	27
copies to:
Arin Elizabeth Berkson
Moore, Berkson & Gandarilla, P.C.
PO Box 216
Albuquerque, NM 87103-0216
George M Moore
Moore, Berkson & Gandarilla
PO Box 216
Albuquerque, NM 87103-0216
Donald A Walcott
PO Drawer 9570
Santa Fe, NM 87504-9570
Joseph Van R. Clarke
1701 Old Pecos Tr
Santa Fe, NM 87505-4758
Gail Gottlieb
Sutton, Thayer & Browne
PO Box 1945
Albuquerque, NM 87103-1945
Andrew M. Sanchez, Sr.
1701 Old Pecos Tr
Santa Fe, NM 87505-4758
William J Arland, III
PO Box 1357
Santa Fe, NM 87504-1357
James A Askew
PO Box 1888
Albuquerque, NM 87103-1888
Leonard K Martinez-Metzgar
PO Box 608
Albuquerque, NM 87103-0608
Westwater Resources
610 Gold Ave., SW Ste. 111
Albuquerque, NM 87102
DreamCatcher Real Estate Company, Inc.
PO Box 5369
Taos, NM 87571
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