Jacqueline C. Melcher

OCR transcription for search; preserved printed pages are authoritative

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For The Northern District Of California

UNITED STATES BANKRUPTCY COURT

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AUTHENTIC
U.S. GOVERN
INFORMATION

GPO

Entered on Docket
July 28, 2005

GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re ] Case No. 01-53251-ASW
]
Jacqueline C. Melcher, aka } Chapter 11
Jacqueline Carlin, ]
]
Debtor. ]
]

MEMORANDUM DECISION
OVERRULING OBJECTION TO CONFIRMATION AND
CONFIRMING JOINT PLAN OF REORGANIZATION
Before the Court is the Joint Plan of Reorganization (“Plan”),
proposed for confirmation by Jacqueline C. Melcher (“Debtor”), the
Debtor in this Chapter 11! case, and the Official Committee of
Unsecured Creditors (“Committee”). An objection to confirmation
has been filed by the Estate of Terrence P. Melcher (“Creditor”) .?
Debtor is represented by Terrance L. Stinnett, Esq. and
Dennis D. Davis, Esq. of Goldberg, Stinnett, Meyers & Davis. The

Committee is represented by John D. Fiero, Esq. of Pachulski,

' Unless otherwise noted, all statutory references are to

Title 11, United States Code (“the Bankruptcy Code”), as amended on
October 22, 1994.

> An objection to confirmation was also filed by Wells Fargo
Bank, NA, but that objection has been resolved by stipulation.

MEMORANDUM DECISION OVERRULING

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For The Northern District Of California

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Cage:

Stang, Ziehl, Young, Jones, & Weintraub P.C. Creditor is rep-
resented by Lance N. Jurich, Esq. of Loeb & Loeb LLP. The matter
has been submitted for decision after trial and post-trial
briefing. At trial, Debtor and Committee called Kevin A. Spellman
(“Spellman”), an appraiser, and Debtor’ as witnesses. Creditor
called Rita E. Spence (“Spence”), an appraiser, as its witness.
This Memorandum Decision constitutes the Court’s findings of
fact and conclusions of law, pursuant to Rule 7052 of the Federal

Rules of Bankruptcy Procedure.

T.

BACKGROUND

Debtor commenced this case by filing a petition under
Chapter 11 of the Bankruptcy Code on June 28, 2001. Debtor’s main
assets are her interests in five pieces of real property.

Creditor is the probate estate of Debtor’s former husband
Terrence Melcher. The estate asserts an ownership interest in two
properties that are part of Debtor’s estate as well as a
$168,839.05 unsecured claim based on other alleged rights of
Terrence Melcher in the state court marital dissolution proceeding
with Debtor.

The Plan proposes that the holders of security interests in
Debtor’s various properties will retain their security interests
pursuant to their loan documents. Debtor will pay the secured tax
claim of Monterey County in equal monthly installments within 120

days after confirmation. The Plan also provides that allowed

* Debtor submitted her direct testimony by declaration and

was cross-examined by Creditor at trial.

MEMORANDUM DECISION OVERRULING
OBJECTION TO CONFIRMATION AND

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general unsecured claims, except the claims of Creditor and Ryan
Melcher (“Ryan”), will be paid in full plus post-petition interest
of 5%, five days after the Effective Date. Ryan’s claim is not
impaired under the Plan.

Regarding Creditor’s claim, the Plan proposes that the two
properties in which Creditor holds an alleged community property
interest -- certain real property in Martha’s Vineyard,
Massachusetts (“Stonewall Beach Property”) and the family residence
located in Carmel, California (“Family Residence”) -- shall remain
as property of the estate under 11 U.S.C. §541 and subject to the
automatic stay of 11 U.S.C. §362(a) until the respective rights of
Debtor and Creditor are finally resolved in the California State
Court .*

The Plan has been accepted by two impaired classes. Creditor
was deemed unimpaired under the Plan and did not vote. If Creditor
had voted, Creditor would have voted to reject the Plan.

Creditor objects to the Plan as follows:

1/ Creditor is impaired under the Plan and was not permitted
to vote, so the solicitation process of the Plan violates the
Bankruptcy Code and Rules, compliance with which is a prerequisite
to confirmation pursuant to 11 U.S.C. §1129(a) (1).

2/ The Plan has not been proposed in good faith, which is a

prerequisite to confirmation pursuant to 11 U.S.C. §1129(a) (3).

+ The California State Court includes all trial and appellate

state courts that the Dissolution Proceeding issues will be before
-- until such issues are determined by final and non-appealable
orders.

MEMORANDUM DECISION OVERRULING
OBJECTION TO CONFIRMATION AND

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3/ Confirmation of the Plan is likely to be followed by a
liquidation or need for further reorganization, which violates
11 U.S.C. §1129(a) (11).

4/ The Plan does not propose to pay Creditor at least as
much as Creditor would receive if Debtor’s estate were liquidated
under Chapter 7, which is a prerequisite to confirmation pursuant
to 11 U.S.C. §1129(a) (7) (A) (31).

5/ The Plan is not “fair and equitable” to Creditor within
the meaning of 11 U.S.C. §1129(b) (1), inasmuch as it violates

11 U.S.C. §1129(b) (2) (B).

Il.
FACTS

Debtor and Creditor are former spouses and have been involved

in a marital dissolution action (“Dissolution Proceeding”) in the
Monterey County Superior Court (“Monterey State Court”) for many
years.

Pre-petition, the Monterey State Court determined in the
Dissolution Proceeding what property was community property and
what property was separate property. With respect to Stonewall
Beach Property, the Monterey State Court determined that Debtor
held a separate property interest in it to the extent of $800,000,
and that the property was otherwise community property. In
November 2000, the Monterey State Court ordered that Stonewall
Beach Property be listed for sale at $12,000,000; in February 2001,
the Monterey State Court ordered that an offer for that amount be

accepted.

MEMORANDUM DECISION OVERRULING

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Ryan is the son of Debtor and Terrence Melcher. Pre-petition,
he filed an action in State Court in Massachusetts contending that
his parents had previously agreed to hold Stonewall Beach Property
in trust for him. In that action, he sought an injunction to
prevent the sale of Stonewall Beach Property that had been ordered
by the Monterey State Court. The injunction was denied, but the
Massachusetts State Court did permit Ryan to maintain a recorded

notice of a lis pendens asserting an interest in the property.

Escrow for sale of Stonewall Beach Property was due to close
on June 29, 2001, but the escrowholder would not insure the buyer’s

title due to the cloud represented by Ryan’s notice of lis pendens.

The escrowholder agreed to “close around” the lis pendens and

insure title if it was indemnified by having $8,000,000 of proceeds
impounded for its use in litigating Ryan’s claim. On or about

June 25, 2001, at the request of Creditor’s attorney in the
Dissolution Proceeding, the Monterey State Court issued an order
imposing such an impound for purposes of indemnifying the
escrowholder. The day before close of escrow, Debtor filed her
Chapter 11 petition and the automatic stay of §362(a) prevented
escrow from closing.

Pre-petition, Debtor moved for reconsideration, filed appeals,
and sought writs concerning many of the Monterey State Court’s
orders. Debtor appealed the Monterey State Court’s order directing
sale of Stonewall Beach Property and sought a stay of the sale
pending appeal; stay was granted on condition that a bond of
$7,420,000 be posted, which Debtor credibly states that she was
unable to do. Creditor does not contend that Debtor had or has an
ability to post a bond in that amount.

MEMORANDUM DECISION OVERRULING
OBJECTION TO CONFIRMATION AND

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Debtor filed her bankruptcy case in part due to her lack of
funds. Between 1996 and 2001, the proposed purchaser of Stonewall
Beach Property had rented that property for six weeks during the
summer. In 2001, in anticipation of his purchase of the property,
the purchaser withheld his $40,000 rental payment due Debtor. In
addition, Terrence Melcher had ceased making debt service and other
expenses on the Stonewall Beach Property and the Family Residence
since his separation from Debtor and had failed to pay child
support to Debtor for five years. At the time of Debtor's
separation from Terrence Melcher, Debtor had only $35,000 in debt
on one of her separate properties and ended up borrowing $800,000
on that property in large part to pay debt service on Stonewall
Beach Property.

During Debtor's bankruptcy case, Creditor filed a motion for
relief from stay. On October 8, 2002, this Court denied Creditor’s
motion and ordered, with Debtor’s agreement, that to the extent
that Creditor has an interest in Stonewall Beach Property, Debtor's
interest in Stonewall Beach Property shall provide adequate
protection for any diminution of value to that property as of
December 4, 2001. At trial, the parties agreed that for purposes
of adequate protection, Creditor’s interest in Stonewall Beach
Property as of December 4, 2001 is $4,440,000.

At trial, each party offered expert witnesses to opine as to
the current value of Stonewall Beach Property. Debtor’s witness
Spellman is an appraiser of residential real estate who was
qualified to testify as an expert concerning the value of
residential properties on Martha’s Vineyard. Creditor’s witness

Spence is an appraiser of commercial and residential real property

MEMORANDUM DECISION OVERRULING

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who was qualified to testify as an expert concerning the value of
residential properties on Martha’s Vineyard and also on discount
rates.

Spellman testified that he believed the fair market value of
Stonewall Beach Property was $13,000,000 as of May 20, 2005. He
based that conclusion upon a cost analysis and a sales comparison
analysis after a personal visit to Stonewall Beach Property.
Spellman reviewed six comparable properties on Martha’s Vineyard in
determining his value -- three oceanfront properties in a nearby
town of West Tisbury, one ocean view property in Chilmark, and two
pond front properties in Edgartown, on the other side of Martha’s
Vineyard. Spellman determined that the value of Stonewall Beach
Property ranged from $12,000,000 to $16,000,000 based on
adjustments to the comparable properties and was $11,353,600 based
on his cost analysis.

Spellman has been an appraiser on Martha’s Vineyard since
1985. He explained that ocean front property, like the Stonewall
Beach Property, is superior in value to ocean view property. With
ocean front property, the owner owns the land to the high mean tide
mark, essentially where the water meets the land. With ocean view
property, the owner does not own the land in front of the property.
Spellman testified that in Chilmark, Massachusetts, the town
closest to Stonewall Beach Property, the town leases land to permit
the public to have access to the beach, so ocean front property is
at a premium. While the Stonewall Beach Property is right on the
ocean, it is does not have beach access since the property meets
the water at a 20 to 30 foot cliff. Stonewall Beach Property holds

a deeded easement across the property next door to gain access to

MEMORANDUM DECISION atone.
OBJECTION TO CONFIRMATION

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the beach. The deeded easement is a 3-foot wide path -- it is less
than 1,000 feet from the house: to the beach along that path.

Spellman testified that Chilmark has approximately 17 to 24
sales per year and most of those properties are not ocean front
properties. The number of sales is low because the entry level
price for a 1 to 2 bedroom home on at least 3 acres of property
that is in the woods and requires the owner to drive to the beach
is $1,000,000. Spellman stated that the small number of sales does
not indicate a lack of demand for property because few properties
are offered for sale. He also explained that the real estate
market is still rising on Martha’s Vineyard and prices have risen
by 20% since 2002. Spellman testified that Stonewall Beach
Property is well-known on Martha’s Vineyard and, if put up for
sale, would likely produce multiple bids.

Spellman noted that, on the property adjacent to Stonewall
Beach Property that the deeded easement crosses, a new structure is
under construction. Spellman testified that there is currently a
new foundation poured and some framing in place. Spellman believes
that the new structure will not obscure the ocean views from the
upper floors of the house on Stonewall Beach Property, although it
will likely obscure some of the current views from lower parts of
the property. Additionally, the foundation is currently in the
deeded easement, so a new path will need to be created for the
deeded easement. Although he vacillated somewhat at first,
Spellman testified that he incorporated these events into his
valuation by taking a value of the property from the lower end of
his value range to account for the new structure. Spellman

believes that buyers would pay $13,000,000 today for Stonewall

MEMORANDUM DECISION OVERRULING

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Beach Property knowing that a new structure was being built next
door that will likely obscure some of the current lower views from
Stonewall Beach Property.

Spence conducted an appraisal of Stonewall Beach Property in
1999 but did not visit the property for this matter and did not
update her appraisal. Spence valued Stonewall Beach Property at
$5,300,000 as of June 14, 1999. Spence has been an appraiser on
Martha’s Vineyard since 1993. Spence testified that any appraisal
of Stonewall Beach Property would need to be discounted by 15%
because this type of property would take an average of 510 days to
sell and, based upon Spence’s conversations with seven other
brokers on Martha’s Vineyard, there is increasing resistance to
sales of property on the upper end of the market, like Stonewall
Beach Property.

Debtor filed an equity analysis hypothesizing the sale of all
of her properties. As of March 4, 2005, Debtor expects net proceeds
after deduction of selling expenses and payment of taxes on the gain

for her properties as follows:

Property Value Mortgage Equity Net Proceeds
Stonewall Beach $12,000,000 $2,098,266 $9,901,734 $3,024,951°
Moshup Trail 1,500,000 769,947 730,053 207,117%
Holt Road 3,350,000 1,575,406 1,774,594 691,617 |

> Debtor projects $720,000 in selling expenses and $3,131,832

in taxes on the gain. The net proceeds represents Debtor’s 1/2
community property interest in this property.

° Debtor projects $120,000 in selling expenses and $402,936 in
taxes on the gain. Creditor does not allege any community property
interest in this property.

’ Debtor projects $201,000 in selling expenses and $881,977 in
taxes on the gain. Creditor does not allege any community property
interest in this property.

MEMORANDUM DECISION OVERRULING
OBJECTION TO CONFIRMATION AND

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642,085 857,915 619,265

25535 Tierra Grande

1,500,000

Pamily Residence 1,240,000

675,000 565,000 226,923",

Debtor testified that the net proceeds do not account for the
approximately $1,800,000 of her separate funds she has expended
since 1997 in connection with paying debt service, property taxes
and maintenance to protect the value of Stonewall Beach Property and
the over $200,000 of her separate funds Debtor put into the Family
Residence prior to Creditor being added to the title. If Creditor
is found to have a community property interest in Stonewall Beach
Property or the Family Residence, Debtor would assert these
expenditures as offsets to any monies owed to Creditor.

Post-petition, Debtor also received Court authority to borrow
$1,400,000 as a second mortgage against Stonewall Beach Property.
From the loan funds, Debtor sequestered approximately $140,000
(“Sequestered Account”) to fund the loan payments for the first
year. At the time of trial, Debtor had approximately $43,000 in the
Sequestered Account to pay the second mortgage payments on Stonewall
Beach Property through September 2005.

Debtor currently rents out each of her properties. However,
the rents received on Stonewall Beach Property are insufficient to
pay the debt service on that property once the funds in the

Sequestered Account run out this October, so Debtor will need to

* Debtor projects $120,000 in selling expenses and $118,650 in
taxes on the gain. Creditor does not allege any community property
interest in this property.

” Debtor projects $99,200 in selling expenses and $11,954 in
taxes on the gain. The net proceeds represents Debtor’s 1/2
community property interest in this property.

MEMORANDUM DECISION OVERRULING
OBJECTION TO CONFIRMATION AND

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provide additional funds to cover the shortfall. There are several
ways in which Debtor can easily satisfy this shortfall.

First, Debtor has a bank account that includes the net proceeds
from the borrowing of $1,400,000 secured by Stonewall Beach Property
(not including the funds put in the Sequestered Account discussed
above) and the refinancing of the Holt Road Property (“Impound
Account”). Debtor has a commitment from Cedar Mortgage Company to
lend Debtor $1,000,000 secured by property located at 25535 Tierra
Grande, Carmel, California (“Tierra Grande Rental Property”) .*°
Debtor testified that there will be $1,409,663 in the Impound
Account once her loan with Cedar Mortgage Company has closed. That
loan is ready to close upon this Court’s confirmation of the Plan.
After Debtor pays all claims that need to be paid on the Effective
Date of the Plan, there will be approximately $280,950 remaining in
the Impound Account. Those funds can be used to pay debt service on
Stonewall Beach Property after the funds in the Sequestered Account
are depleted -- until Debtor either refinances or sells one of her
properties. This will provide Debtor with approximately two years
worth of payments for the Stonewall Beach Property second mortgage.

Second, Debtor testified at trial that she talked with a real
estate broker about selling the Tierra Grande Rental Property and,
based on an increase in the value to $1,800,000 and a decrease in
the debt, that property currently has approximately $1,200,000 in
equity. Debtor used an 8% estimate of the selling costs for the

property ($144,000) and the Court projects that taxes on the gain

' The Cedar Mortgage Company loan will take out the

approximately $650,000 of secured debt on the Tierra Grande Rental
Property and provide Debtor with $350,000 in additional funds.

MEMORANDUM DECISION OVERRULING
OBJECTION T Eur Dostb

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1 |] would increase to $206,550,** leaving Debtor with net proceeds of
2 || approximately $450,000'° if she were to sell the Tierra Grande
Rental Property at $1,800,000 after confirmation.

Debtor also presented credible evidence that, arquendo, if
Stonewall Beach Property were valued today at $9,000,000 (a figure
far below what this Court finds the property is worth) and were sold
in one year, Debtor’s interest in Stonewall Beach Property would

have sufficient equity to cover any diminution of value of

So CO SF DB OH HR WH

Creditor’s stipulated $4,440,000 interest as of December 4, 2001.

10 |] Debtor assumed that the hypothetical $9,000,000 value today would be
11 |] decreased by 10% for delay, leaving $8,100,000 present value for the
12 |} property. From that amount, Debtor deducted costs of sale of

13 | $486,000 and the community mortgage of approximately $700,000 for

144 net proceeds of $6,914,000 to be divided between Creditor and

15 |} Debtor. Each party would receive $3,457,000, from which Debtor’s

161 $800,000 separate property interest would be deducted from

17 || Creditor’s interest and added to Debtor’s interest, leaving Creditor
18 |} with a $2,657,000 distribution and Debtor with a $4,257,000

19 |} distribution.

20 Under the stipulation against. diminution of value, Debtor would
21 |} owe Creditor an additional $1,783,000 from her $4,257,000

22

23 '' Debtor stated that the Tierra Grande Rental Property had a
14 taxable gain of $404,949 with a value of $1,500,000. Increasing
the taxable gain by the additional $300,000 in value and

25 multiplying $704,949 by 20% for federal capital gains taxes
($140,990) and 9.3% for state capital gains taxes ($65,560), the
76 || Court estimates taxes on the gains to total $206,550.

7 " This number is lower than the equity shown by Debtor as of
March 4, 2005 because in Debtor’s calculations the secured debt
9g || against the property is $642,085 while the Cedar Mortgage Company
loan (which will pay off the $642,085 secured debt) is for
$1,000,000.

MEMORANDUM DECISION OVERRULING
OBJECTION TO CONFIRMATION AND

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5.

distribution to bring Creditor’s portion to $4,440,000. Thus, after
the additional payment to Creditor and repayment of Debtor’s
$1,400,000 loan against Stonewall Beach Property, Creditor would
receive $4,440,000 and Debtor would receive $1,074,000 from the
hypothetical $9,000,000 sale one year from now.

Creditor asserts that it may be owed interest at the rate of
10% on the Monterey State Court’s determination of community
property, totaling approximately $2,220,000 a year from now and
Debtor’s interest would not cover that payment. The parties agreed
that Debtor’s $9,000,000 sale analysis did not cover Creditor’s

interest argument or Debtor’s alleged offsets.’

iil.
ANALYSIS

As set forth above, Creditor’s objections to confirmation
require consideration of whether the following criteria for
confirmation have been met:

1/ Solicitation of the Plan complies with the Bankruptcy Code
and Rules, as required by 11 U.S.C. 81129 (a) (1).

2/ The Plan must have been proposed in good faith, as
required by 11 U.S.C. §1129(a) (3).

3/ Confirmation of the Plan is not likely to be followed by a
liquidation or need for further reorganization, as required by

11 U.S.C. §1129(a) (11).

'’ Because Creditor asserts an ownership (community property)
interest in two properties in Debtor’s estate, Creditor’s argument
that it is entitled to interest is not self-evident.

MEMORANDUM DECISION Sto AMD.
OBJECTION TO CONFIRMATION

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] 4/ The Plan must propose to pay Creditor at least as much as

2 || Creditor would receive if Debtor were liquidated under Chapter 7,

3 || required by 11 U.S.C. §1129(a) (7) (A) (ii).

Priority Rule of 11 U.S.C. §1129(b) (2) (B) (ii).
As the proponents of the Plan, Debtor and Committee bear the

burden of establishing each of these elements, see In re Acequia,

\O oO ~ ion ~N pan

Inc., 787 F.2d 1352 (9th Cir. 1986), by a preponderance of the

10 | evidence, see In re Arnold and Baker Farms, 177 B.R. 648 (9th Cir.

11} BAP 1994), aff'd, 85 F.3d 1415 (9th Cir. 1996), cert. denied,

12519 U.S. 1054, 117 S.Ct. 681 (1997).

13
14 A. Plan Solicitation
15 Creditor contends that its class (Class 10) is impaired under

16] the Plan and is entitled to vote.?* Because the Plan deemed its
17 |} class to be unimpaired, it did not receive a ballot. Creditor
18 |] contends that Debtor’s failure to solicit Creditor’s vote on the

19} Plan means the Plan does not comply with 11 U.S.C. §1126°° and,

20 || therefore, the Plan cannot be confirmed under 11 U.S.C. §1129(a)(1

21
22

23 "Under Bankruptcy Codes section 1124(1), a creditor is
24 impaired under the Bankruptcy Code if the plan alters that
creditor’s legal, equitable or contractual rights.

25
' Bankruptcy Code section 1126(a) provides:
26
The holder of a claim or interest allowed under
7 section 502 of this title may accept or reject
a plan. If the United States is a creditor or
28 equity security holder, the Secretary of the

Treasury may accept or reject the plan on
behalf of the United States.

MEMORANDUM DECISION OVERRULING
OBJECTION TO CONFIRMATION AND

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5/ The Plan must be “fair and equitable” to Creditor within

the meaning of 11 U.S.C. §1129(b) (1) by not violating the Absolute

as

).

UNITED STATES BANKRUPTCY COURT

For The Northern District Of California

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Creditor claims it is impaired because the Plan alters its
rights in that the Plan: (1) fails to provide post-petition interest
on the Monterey State Court order; (2) permits Debtor to continue
prosecuting the California State Court appeals without posting an
appeal bond; (3) prevents Creditor from enforcing the Monterey State
Court order immediately; and (4) contains only a naked promise that
Creditor will be paid once Creditor’s claims are allowed.

Debtor claims that her treatment of Creditor under the Plan
does not impair Creditor because the continuation of the automatic
stay under the Plan does not alter Creditor’s rights that Creditor

currently holds, citing In re PPI Enterprises (U.S), Inc., 324 F.3d

197 (3rd Cir. 2003) (*PPI Enterprises”) and In re American Solar

King Corp., 90 B.R. 808 (Bankr. W.D. Tex. 1988) (“Solar King”).

In PPI Enterprises, the debtor’s former landlord objected to

the debtor's proposed plan of reorganization because the plan capped
the landlord’s damages pursuant to 11 U.S.C. §502(b) (6) and treated
the landlord as unimpaired. The Third Circuit held that because

11 U.S.C. §502(b) (6) altered a creditor’s non-bankruptcy claim
irrespective of any proposed plan, the proposed plan could not
depart from that limitation and the plan did not alter the
landlord’s legal, equitable or contractual rights, stating:

A plan which “leaves unaltered” the legal rights
of a claimant is one which, by definition, does
not impair the creditor. A plan which leaves a
claimant subject to other applicable provisions
of the Bankruptcy Code does no more to alter a
claimant’s legal rights than does a plan which
leaves a claimant vulnerable to a given state’s
usury laws or to federal environmental laws.
The Bankruptcy Code itself is a statute which,
like other statutes, helps to define the legal
rights of persons, just as surely as it limits
contractual rights. Any alteration of legal
rights is a consequence not of the plan but of
the bankruptcy filing itself.

MEMORANDUM DECISION ween ue
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PPI Enterprises, 324 F.3d at 204 (quoting Solar King, 90 B.R. at

819-20).

Similarly, in Solar King, the creditor objected to its

treatment as a subordinated creditor pursuant to 11 U.S.C. §510(b).
The Bankruptcy Court held that to the extent that the proposed plan
provided the creditor with the same treatment as provided in the
express provisions of 11 U.S.C. §510(b), the plan did not impair the
creditor. “To the extent the plan goes beyond Section 510(b) to
deprive them of any property on account of their claims, it impairs

the class.” Solar King, 90 B.R. at 822.

Here Debtor argues that because Stonewall Beach Property and
the Family Residence remain property of the estate under the Plan
and subject to the automatic stay, the Plan does not alter
Creditor’s rights. Creditor currently is subject to the provisions
of the automatic stay and will remain subject to them after
confirmation of the Plan.

Bankruptcy Code Section 1141(b) permits a debtor to maintain
property in a confirmed plan as property of the estate.’®
Bankruptcy Code section 362(c) (1) provides that the automatic stay
continues so long as such property remains property of the estate.
Thus, the Plan’s provision for retention of the automatic stay is
expressly authorized by the Code -- the treatment of Class 10 does
not alter Creditor’s current legal, contractual or equitable rights

and the Plan does not impair Creditor.

' Bankruptcy Code section 1141(b) provides:

Except as otherwise provided in the plan or the
order confirming the plan, the confirmation of
a plan vests all of the property of the estate
in the debtor.

MEMORANDUM DECISION OVERRULING

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Creditor’s argument that the Plan only provides it with a naked
promise to pay is simply incorrect. The Plan provides Creditor with
whatever legal rights the California State Court determines that
Creditor holds -- no more, no less. Thus, for example, if the
California State Court were to determine that Creditor has a
community property interest in the Stonewall Beach Property, then
Creditor will have such an interest under the Plan. The Plan is
straightforward in this respect. Moreover, because the Stonewall
Beach Property and the Family Residence remain property of the
estate pursuant to the Plan, Debtor cannot sell or hypothecate them
without further court order -- on notice to Creditor. Therefore,
the Plan provides Creditor with far more legal rights than a naked
promise to pay.

Even, assuming arquendo, the Court had found that the Plan
impairs Creditor’s claim, Creditor has confirmed that it would vote
against the Plan. The parties submitted post-trial briefing on
whether, assuming Creditor is impaired by the Plan, Debtor’s failure
to solicit Creditor’s vote is fatal to confirmation of the Plan.
None of the parties found a case determinative of the issue. The

case most directly related to this issue is In re Jones, 32 B.R. 951

(Bankr. D. Utah 1983). In Jones, the debtors’ plan proposed to cure
the defaults of two creditors by making monthly installment payments
commencing 30 days after the effective date. The plan stated that

those creditors were not impaired. At the confirmation hearing, the

bankruptcy court sua sponte questioned whether those creditors were
impaired. The bankruptcy court held that such treatment did impair
those creditors and if the debtors proposed to treat the creditors

in that fashion, the debtors “must amend the plan to specify that

MEMORANDUM DECISION Orton ene
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classes B-2 and B-3 are impaired and permit them to vote.” Jones,
32 B.R. at 960. However, the Jones court did not reach the question
whether the creditors could be assumed to have voted against the
plan for confirmation purposes and there is no holding that such a
modification and voting could not be summarily conducted. Moreover,
Jones is not binding authority in any event.

In this case, if the Court were to determine that Creditor was
impaired, Creditor has stated clearly that it would vote against the
Plan, so there is nothing to gain by requiring Debtor and the
Committee to modify the Plan, solicit Creditor’s vote and, absent a
Court order shortening the period, wait 20 days for Creditor to send
in a ballot rejecting the Plan. It would be a futile exercise.
Plus, Creditor has filed its objections to plan confirmation --
which the Court has carefully considered. The parties fully briefed
Creditor’s objections and the Court has conducted an evidentiary
hearing on those objections that contained factual elements.
Creditor has made its position on the Plan perfectly clear. The
Court will deem that if Creditor were impaired, Creditor would vote
to reject the Plan and so the Court will evaluate whether Debtor and

the Committee meet the requirements of 11 U.S.C. §1129(b) (1).

B. Good Faith

The term “good faith” in the context of 11 U.S.C. §1129(a) (3)
is not statutorily defined but has been interpreted by case law as
referring to a plan that “achieves a result consistent with the

objectives and purposes of the Code.” In re Syimar Plaza, L.P.,

314 F.3d 1070, 1074 (9th Cir. 2002), cert. denied, 538 U.S. 1035,

123 S.Ct. 2097 (2003), citing In re Corey, 892 F.2d 829, 835 (9th

MEMORANDUM DECISION OV. ton END.
OBJECTION TO CONFIRMATION

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Cir. 1989), cert. denied, 498 U.S. 815, 111 S.Ct. 56 (1990). “The

requisite good faith determination is based on the totality of the

circumstances.” Id., citing In re Stolrow’s, Inc., 84 B.R. 167, 172

(9th Cir. BAP 1988).

Creditor asserts that the Plan is not proposed in good faith
because the Plan: (1) provides for indefinite imposition of the
automatic stay; and (2) improperly provides for preempting of state
court orders. Neither of these are the case.

First, while the Plan does provide for the continuation of the
automatic stay with respect to Creditor’s Class 10, under Plan
section TV.A.10.a.iii., that stay lifts “at such time as all issues
in the Dissolution Proceeding have been determined by final and non-
appealable orders, except those involving child or spousal support.”
Plan at 11:3-5. Thus, the automatic stay lifts when the Dissolution
Proceeding is complete and the stay has a definite termination.

Moreover, confirmation of a plan in a bankruptcy case is
legitimate when the filing debtor is faced with an appeal bond that

would severely disrupt its business. In re Marshall, 298 B.R. 670

(Bankr. C.D. Cal. 2003). In Marshall, the debtors filed their
bankruptcy petition on the eve of a hearing where a creditor sought
an order requiring the debtors to transfer substantially all of
their assets to Texas to satisfy a $12 million judgment in probate
court. The judgment was on appeal and required an $18 million
appeal bond. The debtors did not have sufficient liquid assets to

post a bond of this size and the bankruptcy court found that the

MEMORANDUM DECISION OVERRULING
OBJECTION TO CONFIRMATION AND

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debtors’ plan of reorganization was filed in good faith. Marshall,
298 B.R. at 683-84.*'

Here Debtor does not have sufficient liquid assets to post the
required $7,420,000 appeal bond and Creditor does not claim that she
does. Debtor supports herself in large part from the rental income
of her properties and so selling those properties would eliminate
that rental income. Debtor’s proposal to pay her general unsecured
creditors in full and keep the Stonewall Beach Property and the
Family Residence as part of the estate until the Dissolution
Proceeding is complete is consistent with the objectives and
purposes of the Code. Debtor merely seeks to complete the
California State Court litigation and receive a determination of the
parties’ respective legal rights. Creditor is fully protected by
the retention of the two properties to insure that its claim will be
paid, if upheld on appeal, and Debtor is permitted to pursue her
appeal without having to liquidate the real property that provides
her income.

Second, the Plan does not preempt state court orders. Under
Plan section IV.A.10.a.ii., both Debtor and Creditor are “bound by
the terms of any final non-appealable orders made and entered in the
Dissolution Proceeding whether at the appellate level or at the
trial court level.” Plan at 10:23-24. The Plan does reserve
Debtor's right to object to the allowance of any proof of claim or
request for payment of expense of administration filed by Creditor

in this case, but that caveat does not mean Debtor has the right to

'’ In Marshall, the debtors’ plan originally proposed to pay
the judgment creditor in full, however the judgment creditor failed
to file a proof of claim in the bankruptcy case. The debtors
amended their plan to discharge the judgment creditor's unfiled
claim.

MEMORANDUM DECISION Orion AND.
OBJECTION TO CONFIRMATION

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relitigate the California State Court proceedings in this Court and
Debtor has stated that she will not.’**

Moreover, the fact that the Plan leaves the automatic stay in
place pending the California State Court decision in the Dissolution
Proceeding does not leave Creditor without legal rights. Creditor
is free to file a motion to lift the automatic stay at anytime and a
decision by the bankruptcy court to grant or deny such a motion is
appealable. As noted above, Bankruptcy Code section 1141 (b)
expressly permits a debtor to maintain property in a confirmed plan
as property of the estate.

The Court finds that the Plan is proposed in good faith

pursuant to 11 U.S.C. §1129(a) (3).

C. Feasibility

The Court can confirm a plan only if the Court determines that
confirmation is not likely to be followed by liquidation, or the
need for further reorganization pursuant to 11 U.S.C. §1129(a) (11);
this is commonly referred to as the “feasibility” requirement.

To demonstrate that a plan is feasible, a debtor
need only show a reasonable probability of
success. The Code does not require the debtor

to prove that success is inevitable, anda
relatively low threshold of proof will satisfy

§1129{(a) (11), so long as adequate evidence
supports a finding of feasibility. [Citations
omitted].

In re Brotby, 303 B.R. 177, 191 (9th Cir. BAP 2003).

Creditor claims the Plan is not feasible because success of the
Plan depends upon Debtor’s success in her appeals, her ability to

service her debt, stagnant interest rates, and real estate market

'’ This Court's order confirming the Plan will also so provide.

MEMORANDUM DECISION won RMD
OBJECTION TO CONFIRMATION AN!

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conditions. Further, according to Creditor, Debtor will not be able
to pay Creditor’s obligations after the Effective Date.

Debtor testified credibly that all general unsecured claims
will be paid from the Impound Account and additional funds from the
Cedar Mortgage Company loan. Debtor will provide a reserve for
contested claims. Debtor will have sufficient funds to pay the
administrative claims not subject to subordination and all general
unsecured claims with interest. Debtor also testified credibly that
she has over $3,350,000 in equity in her separate properties and
will have $324,000 in excess funds between the Impound Account and
the Sequestered Account to service the second mortgage on Stonewall
Beach Property after payments required on the Effective Date to
provide a cushion for payment of debt service until one of her
properties sells.’* Debtor testified that she recently talked with
a real estate broker about selling the Tierra Grande Rental Property
and that property has approximately $1,200,000 in equity. Debtor
believes the property can sell quickly, taking less time than the
normal one year it takes to sell multi-million dollar homes. The
Court finds there will be sufficient liquid funds in the future to
service the debt on the various properties.

Finally, Stonewall Beach Property and the Family Residence
remain property of the estate under the Plan and Debtor cannot sell
or further encumber those properties without a court order. Thus,

those properties will be available to pay Creditor should its claim

" The $324,000 is comprised of the $43,000 in the Sequestered
Account and the approximately $280,950 remaining in the Impound
Account after all claims that need to be paid on the Effective Date
are paid.

MEMORANDUM DECISION OVERRULING
OBJECTION TO CONFIRMATION

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be upheld in the California State Court. There is sufficient equity
in these properties to insure Creditor will be paid.

The Court specifically finds that Stonewall Beach Property is
currently worth at least $13,000,000. The Court finds Spellman’s
analysis of the value of the Stonewall Beach Property much more
credible and well supported than that of Spence. There was a firm
offer for the property for $12,000,000 in 2001 and Spellman
testified that it might now be worth as much as $16,000,000 and that
the real estate values on Martha’s Vineyard have been, and are,
increasing. Stonewall Beach Property will retain this value
notwithstanding the likely construction on the Cohen property.
Spellman testified that there were no ocean front properties of this
price range sold in 2004 and that there are few properties
available. If it were necessary to sell Stonewall Beach Property,
it is likely that there would be multiple offers for this prime
piece of realty, as Spellman testified. This has already been shown
-- Debtor received two offers of $12,000,000 and $12,100,000,
respectively -- when in 2001 the Monterey State Court required
Debtor to sell the property.

Moreover, assuming arquendo, the Stonewall Beach Property was
sold for the extremely low price of $9,000,000 one year from now,
Debtor has shown that she has sufficient equity in her interest in
that property to cover the adequate protection payment Debtor agreed
to pay Creditor. Debtor can clearly pay Creditor for whatever
interest the California State Court determines Creditor may have in
the two properties.

Further, Debtor testified without contradiction that there is

over $450,000 in equity in the Family Residence and the value of

MEMORANDUM DECISION OVERRULING
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ry

that property is increasing. This cushion 1s more than adequate to
protect Creditor while the automatic stay of the Plan is in place.

The Court finds the Plan is feasible.

D. Chapter 7 Test

A Chapter 11 plan must propose to pay creditors holding
impaired claims who do not vote to accept the plan at least as much
as the creditor would receive in liquidation under Chapter 7,
pursuant to 11 U.S.C. §1129(a) (7) (A) (11); this is commonly referred
to as the “best interest of creditors test”, or the “Chapter 7
test”. The Plan proposes to distribute to Creditor any amounts
required upon a final determination by the California State Court
that Debtor is liable to Creditor.

Creditor contends that in a liquidation, Creditor would be paid
in full since Debtor has over $13,800,000 in equity in her various
properties and only $1,900,000 in administrative and general
unsecured claims. Creditor asserts that in a Chapter 7 liquidation,
it would receive half of the proceeds from sale of the Stonewall
Beach Property and the Family Residence. However, the Court finds
that this is not the case.

Under the Plan, Creditor is to be paid in full upon a
determination of its claims, if any, against Debtor and its
interests, if any, in property of the estate. Creditor will receive
exactly what it is entitled to once the California State Court
litigation over the parties’ respective rights has been concluded.
In a Chapter 7 liquidation, Creditor would not receive any portion
of the proceeds from a. sale of Stonewall Beach Property or the

Family Residence until the respective rights of Debtor and Creditor

MEMORANDUM DECISION OVERRULING
OBJECTION TO CONFIRMATION AND

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in those properties is determined. Creditor assumes that it would

be paid from any sale of Stonewall Beach Property and the Family

Residence, but the Chapter 7 trustee would litigate -- and the
bankruptcy court would determine -- what, if any, claims Creditor
had against Debtor prior to distributing monies to it. This is

precisely what Debtor proposes to do under the Plan. The Chapter 7
trustee would not need a bond to litigate Creditor’s claims -- the
Chapter 7 trustee could do the same thing Debtor is doing under the
Plan. Creditor’s argument is premised on Debtor being denied her
day in court if the bankruptcy case were converted to chapter 7 --
but Debtor’s estate would have the same rights to contest Creditor’s
claim in a Chapter 7 that Debtor does in a Chapter 11. The Court

finds that the Chapter 7 test is met.

E. Absolute Priority Rule

The Plan has been accepted by two of its four classes:

Classes 1, 2, 4, 5, 6, 8, 9, 10, 11 and 15 are unimpaired and
therefore deemed to accept pursuant to §1126(f£).

Classes 12°° and 16 are impaired and voted to accept.

Classes 3°’ and 14 are impaired and did not vote.

” Creditor objects to confirmation of the Plan on the basis
that because the general unsecured creditors are receiving post-
petition interest, they are actually unimpaired and cannot vote on
the plan. Debtor and the Committee assert that because Class 12 is
receiving less interest then they would be allowed under either
State law or their contracts, Class 12 is impaired. Because Class
16 -- the claim of Monterey County Bank -- is impaired and voted
for the Plan, whether Class 12 is impaired is irrelevant because
Debtor and the Committee have an impaired assenting class. In any
event, the Court agrees with Debtor and the Committee that the
general unsecured creditors are impaired under the Plan.

7! Class 3 is the allowed secured claim of Wells Fargo Bank.
Debtor and Wells Fargo Bank have entered into a stipulation
resolving the objection to the Plan and rendering Wells Fargo Bank

MEMORANDUM DECISION OVERRULING
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Classes 7 and 13 are intentionally omitted.

Compliance with the Absolute Priority Rule is one of two pre-
requisites for “cramdown”, which is permitted by 11 U.S.C.
§1129(b) (1) if a plan fails to meet the requirement of 11 U.S.C.
§1129(a) (8) that each impaired class has voted to accept the plan,
but does meet each other applicable requirement of 11 U.S.C.

§1129 (a):

if all of the applicable requirements of

subsection (a) of this section other than
paragraph (8) are met with respect to a plan,
the court, on request of the proponent of the
plan, shall confirm the plan notwithstanding the
requirements of such paragraph if the plan does
not discriminate unfairly, and is fair and
equitable, with respect to each class of claims
or interests that is impaired under, and has not
accepted, the plan.

Debtor and the Committee request confirmation under the “cramdown”

provisions of 11 U.S.C. §1129(b) (1).

With respect to the first prerequisite for cramdown, Creditor
complains that the Plan unfairly discriminates against it because,
under the Plan, the general unsecured creditors are paid in full in
cash with post-petition interest while it receives no payment of any
kind. First, Creditor has asserts a $168,839.05 unsecured claim
against the estate. Creditor’s claim is the subject of a pending
objection. This Court’s order confirming the Plan will provide for
payment of Creditor’s unsecured claim with post-petition interest if
and when allowed. In addition, Creditor claims an ownership

(community property) interest in the Stonewall Beach Property and

Family Residence. However, under In re Johnston, 21 F.3d 323 (9th

unimpaired.

MEMORANDUM DECISION OVERRULING

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Cir. 1994), the classification and treatment of Creditor’s claim
complies with 11 U.S.C. §1129(b) (1).
In Johnston, creditor Steelcase held a claim that was the

subject of ongoing litigation and was provided for in a separate

class. Under the plan of reorganization, all unsecured claims were
to be paid in full, plus interest. Payment to Steelcase was
contingent upon the success of the litigation. The plan called for

the claim to be paid in full within 120 days of the entry of the
judgment. The Ninth Circuit held that the treatment of Steelcase’s
claim was not unfair and discriminatory treatment because there were
reasonable, nondiscriminatory reasons for the separate treatment.

In this case, there are reasonable, nondiscriminatory reasons
for the treatment of Creditor’s claim. First, Creditor’s claim is
disputed and is in the process of being litigated. The Plan
provides for Creditor’s claim to be paid in full once determined by
the California State Court. Chapter 11 plans routinely and
appropriately provide that a creditor whose claim is disputed has to
wait to be paid until the dispute over the claim has been resolved.

As noted above, Creditor claims a community property interest
in the Stonewall Beach Property and the Family Residence. At this
point, Creditor is not entitled to post-petition interest on any
state court order, so that fact that general unsecured creditors are
receiving post-petition interest on their claims and the Plan does
not specifically provide the same for Creditor is not unfair
discrimination. If the California State Court determines that
Creditor is entitled to post-petition interest, Debtor shall provide

for that payment, subject to her offsets.

MEMORANDUM DECISION OVERRULING

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Further, the two properties in which Creditor asserts an
interest are being retained as property of the estate under the Plan
and will be available to satisfy Creditor’s claim if the California
State Court determines that it has one. If the California State
Court awards Creditor with a community property interest in
Stonewall Beach Property and the property ultimately sells for
$13,000,000 or $16,000,000 or more, Creditor will benefit from the
higher price and receive even more money from the property.
Creditor’s downside risk as an owner of Stonewall Beach Property has
been essentially eliminated by Debtor’s agreement that any
diminution of the value of the Stonewall Beach Property below
$12,000,000 shall come out of Debtor's share of the sale proceeds.
As demonstrated above, even if the Stonewall Beach Property were to
sell for as little as $9,000,000 next year, there is sufficient
equity in Debtor’s interest in the property to adequately protect
Creditor’s interest.

The second prerequisite for cramdown -- fair and equitable
treatment of an impaired class that did not vote to accept a plan --
is defined for purposes of unsecured creditors by 11 U.S.C.
§1129(b) (2) (B), which embodies what is commonly referred to as the
Absolute Priority Rule:

(i) the plan provides that each holder of a
claim of such class receive or retain on account
of such claim property of a value, as of the
effective date of the plan, equal to the allowed
amount of such claim; or
(ii) the holder of any claim or interest that is
junior to the claims of such class will not

receive or retain under the plan on account of
such junior claim or interest any property.

MEMORANDUM DECISION OVERRULING

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Thus, as used in 11 U.S.C. §1129(b) (2) (B), the “phrase ‘fair and
equitable’ is not a vague exhortation to bankruptcy judges that they
do the right thing; rather, it implements the so-called absolute
priority rule under which an objecting class must be paid in full
before any claim or interest junior to it gets anything at all.” In
re Perez, 30 F.3d 1209, 1212-13 (9th Cir. 1994).

Creditor argues that the Absolute Priority Rule is not met here
because Debtor will continue in existence and in possession of her
property, even though Creditor will not be paid in full. However,
this is true for any disputed claim that is being litigated post-
confirmation. In this connection, the Absolute Priority Rule has
two parts and 11 U.S.C. §1129(b) (2) (B) (i) provides that “each holder
of a claim of such class receive or retain on account of such claim
property of a value, as of the effective date of the plan, equal to
the allowed amount of such claim.”

Here, Creditor retains, as of the Effective Date of the Plan,
value equal to the allowed amount of its claim. First, Creditor
does not have an allowed claim, so there is no legal requirement
that it “retain” anything under the Bankruptcy Code. However, the
Plan provides that Creditor’s possible interest in Stonewall Beach
Property will be repaid from a sale of the property or other means
by Debtor to satisfy the debt if the California State Court
determines that it has such an interest. The same holds true for
the Family Residence. There is no need for Debtor to provide a
reserve or post a bond because the Stonewall Beach Property and the
Family Residence remain property of the bankruptcy estate under the
Plan and, as the Court has found and finds today, adequately protect

Creditor’s interests. Plus, under 11 U.S.C. 8363 and §364, Debtor

MEMORANDUM DECISION OVERRULING
OBJECTION TO CONFIRMATION AND

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For The Northern District Of California

UNITED STATES BANKRUPTCY COURT

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cannot sell or encumber those properties without further order of

the Court.

IV.

CONCLUSION

Debtor and Creditor engaged in contentious litigation in the
Dissolution Proceeding. Debtor filed this Chapter 11 case in part
to permit her to remedy what she considers to be injustices
inflicted upon her in the Dissolution Proceeding. Debtor is unable
to provide a bond to stay the Dissolution Proceeding while she
pursues her appeals. The Plan is designed to maintain the status
quo and protect Creditor while Debtor appeals the Dissolution
Proceeding. The Court finds that the Plan appropriately protects
Creditor during the appeals and is an appropriate use of Chapter 11.

For the reasons set forth above, Creditor’s objection to
confirmation of the Plan is overruled and the Plan shall be
confirmed. Counsel for Debtor shall submit a form of order so
providing, after review as to form by counsel for Creditor and the

Committee.

kilee WZ inlet

ARTHUR S. WEISSBRODT
UNITED STATES BANKRUPTCY JUDGE

MEMORANDUM DECISION OVERRULING

Ca

Gott ra2obinDaGt dO Aborckileds@7/25/05 &Atered: 07/28/05 11:44:38 Page 30
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Case No. 01-53251
UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
CERTIFICATE OF MAILING

I, the undersigned, a regularly appointed and qualified
Administrative Law Clerk in the office of the Bankruptcy Judges
of the United States Bankruptcy Court for the Northern District
of California, San Jose, California hereby certify:

That I am familiar with the method by which items to be
dispatched in official mail from the Clerk's Office of the United
States Bankruptcy Court in San Jose, California are processed on
a daily basis: all such items are placed in a designated bin in
the Clerk's office in a sealed envelope bearing the address of
the addressee, from which they are collected at least daily,
franked, and deposited in the United States Mail, postage pre-
paid, by the staff of the Clerk's Office of the Court;

That, in the performance of my duties, on the date set forth
below, I served the MEMORANDUM DECISION OVERRULING OBJECTION TO
CONFIRMATION AND CONFIRMING JOINT PLAN OF REORGANIZATION in the
above case on each party listed below by depositing a copy of
that document in a sealed envelope, addressed as set forth, in
the designated collection bin for franking, and mailing:

Terrance L. Stinnett, Esq. John D. Fiero, Esq.

Dennis D. Davis, Esq. Pachulski, Stang, Ziehl,
Goldberg, Stinnett, Meyers & Young, Jones & Weintraub P.C.
Davis 3 Embarcadero Center #1020

44 Montgomery St. #2900 San Francisco, CA 94111

San Francisco, CA 94104

James F. Lewin Lance N. Jurich, Esq.

Wells Fargo Bank Loeb & Loeb LLP

P.O. Box 12289 10100 Santa Monica Blvd. #2200
El Cajon, CA 92022-2289 Los Angeles, CA 90067-4164

I declare under penalty of perjury under the laws of the
United States of America that the foregoing is true and correct.
Executed on July 26, 2005, at San Jose, California.

L——

KRISTI S. GERRIOR

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