Genaro Mendoza

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1Originally, confirmation was opposed by several creditors, including City National Bank, First
Republic Bank, and JP Morgan Chase Bank. However, all of those objections have been resolved and
it appeared when this matter first came on for hearing that the plan was consensual. However, after
confirmation U.S. Bank moved for reconsideration on grounds its counsel had mis-calendared the
hearing. The debtor and U.S. Bank have stipulated to consideration of U.S. Bank’s objections.
1
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
GENARO MENDOZA, 	No. 09-11678
Debtor(s).
______________________________________/
Memorandum re Plan Confirmation
_________________
Debtor Genaro Mendoza has for many decades been in the business of buying poorly managed
or poorly maintained income properties, especially large apartment houses. He installs on-site
managers, renovates the properties, reduces the vacancy rates and sells them. His business model
involved purchasing properties which initially did not cash flow and funding the deficit on a short term
basis with high interest junior liens. It also required him to sell a certain number of appreciated
properties periodically. The recent downturn in real estate values and available financing forced his
Chapter 11 filing. He has proposed a plan of reorganization which proposes to pay all of his creditors
in full, with interest. Creditor U.S. Bank National Association, as Trustee for the Registered Holders
of Countrywide Commercial Mortgage Trust 2007-MF1, Commercial Mortgage Pass-Through
Certificates, Series 2007 MF1 (“U.S. Bank”) objects.1
Entered on Docket
April 20, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 09-11678 Doc# 233 Filed: 04/19/10 Entered: 04/20/10 08:18:33 Page 1 of
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2Even this rate is considerably higher than the contract rate which, due to its variability and the
low current prime rate, is set to recalculate at less than 3%.
2
U.S. Bank holds a senior deed of trust secured by a 60 - unit apartment house in Rohnert Park,
California. Originally, the plan called for U.S. Bank to retain its lien and be paid in full at the end of
five years, with monthly interest-only payments at 4.5%. The plan was modified on February 22,
2010, to reduce the term to three years and again on April 15, 201, to reduce the interest rate to
3.75%. 2 U.S. Bank objects on four grounds: that the plan is not feasible, that the plan discriminates
unfairly, that the interest rate is too low, and that the law does not permit the debtor to cure the default
under the note created when he placed a junior consensual lien on the property.
The court finds no merit to U.S. Banks’ argument that the plan discriminates unfairly. The
treatment afforded to it under the plan is the same as that of numerous other banks who hold senior
liens on similar properties. The other banks have all accepted the plan voluntarily. While the plan
does provide for higher interest to some junior creditors, that only reflects the greater risk under the
plan borne by junior creditors.
There is likewise no merit to the argument that the plan is unfeasible. The uncontested
evidence before the court is that the apartment house is being extremely well managed. It has been
renovated and the vacancy rate is near zero. The cash flow is more than sufficient to cover the
payments to U.S. Bank, no matter what interest rate the court fixes. The holder of the junior lien has
agreed to accept whatever is left over after the payment to U.S. Bank, even if that means negative
amortization. The debtor has sold at least one large apartment house while in Chapter 11 and
prospects for further sales seem reasonable. The plan is very feasible, especially given the debtor’s
long history of successful investment and property management.
U.S. Bank agues that the plan is not confirmable over its objection because the debtor placed a
junior encumbrance on the property in violation of a “due-on-sale-or-encumbrance” provision and the
plan cannot cure this “noncurable default.” However, the court finds no merit to this position. In
reorganization proceedings, essentially all defaults are curable. 11 U.S.C. § 1123(a)(5)(G); In re Entz-
Case: 09-11678 Doc# 233 Filed: 04/19/10 Entered: 04/20/10 08:18:33 Page 2 of
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3
White Lumber and Supply, Inc., 850 F.2d 1338, 1341 (9th Cir.1988). This includes breach of a due-
on-sale clause in a deed of trust. See In re Coastal Equities, Inc. 33 B.R. 898, 905 (Bankr. S.D. Cal
1983)[“This Court finds that a due-on-sale clause is not something so sacrosanct that it is immune
from modification in a bankruptcy setting.”]. 	In re Flores, 345 B.R. 615, 617 (Bankr.N.D.Ill.2006);
In re Garcia, 276 B.R. 627, 642-43 (Bankr.D.Ariz.2002); In re Trapp, 260 B.R. 267, 271-72
(Bankr.D.S.C.2001); In re Rutledge, 208 B.R. 624, 628 (Bankr.E.D.N.Y.1997); In re Allston, 206 B.R.
297, 299 (Bankr.E.D.N.Y.1997). Violation of the due-on-sale clause gives U.S. Bank a right to
compensation for any economic loss, not a right to void any attempt at reorganization. 	The case relied
upon by U.S. Bank, In re Claremont Acquisition Corp., Inc., 113 F.3d 1029 (9th Cir. 1997), dealt with
assumption and assignment of a franchise agreement under § 365 of the Code without a plan of
reorganization, not the debtor’s right to cure a default under a plan.
In this case, the violation of the due-on-sale-or encumbrance clause was of such minor moment
that the current owners of the note purchased it well after the junior deed of trust was recorded and
apparently thought it so unimportant that they did not even bother to check for it. Compensation by a
slightly higher interest rate is a fair and equitable way of dealing with this rather inconsequential
breach.
Both the debtor and U.S. Bank agree that an appropriate rate of interest should be calculated
according to Till v. SCS Credit Corp., 541 U.S. 465 (2004), and that the court should start with a
prime rate of 3.25%. However, their experts came up with different results: the debtor’s came up with
a rate of 4% to 6% while that of U.S. Bank arrived at 6.15%. Both experts reached their bottom line
when the plan proposed a five-year term for the note.
As is often the case with real expert testimony, the two experts in this case essentially agree
with each other once inherent biases based on employer are disregarded. U.S. Bank’s expert arrived at
6.15% based on the entirely false assumption that the property was being poorly managed, when in
fact the evidence before the court is entirely to the contrary. Deducting the full percent added by U.S.
Bank’s expert based on this false assumption gives a figure of 5.15%, pretty much in line with the
Case: 09-11678 Doc# 233 Filed: 04/19/10 Entered: 04/20/10 08:18:33 Page 3 of
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opinion of the debtor’s expert.
The debtor argues now for a lower rate based on two factors. First, the plan has been revised to
call for a three-year term instead of five years. Second, the other banks have consented to a 3.75%
rate. There is no other evidence to support this lower rate, except that both experts agree that some
reduction is appropriate due to the shorter term.
The lower rate accepted by the other banks is some evidence for the lower rate to U.S. Bank, as
it is in essence an admission against their interests. However, the value of this evidence is slight since
the court has no way of knowing exactly what was on the minds of those other banks and how much of
their concession was due to the persistence of debtor’s counsel and a desire to avoid a protracted
confirmation battle. Considering all of the risk factors used by the two experts in reaching their
figures, the court finds that the appropriate rate of interest for the 5-year term originally proposed was
4.75%. The court finds that the reduction to a three-year term justifies a reduction of the interest rate
to 4.25%. However, this rate should be increased by .15% due to the increased risk associated with the
addition of a junior deed of trust in violation of the due-on-encumbrance provision. Accordingly, the
court will confirm the plan if the interest rate payable to U.S. Bank is increased to 4.4%.
For the foregoing reasons, the court will overrule all of the objections of U.S. Bank except the
objection that the interest rate is too low. If the debtor amends his plan to provide for a 4.4% interest
rate to U.S. Bank, he may then submit an order confirming the plan as so amended.
Dated: April 19, 2010
SAlan Jaroslovsky
U.S. Bankruptcy Judge
Case: 09-11678 Doc# 233 Filed: 04/19/10 Entered: 04/20/10 08:18:33 Page 4 of
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