DBI Housing, Inc.

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re
DBI HOUSING, INC.,
Debtor.
Case No. 2:12-bk-51335-RK
Chapter 11
MEMORANDUM DECISION ON MOTION
OF LITTLE MEDICI, LLC, FOR RELIEF
FROM AUTOMATIC STAY REGARDING
PROPERTY LOCATED AT 4219-4225
SOUTH HOOVER STREET, LOS
ANGELES, CALIFORNIA, 90037
Trial Hearing: May 9, 2013
Time: 9:00 a.m.
Courtroom: 1675
The motion for relief from the automatic stay filed on January 22, 2013 by Little
Medici, LLC (“movant”) first came on for hearing before the undersigned United States
Bankruptcy Judge on February 19, 2013. Because the motion raised material factual
issues regarding valuation, the court set and conducted an evidentiary hearing on the
motion on May 9, 2013.
By its motion, movant seeks relief from the automatic stay for a lack of adequate
protection of its lien pursuant to 11 U.S.C. § 362(d)(1), for failure to commence required
installment payments pursuant to 11 U.S.C. § 362(d)(3), and for bad faith pursuant to 11
FILED & ENTERED
MAY 22 2013
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	bakchell
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U.S.C. § 362(d)(4) on grounds that this bankruptcy case affecting movant’s real property
collateral is a serial bankruptcy filing.
The evidentiary hearing was necessitated because movant and the debtor
disagree as to the value of the property located at 4219-4225 South Hoover Street, Los
Angeles, California, 90037 (the “subject property”), which is a material issue to resolving
the issues raised by the motion. See In re Mellor, 734 F.2d 1396, 1400-1401 (9th Cir.
1984). The court conducted the evidentiary hearing to receive testimony and
documentary evidence to resolve the issues of valuation on May 9, 2013. At the hearing
on May 9, 2013, Roksana Moradi, of the law firm of Simon Resnik Hayes LLP, appeared
on behalf of the debtor. Chad Biggins, of the Law Offices of Chad Biggins, appeared on
behalf of the movant.
The parties do not dispute that movant’s lien is in first position on the subject
property in the amount of $428,267.00 as of the date of filing the motion, on January 22,
2013. At the evidentiary hearing, debtor’s valuation expert witness, Steven J. Decker,
stated that the subject property was worth $620,000 as of April 5, 2013. See Declaration
of Steven J. Decker, attached to Debtor’s Opposition Brief, Exhibit B at 14. Movant’s
valuation expert witness, David Hahn, stated that the subject property was worth
$415,000 as of March 20, 2013. See Declaration of Chad Biggins with Appraisal of David
Hahn attached as Exhibit A. The appraisal report of Mr. Hahn was attached to counsel’s
declaration, but the report itself was not accompanied by Mr. Hahn’s declaration under
penalty of perjury. The court heard the testimony of the appraisers called by the parties
as expert witnesses, and Mr. Hahn adopted his report as his direct testimony during his
testimony under penalty of perjury at trial. The parties conducted direct, cross, re-direct,
and re-cross examination of these witnesses, and the appraisal reports of the expert
witnesses were received into evidence without objection.
For the reasons discussed herein, the court determines that the fair market value
of the subject property is $510,000. Although both appraisers were certified state real
estate appraisers and experienced, and the court finds that their testimony was
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admissible and credible, the court does not completely adopt the opinion of either expert
witness. The court finds that the comparable sales analysis of Mr. Decker is more
credible than Mr. Hahn's because Mr. Decker considered the surrounding neighborhood
in his analysis, and his valuation report includes two comparable sales that occurred in
2013. See Debtor’s Opposition Brief, Exhibit B at 10. Additionally, Mr. Decker used all
non-REO (Real Estate Owned) property sales for comparison, which are more indicative
of fair market value, and all his selected properties were within two miles of the subject
property. Testimony of Steven Decker, May 9, 2013 at 10:56-11:03 a.m. In this court’s
view, Mr. Hahn's sales comparables were generally inferior because they were more
distant from the subject property in comparison to Mr. Decker’s sales comparables.
Moreover, Mr. Hahn’s sales comparables #1 and #4 were REO sales. Testimony of
Steven Decker, May 9, 2013 at 10:56-10:57 a.m. Mr. Hahn did not give an explanation
for the use of REO sales in his sales comparables other than a generalized statement
that REO sales influenced the local real estate sales market, though in contrast, Mr.
Decker was able to identify more non-REO sales in the neighborhood, which would better
reflect the market valuation that the court should conduct. Id. If Mr. Hahn was right that
REO sales heavily influenced the local market, this would have been reflected in Mr.
Decker’s non-REO sales comparables, which does not appear to be the case. Id.
Mr. Hahn also did not include a neighborhood analysis in his valuation report, nor
did he adjust his sales comparables based on the availability or lack of parking at those
properties. Testimony of David Hahn, May 9, 2013 at 9:53-9:56 a.m. Sales comparable
#3 in Mr. Hahn's valuation report reflected a sale that occurred 18 months ago, in
September 2011, explained that the market has not changed much in 18 months.
Testimony of David Hahn, May 9, 2013 at 10:17 a.m. Using Mr. Decker’s sales
comparable analysis of $56,000 per rentable unit (not including the two studio units not
yet legally permitted), which the court finds credible, yields a market valuation of
$504,000. Mr. Decker relied upon his Sales Comparables #1, 2 and 5 as the most
relevant in determining a $56,000 per rentable unit figure, which the court also finds to be
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credible, as these comparable properties are located close to the subject property (less
than 0.6 mile away) and similar in character (i.e., residential rental).
Mr. Decker conducted a substantial analysis of the rental market for the subject
property, comparing other similar rental properties to determine the correct market rent of
the rental units in the subject property. This analysis rendered a higher appraised value
for the subject property because the analysis supported higher potential rental rates. In
contrast, Mr. Hahn did not conduct his own market rent analysis, and instead relied upon
previous appraisers' computations, which he admitted were not the most current rates.
See Declaration of Chad Biggins with Appraisal of David Hahn attached, Exhibit A at 11;
Testimony of David Hahn, May 9, 2013 at 10:02-10:03 a.m. Although it is permissible for
experts in the field to rely on other experts' reports, Mr. Hahn conceded that the current
rental rates are preferable when making a proper income analysis of a property. See
Testimony of David Hahn, May 9, 2013 at 10:02-10:03 a.m., 10:24 a.m. Both expert
witnesses gave primary weight to the income analysis approach for this property.
Additionally, Mr. Hahn's valuation report was inferior because it did not analyze the
existence of rent control, nor did he conduct or obtain a current rent roll for the subject
property. Testimony of David Hahn, May 9, 2013 at 10:02-10:03 a.m.,10:20-10:21 a.m.
Mr. Hahn used rent rolls from previous appraisals. Id. However, the court notes that Mr.
Decker included potential rents from the two nonconforming units located in the subject
property in his market rent analysis. This is perhaps the most significant difference in the
valuation analysis of the two appraisers based on the income approach. Mr. Hahn
valued the rent generated by the two nonconforming units at $0 based on their
nonconformity. See Declaration of Chad Biggins with Appraisal of David Hahn attached,
Exhibit A at 11. In contrast, Mr. Decker's report included the rent of two "single units,"
one of which is currently leased (both are nonconforming units), and valued the rental
value of those two units at a total income of $12,876 per year. See Debtor's Opposition
Brief, Exhibit B at 16. Although Mr. Decker explained his reasoning for including those
units in his analysis—because the units could be converted to commercial (legal) units or
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prospective buyers would consider the units in purchase price notwithstanding their
nonconformity—Mr. Decker conceded that, as of May 9, 2013, the units were not yet
legally permitted. Testimony of Steven Decker, May 9, 2013 at 10:33-10:34 a.m.
Although Mr. Decker stated he considered the nonconformity of the units in determining
his overall capitalization rate of 8%, he did not apply a discount factor based on the
nonconformity. Testimony of Steven Decker, May 9, 2013 at 10:51-10:52 a.m. The court
finds that these rent values should be considered because the income of these units
reflects actual reality, but should be substantially discounted in the income-approach
determination, because while the units are not yet legally permitted units, there was
credible testimony that debtor has obtained a zoning variance for the units, subject to
further approval of building permits. Accordingly, the court will adjust the net operating
income computed by Mr. Decker, which the court finds credible, though the court will not
consider the potential income of the vacant studio unit computed at a market rate of
$8,040, and subtracting out that income, but allowing the actual rent controlled income for
the leased studio unit of $4,836, the court determines the adjusted net operating income
for the subject property to be $43,827, yielding a capitalized value of $547,837 based on
a 8% capitalization rate. Testimony of Steven J. Decker, May 9, 2013 at 10:33-10:34
a.m. Subtracting Mr. Decker’s adjustments for rent loss of $6,896 and deferred
maintenance of $7,000, which adjustments the court finds to be credible, results in an
indicated value of $533,939 based on an income approach.
Mr. Decker stated his opinion that, in the last 18 months, the local real estate sales
market has improved slightly, based on the fact of rising rents of approximately 4 to 8%
during that time frame. Testimony of Steven Decker, May 9, 2013 at 11:24 a.m. In an
order entered on January 31, 2012 in the prior bankruptcy case, the court by Honorable
Ellen Carroll valued the subject property at $510,000 as of July 13, 2011 upon debtor’s
motion, not opposed by movant. Considering the competing valuation opinions by the
expert witnesses—on the one hand, Mr. Decker believes the market has slightly
improved, if at all, and on the other, Mr. Hahn considering an 18-month-old comparable
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sale to be relevant in today's market and stating that the market has not changed much—
the court finds that because the market has remained stable or slightly improved since
the court’s valuation July 2011, it is appropriate to value the subject property at least
$510,000 at this time. This valuation is supported by the court’s determinations of market
value under the sales comparable and income approaches discussed above.
Because the court determines the value of the subject property to be $510,000,
there is equity of $81,733 net of movant’s lien, creating an equity cushion of
approximately 16%. The court determines that this is a sufficient equity cushion to
adequately protect movant’s lien, and thus, concludes that at this time, stay relief for this
secured creditor should be denied based on 11 U.S.C. § 362(d)(1). See In re Mellor, 734
F.2d at 1400-1401 and n. 2, and cases cited therein, including In re McGowan, 6 B.R.
241, 243 (Bankr. E.D. Pa. 1980) (10% equity cushion sufficient adequate protection) and
In re Rogers Development Corp, 2 B.R. 679, 685 (Bankr. E.D. Va. 1980) (15-20% equity
cushion sufficient adequate protection); see also, In re Pitts, 2 B.R. 476, 476-478 (Bankr.
C.D. Cal. 1979)(suggesting that the adequate protection provided by an equity cushion
may be reanalyzed periodically to avoid dissipation).
As a separate matter, the court also finds that 11 U.S.C. § 362(d)(3) does not
apply to this debtor because the property is not Single Asset Real Estate (SARE) within
the meaning of that section or 11 U.S.C. § 101(51B). Movant checked off the box for
relief under 11 U.S.C. § 362(d)(3) in its form motion, but did not check off the boxes that
the property qualifies as a SARE and met the test for relief under that section in its
moving papers. Moreover, movant did not present any evidence showing that the
property was a SARE. Debtor did not self-identify itself as a SARE debtor in its
bankruptcy petition, nor has the court determined that debtor was a SARE debtor. As
indicated in its bankruptcy schedules, debtor has income from its active business and
multiple rental property located at 2424 South Raymond Street, Los Angeles, California,
and 735 West 52nd Place, Los Angeles, California as well as the subject property.
Indeed, a SARE chapter 11 bankruptcy case is one in which the debtor owns a single
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piece of real estate—property or project, “other than residential real property with fewer
than 4 residential units, which generates substantially all of the gross income of a
debtor . . . .” 11 U.S.C. § 101(51B). In re Hassen Imports Partnership, 466 B.R. 492,
507 (Bankr. C.D. Cal. 2012) (“Further, it is undisputed that the Debtor owns multiple
commercial properties and, thus, the Properties cannot be classified as a ‘single property’
under § 101(51B).”); see also, In re McGreals, 201 B.R. 736, 742-743 (Bankr. E.D. Pa.
1996) (“[I]n order for two or more separate properties to constitute a single project within
meaning of Code § 101(51B), the properties must be linked together in some fashion in a
common plan or scheme involving their use[;]” mere common ownership without intent to
combine the properties in any way does not constitute a “common plan or scheme.”). It
appears that movant made a mistake in checking off the box for § 362(d)(3) relief
because assertion of a claim under that section is erroneous.
Finally, the court finds that the circumstances indicate that this was not a bad-faith
filing to justify relief from stay pursuant to 11 U.S.C. § 362(d)(4). Although this is the
debtor’s second bankruptcy filing (see Prior Bankruptcy Case No. 2:11-bk-38517 RK
Chapter 11), the first bankruptcy case was dismissed at the debtor’s request because it
was not able to comply with United States Trustee Guidelines at that time due to fiscal
constraints. Debtor’s monthly operating reports required extensive amendments, which
the debtor determined would impair the feasibility of its plan for reorganization. Debtor
refiled its bankruptcy case to avoid the unnecessary expense of correcting its monthly
operating reports and to start on a “clean slate” in negotiating with creditors and
formulating a plan of reorganization to repay creditors, which does not indicate a “scheme
to delay, hinder, or defraud” its creditors within the meaning of § 362(d)(4). In this case,
debtor has filed a proposed plan of reorganization to pay movant’s secured claim in full at
the contract rate of 7.75% amortized over 30 years, and although the proposed payment
duration stretches out the repayment of the existing loan, this indicates to the court the
lack of a scheme to delay, hinder or defraud creditors, though the court takes no position
at this time whether the plan is otherwise confirmable on a “cramdown” basis under 11
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U.S.C. § 1129(b) because taking such a position would be premature before the
confirmation hearing. The filing of the proposed plan with accompanying disclosure
statement on January 4, 2013 was relatively prompt after the case was filed on
December 18, 2012. Based on these circumstances, the court find that debtor has met
its burden of proving by a preponderance of the evidence that this case was not filed as a
scheme to delay, hinder or defraud creditors within the meaning of 11 U.S.C. § 362(d)(4).
For the reasons stated herein, the court will enter a separate order denying the
motion for relief from the automatic stay. This memorandum decision constitutes the
court’s findings of fact and conclusions of law.
###
Date: May 22, 2013
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NOTICE OF ENTERED ORDER AND SERVICE LIST
Notice is given by the court that a judgment or order entitled (specify) MEMORANDUM
DECISION ON MOTION OF LITTLE MEDICI, LLC, FOR RELIEF FROM AUTOMATIC STAY
REGARDING PROPERTY LOCATED AT 4219-4225 HOOVER STREET, LOS ANGELES,
CALIFORNIA was entered on the date indicated as “Entered” on the first page of this judgment or
order and will be served in the manner indicated below:
I. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (“NEF”) – Pursuant to
controlling General Order(s) and Local Bankruptcy Rule(s), the foregoing document was served
on the following person(s) by the court via NEF and hyperlink to the judgment or order. As of May
22, 2013, the following person(s) are currently on the Electronic Mail Notice List for this
bankruptcy case or adversary proceeding to receive NEF transmission at the email address(es)
indicated below:
Marc Andrews sandra.g.mcmasters@wellsfargo.com
Douglas C Biggins chadbiggins@gmail.com
Steve Burnell sburnell@frankel-tennant.com
J Sheldon Capeloto jcapeloto@capelotolaw.com
Richard Girgado rgirgado@counsel.lacounty.gov
M Jonathan Hayes jhayes@srhlawfirm.com,
roksana@srhlawfirm.com;carolyn@srhlawfirm.com;shawnj@srhlawfirm.com
Alvin Mar alvin.mar@usdoj.gov
Peter F McAndrews pfm@mamlawfirm.com
Peter F McAndrews pfm@mamlawfirm.com
Douglas G Tennant dtennant@frankel-tennant.com
Eric J Testan etestan@frankel-tennant.com
Michael D Testan mtestan@frankel-tennant.com
Susana B Tolchard susana@tolchardlaw.com, centraldistrictbk@gmail.com
United States Trustee (LA) ustpregion16.la.ecf@usdoj.gov
Mark T Young myoung@donahoeyoung.com
II. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this
judgment or order was sent by U.S. Mail, first class, postage prepaid, to the following person(s)
and/or entity(ies) at the address(es) indicated below:
DBI Housing, Inc.
4808 West Washington Blvd.
Los Angeles, CA 90016
Steven J. Decker
Steven J. Decker & Associates
5800 Hannum Ave Ste#A235
Culver City, CA 90230
III. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this
judgment or order which bears an “Entered” stamp, the party lodging the judgment or order will
serve a complete copy bearing an “Entered” stamp by U.S. Mail, overnight mail, facsimile
transmission or email and file a proof of service of the entered order on the following person(s)
and/or entity(ies) at the address(es), facsimile transmission number(s) and/or email address(es)
indicated below:
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