Zenaida Masacayan Postolica and Danut Laur Postolica

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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Entered on Docket
March 27, 2012

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

FILED

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NORTHERN DISTRICT OF CALIFORNIA

In re ] Case No. 10-51522-ASW
]
ZENAIDA MASACAYAN POSTOLICA and ] Chapter 11
DANUT LAUR POSTOLICA, ]
]
Debtors. ]
]

MEMORANDUM DECISION ON EVIDENTIARY HEARING REGARDING DEBTORS’
MOTION TO SET VALUE OF REAL PROPERTY
Before the Court is the motion (“Motion”) of debtors Zenaida
and Danut Postolica (collectively “Debtors”) to set the value of
property located at 2827-2833 B Street, Rosamond, California 92560
(“Property”). For purposes of their Chapter 11 plan of
reorganization, Debtors seek to value the Property at $70,000,
limit East West Bank’s secured claim to $70,000 and adjust the
interest rate on the claim from the current seven percent to five
percent. East West Bank opposes Debtors’ motion, and instead seeks
a determination that the Property is worth $100,000.
The Court held a two-day evidentiary hearing on the Motion.
Following the conclusion of that hearing, the matter was taken
under submission. At the evidentiary hearing, Debtors were

represented by Lewis Phon, Esq. of The Law Offices of Lewis Phon.

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Celine Mui Simon, Esq. of French & Lyon, Attorneys at Law appeared
on behalf of East West Bank. On the first day of the hearing,
Debtors called Jesus Medina (“Medina”), a real estate broker, and
Zenaida Postolica (“Postolica”) as witnesses. East West Bank
called Kenneth G. Ricks (“Ricks”), an appraiser, as a witness. On
the second day, East West Bank called Ricks as a witness and
Debtors recalled Medina and Postolica as witnesses.

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.

I.
FACTS

Debtors commenced this case by filing a petition under Chapter
11 of the Bankruptcy Code on February 18, 2010. Debtors own
several investment properties, including the Property. The
Property is a four-unit residential building. The Property is
encumbered by a first deed of trust securing a loan from East West
Bank. On the bankruptcy petition date, Debtors owed East West Bank
$95,157.03 under the note.

On August 28, 2010, Debtors filed the Motion. On January 20,
2011, East West Bank filed an objection to the Motion.

At the evidentiary hearing, both Medina and Ricks were
qualified by the Court to testify as experts concerning the value
of the Property. Postolica, while not a qualified expert, but as
an owner, was able to provide testimony that was helpful to the

Court.

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Medina has been a licensed real estate broker in California
since 1984 and in Nevada since 2005 and owns a brokerage company,
Crestline Financial and Marketing Services, Inc. Medina has over
twenty (20) years of experience working as a real estate broker
selling and buying homes in the San Francisco Bay Area for Medina’s
real estate clients. As part of Medina’s services, Medina values
real properties before listing the properties for sale and advises
clients, of the properties’ values. Debtors asked Medina to
determine the market value of the Property as a personal favor to
Debtors. According to Medina’s testimony, Medina knows Zenaida
Postolica’s sister.

In Medina’s Declaration filed on June 1, 2011, Medina states
that Medina believes the fair market value of the Property was
$80,000. Medina explains that the $80,000 value reflects the price
at which the Property would likely sell in ninety (90) days. At
trial, Medina opined that he believed the Property to be worth
between $60,000 and $80,000. Medina explained that his valuation
was based on what he thought a reasonable investor would likely pay
for the Property.

In arriving at.Medina’s valuation for the Property, Medina
testified that he considered several factors, including: (i) the
Property’s relatively high vacancy rate of 25%; (ii) the general
condition of the Property, including Medina’s estimate that the
Property needs $10,000 to $12,000 for landscaping and $2,000 to
$3,000 for a new fence; and (iii) Medina’s opinion that the real
estate market in Rosamond has been declining for the past two
years. Medina also testified that his valuation was based on one

single comparable property, as well as Ricks’ comparable properties

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(which includes Medina’s comparable property as Ricks’ comparable
number one).

Ricks is a certified general real estate appraiser throughout
the State of California, a real estate broker, and principal of
Kenneth Ricks & Associates. Ricks has been active in appraising
real estate in southern California since 1986 and estimates that he
prepares roughly twenty-five (25) real estate appraisals for
potential buyers every year. Ricks was retained by East West Bank
to conduct an appraisal of the Property. Ricks appraised the
Property twice. On September 22, 2010, Ricks appraised the
Property at $90,000. On June 29, 2011, Ricks appraised the
Property at $100,000. Ricks testified that the reason for the
discrepancy between the two appraisal values was because he had no
access to the interior of the Property during the first appraisal.
In addition, Ricks testified that there was only one other
comparable sale at the time of the first appraisal. Ricks
testified that he had access to.the Property during the second
appraisal and was able to make a better evaluation of the interior
of the Property. Further, Ricks testified that there were more
comparables where the sales had closed by the time of the second
appraisal.

In appraising the Property, Ricks testified that he used three
methods to value the Property: (i) the income approach; (ii) the
sales comparison approach; and (iii) the replacement cost approach.
Ricks stated that he gave emphasis to the sales comparison and
income based valuation approaches because these methods best

reflect the actions of the buyers and sellers.

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The sales comparison approach to value is based upon an
analysis of comparable properties within the same neighborhood in
light of factors such as.the real estate market of the particular
neighborhood, the school systems, and the dwelling’s
characteristics including square footage, age, and condition.
Adjustments are then made to the sales price of the comparable
properties for characteristics of each comparable property which
would make the comparable property more or less valuable than the
Property, including variations in total square footage and living
space, the total number of bedrooms/bathrooms/fireplaces, superior
or inferior condition of the roof, style of heating and air
conditioning, additions to the property such as a pool, and whether
the property or portions of the property such as the kitchen had
been recently remodeled.

According to Ricks’ testimony and appraisal, Ricks used five
comparable properties for Ricks’ sales comparison approach. The
comparable properties ranged from 0.2 to 0.4 miles from the
Property. Four of the properties closed escrow between October
2010 and February 2011. One of the properties did not close escrow
prior to Ricks’ valuation, and whether that property ever closed
escrow is still unknown. The adjusted sales prices of the
comparable properties ranged from $47,525 to $113,590.

In valuing a property based on the income approach, the
adjusted sales price of each comparable property is divided by that
property’s monthly rents. The resulting figure is the gross rent
multiplier for that property. Using the income approach to
valuation, the subject property can then be valued by multiplying

the monthly rents for the subject property by a representative

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gross rent multiplier for the comparable properties. The theory
behind this approach is that an investor is likely to pay a certain
purchase price for a certain income stream.

The gross rent multiplier figures for Ricks’ comparable
properties ranged from thirty-two (32) to sixty-five (65). Ricks
testified that Ricks decided to use a multiplier of forty (40) for
Ricks’ income approach valuation, which Ricks acknowledged is on
the low end of the gross rent multiplier range for Ricks’
comparables. According to Ricks’ appraisal, when the Property has
no vacancies, the total monthly rents collected is $2,740. Ricks’
appraisal also includes a separate calculation to reflect the
seven month vacancy of one unit on the Property, which has reduced
the actual total monthly rent to $2,140. However, Ricks testified
that a 25% vacancy rate is uncommon for Rosamond and that the more
appropriate vacancy rate is 10%. Ricks stated that the on-site
manager told him that it usually takes thirty (30) days to rent out
a unit in the area after the unit is fixed up and the previous non-
paying tenant is evicted. Ricks stated that Debtors are charging
high rent prices for some of the Property’s non-vacant units. To
value the Property, Ricks first calculated what Ricks believes is
the market rental value for each of the Property’s four units and
added those figures. The resulting value, which assumes no
vacancies, is $2,500. When Ricks multiplied his gross rent
multiplier (40) by his value for the total monthly rental income
($2,500), the resulting value was $100,000. Thus, Ricks’ valuation
of the Property under the income approach is $100,000. Ricks also
testified that because of the climate in the area where the

Property is located, it would not make sense for an owner to invest

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$10,000-$12,000 in landscaping improvements (as Medina had
suggested).

Postolica also opined as to the value of the Property and
provided other important and useful information regarding the
Property. Postolica explained that after Edwards Air Force Base
closed, the Property attracted primarily low-income tenants.
Postolica explained that these tenants tended to leave without
notice, sometimes stayed for only two to three months, vandalized
the Property, and frequently stole appliances including the
refrigerator and stove as they vacated the Property.

In clarifying the sum of these costs, Postolica explained that
the replacement cost for a stove is roughly $500; the replacement
cost for a refrigerator is roughly $700-$1000; the replacement cost
for swamp coolers is $350; the replacement cost for a clothes
washer is roughly $350; and the replacement cost for a dryer is
$350. . Postolica estimated that every time there is a vacancy, it
costs roughly $1,000 to evict the tenant and $2,500 to replace the
stolen items and repair damage to the unit. Postolica testified
that as of the October hearing, one of the four units of the
Property had been vacant for seven months. As a result of these
costs, as well as Postolica’s experience as an investor in rental
properties, Postolica estimated that the fair market value for the
Property is less than $70,000.

Il.

ANALYSIS

Debtors’ Motion requests that this Court determine the value
and status of East West Bank’s lien as partially unsecured and
void. Debtors contend that because the value of the Property on

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the bankruptcy petition date was less than the debt secured by East

West Bank’s first priority trust deed, Bast West Bank’s lien was
partially unsecured at the time of the bankruptcy. East West Bank
opposes the Motion arguing that the value of the Property exceeded
Bast West Bank’s first priority lien -- thus East West Bank’s first
priority trust deed is fully secured.

Debtors seek to value East West Bank’s lien on the Property
based on Bankruptcy Code section 506(a) (1), which states:

An allowed claim of a creditor secured by a lien on

property in which the estate has an interest ...isa

secured claim to the extent of the value of such

creditor’s interest in the estate’s interest in such

property . . . and is an unsecured claim to the extent

that the value of such creditor’s interest .. .is less

than the amount of such allowed claim.
11 U.S.C. § 506(a) (1). Debtors contend the Property value is
$70,000. East West Bank contends the Property value is $100,000. If

Debtors’ value figure is adopted, then East West Bank’s lien would be
$70,000 secured and $25,157.03 unsecured. If East West Bank’s value
figure is adopted, then East West Bank’s lien would be fully secured
for $95,157.03.

Bankruptcy Code section 506(a) (1) instructs that when a court
determines the value of collateral, “such value shall be determined
in light of the purpose of the valuation and of the proposed
disposition or use of such property...” 11 U.S.C. § 506(a)(1). When
the debtors intend to stay in their house, the proper valuation of
the house under Bankruptcy Code section 506(a) is the fair market

value. Taffiv. United States of America (In re Taffi), 96 F.3d,

1190, 1192 (9th Cir. 1996). The fair market value is not the
“replacement” value because the house is not being replaced. Neither

is it the “foreclosure” value because no foreclosure is intended in

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the Chapter 13 plan. Taffi, 96 F.3d at 1192. Similarly, no
foreclosure is intended by Debtors in this Chapter 11 case. The fair
market value is “the price which a willing seller under no compulsion
to sell and a willing buyer under no compulsion to buy would agree
upon after the property has been exposed to the market for a
reasonable time.” Taffi, 96 F.3d at 1192. Debtors intend to rent
out units from the Property and treat East West Bank’s lien as
partially unsecured.

Debtors bear the initial burden of proof of overcoming any
presumption established by the stated value in the secured creditor’s

proof of claim. In re Southmark Storage Associates Ltd. Partnership,

130 B.R. 9, 10 (Bankr. D. Conn. 1991). The secured creditor has the
ultimate burden of persuasion to demonstrate, by a preponderance of
the evidence, the value of the collateral which secures its claim.
Td. at 10.

The Court has considered all the evidence admitted at trial as
well as the parties’ written briefs and oral arguments.

As previously mentioned, Debtors’ expert, Medina’s valuation was
based on analysis of several factors which included: (i) the
Property’s high vacancy rate of 25%; (11) the general condition of
the Property; (iii) Medina’s opinion that the real estate market in
Rosamond has been declining; and (iv) one comparable property that is
located .4 miles from the Property. The comparable property closed
escrow on February 25, 2011 and was among the comparables that East
West Bank’s expert Ricks also considered. Based on these factors
Medina concluded that the Property had a value between $60,000 to

$80,000 as of the filing of Debtors’ bankruptcy case. Debtors have

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presented sufficient evidence to overcome the presumption of value
set forth in Bast West Bank’s claim.

After weighing the evidence and testimony before the Court, the
Court has ultimately determined the value of the Property by using
both the income and the sales comparison approaches. The Court finds
that Medina is sincere and very experienced in real estate, but that
he has relatively little experience valuing properties in the region
where the Property is located. That would not render his opinion of
the Property’s value without use to the Court because he could have
used traditional methods to value the Property and consulted
knowledgeable local real estate professionals to the extent
necessary. However, the Court has decided not to rely substantially
upon Medina’s valuation because Medina’s method has limited
mathematical support in determining the value of the Property.
Further, Medina only uses one comparable property in his valuation
and the Court cannot accurately determine the value of the Property
based on one comparison.

The Court is not relying on the replacement cost approach
because the Court deems it less useful under the circumstances, as
Ricks testified. Moreover, Debtors intend to keep the Property as an
investment property and not to replace the Property with another
property.

The sales comparison approach and the income approach will be

addressed separately.

A. Sales Comparison Approach
First, the Court analyzes the value of the Property under the

sales comparison approach. As previously mentioned, the sales

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comparison approach is based upon an analysis of comparable
properties within the same neighborhood in light of factors such as
the real estate market of the particular neighborhood, the school
systems, and the dwelling’s characteristics including square footage,
age, and condition. Adjustments are then made to the sales price of
the comparable properties for characteristics of each comparable
property which would make the comparable property more or less
valuable than the’ Property, including variations in total square
footage and living space, the total number of
bedrooms/bathrooms/fireplaces, superior or inferior condition of the
roof, style of heating and air conditioning, additions to the
property such as a pool, and whether the property or portions of the
property such as the kitchen had been recently remodeled.

Here, four of Ricks’ comparable properties were similar in some
respects to the Property based on the criteria stated above and had
closed escrow by the time of the filing of Debtors’ bankruptcy
petition. The Court did not rely on the value of Ricks’ fifth
comparable property because the Court has no way of knowing whether
that comparable actually sold and, if so, for what price. The four
comparables that closed escrow by Debtors’ filing of bankruptcy are:
(1) 2437 Diamond St., which Ricks valued the adjusted sales price at
$102,285; (2) 2801 Desert St., which Ricks valued the adjusted sales
price at $47,525; (3) 1900 Poplar St., which Ricks valued the
adjusted sales price at $113,590; and (4) 2761-2763 Desert St., which
Ricks valued the adjusted sales price at $103,115. Each of these
properties is somewhat similar in size and condition to Debtors’
Property. In addition to Ricks’ analysis, and based on those

Similarities and the proximity of the comparable properties to the

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Property, the Court calculated the average adjusted sales price of
the four comparables. If one factors the four comparables equally,

the average adjusted sales price of the four comparables is $91,629.

B. Income Approach

The second method used by Ricks and considered by the Court, the
income approach, confirms the value reached under the sales
comparison approach. Use of the income approach is also appropriate
because Debtors intend to retain and use the Property as an
investment property. As discussed above, the theory behind the
income approach is that an investor is likely to pay a certain
purchase price for a certain income stream. Under the income
approach, the subject property is valued by multiplying the monthly
rents for the subject property by a representative gross rent
multiplier for comparable properties. To calculate the gross rent
multiplier, the adjusted sales price of a comparable property is
divided by that property’s monthly rents.

Because there is evidence of four comparable properties before
the Court, the Court will use a gross rent multiplier that is the
average of the gross rent multipliers of the four comparables that
closed escrow by the time of the filing of Debtors’ bankruptcy
petition, including the one comparable property on which Debtors’
expert relied. The gross rent multipliers for the comparables are:
(1) 2437 Diamond St., which has a gross rent multiplier of 56.67; (2)
2801 Desert St., which has a gross rent multiplier of 37.78; (3) 1900
Poplar St., which has a gross rent multiplier of 44.83; and (4)
2761-2763 Desert St., which has a gross rent multiplier of 32. The

average of these multipliers is 42.82.

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Here, the total monthly rent for the four units in the Property
is $2,740. The actual monthly rent for the units has been $2,140
because, if one believes Postolica, the Property has had a 25%
vacancy rate for seven months. East West Bank’s appraiser, Ricks,
testified that a 25% vacancy rate in Rosamond is high and that the
vacancy rate is closer to 10% based on Ricks’ experience in valuing
other rental properties in the area. Ricks testified that the
monthly rent for the Property should be in the amount of $2,500.
However, the Court to some extent accepts Postolica’s testimony and
finds that one unit has been vacant for seven months. That is some
evidence of what the vacancy rate is likely to be in the future, but
it is not dispositive. Nevertheless, it is significant. The Court
finds that a 20% vacancy rate is more appropriate for this Property.
Thus, the Court will use a 20% vacancy rate in order to calculate the
income approach. The Court multiplies the average of the gross rent
multiplier (42.82) by the adjusted rent ($2,192), to reach the
Court’s determination that the value of the Property is $93,861.44
under the income approach. The resulting value under the income
approach is slightly higher than the value determined by the sales

comparison approach.

Cc. Ms. Postolica’s Testimony

Ms. Postolica testified as to the condition and value of the
Property. Ms. Postolica’s testimony is useful in establishing actual
expenses that occurred because of stolen property and vandalism when
tenants vacated the Property. Ricks testified that both the sales
comparison and income approaches account for the thefts and

vandalism. According to Ricks, if the Property has theft and

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vandalism problems, other similar properties would have similar
problems and each property’s adjusted sales price and rent would
reflect the presence of those problems. While the sales and income
approach do account for some of the costs testified by Postolica,
Postilica’s testimony convinced the Court that the Property has a
greater turnover of tenants and a higher incidence of vandalism and
stolen property than the average comparable property.

To account for this difference, the Court adjusts the calculated
values of both the sales comparison approach and income approach by
$2,000. Under the sales comparison approach, the value of the of the
property adjusts to $89,629.00. Under the income approach, the value
of the property adjusts to $91,861.44. The Court averaged the
adjusted values under the sales comparison and income approaches to
reach an actual value for the Property of $90,745.22.

In light of the Court’s valuation of the Property, East West
Bank’s $95,157.03 lien against the Property is undersecured. As a
result, East West Bank’s lien is secured in the amount of $90,745.22.
and unsecured in the remaining amount of $4,411.81.

Til.
CONCLUSION

Based on the evidence admitted at hearing and the written and oral
arguments of counsel, the Court finds the sales comparison and income
approaches to be the appropriate methods to value this Property.
While Medina was experienced and sincere, Medina’s appraisal was not
as reliable or accurate as Ricks’ appraisal was, for the reasons
explained above. The Court values the Property at $90,745.22, which
is $4,411.81 less than East West Bank’s first priority deed of trust

in the amount of $95,157.03.

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For the foregoing reasons, Debtors’ Motion to determine the
value and status of East West Bank’s lien as unsecured is granted.
The Court finds that the value of the Property was less than the
amount secured by the first deed of trust at the time bankruptcy was
filed. Accordingly, East West Bank’s secured claim is in the amount
of $90,745.22 and is unsecured in the amount of $4,411.81. Counsel
for Debtors shall prepare a proposed form of order, serve it on

counsel for East West Bank, and then submit it to the Court.

pated: 4 W\\% Lpthue S. W)risetrest|~

ARTHUR S. WEISSBRODT
UNITED STATES BANKRUPTCY JUDGE

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Court Service List

Zenaida Masacayan Postolica
620 Morse Avenue
Sunnyvale, Ca 94085

Danut Laur Postolica
620 Morse Avenue
Sunnyvale, Ca 94085

Fast West Bank

Attn: Managing Agent or
Corporate Officer

P.O. Box 7670

San Francisco, CA 94012

East West Bank

Attn: Managing Agent or
Corporate Officer

711 Van Ness Avenue

San Francisco, CA 94102

Lewis Phon

Law Offices of Lewis Phon
4040 Heaton Court
Antioch, CA 94509

Patricia H. Lyon
French & Lyon

22 Battery Street, Suite 404
San Francisco, CA 94111
Celine Mui Simon

French & Lyon

22 Battery Street, Suite 202
San Francisco, CA 94111

Office of the U.S.
U.S. Federal Bldg.
280 S 1lst St. #268
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Trustee / SJ

DOE Aran DeemOCH oLO Filed: 03/20/12 E

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