Victoriano David Duarte and Annaliza Pugeda Duarte

OCR transcription for search; preserved printed pages are authoritative

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GPO

Entered on Docket
February 08, 2011
GLORIA L. FRANKLIN, CLERK

U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

nite’ an JOSe UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re Case No. 10-50394-ASW

]
]
VICTORIANO AND ANNALIZA DUARTE, ] Chapter 13
]
Debtors. ]
]

MEMORANDUM DECISION RE MOTION TO DETERMINE VALUE
AND STATUS OF JUNIOR LIENHOLDER’S CLAIM

Before the Court is the motion (“Motion”) by debtors
Victoriano and Annaliza Duarte (“Debtors”) to determine the value
and status of the second priority deed of trust held by creditors
Duane E. Gifford and Marilyn L. Gifford (“Giffords”) against the
Debtors’ primary residence located at 767 Lakehaven Dr. Sunnyvale,
California 94089 (“ Property”). Debtors seek a determination that
the Giffords’. second deed of trust is not secured in any amount and
thus may be treated as unsecured in Debtors’ chapter 13 plan. The
Giffords oppose the Motion. Debtors are represented by Drew
Henwood, Esq. of The Law Offices of Drew Henwood. The Giffords are
represented by Benjamin R. Levinson, Esq. of the Law Office of

Benjamin R. Levinson.

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An evidentiary hearing on the Motion was held on September 2,
2010, and the matter has been submitted for decision. At the
evidentiary hearing, Debtor called Daniel Ordaz (“Ordaz”), an
appraiser, and Debtors as witnesses. The Giffords called Boris
Chtchetinin, an appraiser, as a 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.

FACTS

Debtors commenced this case by filing a petition under
Chapter 13 of the Bankruptcy Code on January 17, 2010. Debtors’
main asset is the Property. Debtors purchased the Property in 1996
and have lived at the Property continuously since the time of
purchase. Two deeds of trust have been recorded on the Property.
The senior obligation and first deed of trust on the Property is
held by US Bank National Association (“US Bank”). The Giffords are
the beneficiaries of a pre-petition loan made to the Debtors. The
Giffords’ loan is secured by the second priority trust deed (the
“Giffords’ Lien”) against the Property.

On the bankruptcy petition date, January 17, 2010, the amount
owing to the first deed of trust holder US Bank was no more than
$387,435.63 and that sum included advances by US Bank for payment

of real property taxes.’ On March 3, 2010, Debtors filed the

' US Bank’s proof of claim in the amount of $387,435.63 was
submitted to the Court at the time of hearing and entered into

evidence. The Giffords do not contest that amount.

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1 Motion. | On March 12, 2010, the Giffords filed a Notice of

2 | Opposition and Request for Hearing. The hearing, initially held on
3} June 7, 2010, was continued to September 2, 2010 for an evidentiary
4 || hearing.

5 At the September 2, 2010 hearing, each party offered an expert
6 ||} witness to opine as to the value of the Property at the time of

7 || Debtors’ bankruptcy petition. Both experts prepared written

8 || reports and those reports were entered into evidence. Debtors’

9] expert witness Daniel Ordaz is an independent contract appraiser of
10} real property specializing in Santa Clara County. The Giffords’

11 || expert witness Boris Chtchetinin is an owner and principal

12 | appraiser for his own appraisal business, that operates throughout
13 || the entire Bay Area but specializes in Santa Clara County. Both

14 || appraisers were qualified to testify as experts concerning the

15 || value of the Property. Debtor Annaliza Duarte testified as to the
16 | condition of the Property on the petition date. Debtor Victoriano
17 | Duarte testified as to the value and surroundings of the Property
18 | on the petition date.

19 Ordaz holds a license from the State of California to conduct
20 | real property appraisals which Ordaz obtained in September of 2006.
21 |} Ordaz estimated that Ordaz has done roughly 757 appraisals with 500
22} of those appraisals occurring in Santa Clara County. Debtors asked
23 || Ordaz to determine the market value of the Property as of the

24 || bankruptcy petition date, January 17, 2010.
25 Ordaz testified that Ordaz believed the fair market value of
26 || the Property was $370,000.00 as of January 17, 2010. Ordaz based
27 | that conclusion upon a sales comparison analysis of four comparable
28 || properties. Three of the properties were bank-owned properties,
MEM

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i.e., the respective banks obtained these properties through
foreclosure and now offer the properties for sale. One of the
properties was a short sale. Ordaz determined that the value of
the Property was $370,000 based on the sales comparison approach
and $371,723 based on the cost approach.

Ordaz explained that a 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.

Ordaz testified that the Property was in average condition. Of
particular note, Ordaz emphasized that all four of Ordaz’s
comparables had closed escrow prior to January 17, 2010, and thus
the market would have been aware of those final sale prices at the
time of petition. Ordaz criticized Chtchetinin’s report as
Chtchetinin’s report consisted exclusively of sales that had closed
after Debtors’ bankruptcy petition date.

As noted above, the Ordaz report contained three sales of
bank-owned properties and one short sale. The sales prices of the
Ordaz comparables ranged from $366,860 to $395,000 and were sold
between September 25, 2009 and January 13, 2010. The comparables
were located from .14 miles to .80 miles away from the Property.
Ordaz explained that Ordaz was unable to find any private sales
(i.e., sales that were not bank owned) or short sales among the
comparables in his research that were applicable and relevant.
Ordaz further stated that bank-owned property sales and short sales
were the predominant form of sale within the area of the subject

property and thus are valid comparables when those sales are the

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dominant sales mode within the neighborhood. Ordaz did not make
adjustments in sale price based on whether the comparable consisted
of a bank-owned property or short sale because Ordaz testified that
it is not standard industry practice to make such adjustments due
to the difficulty in objectively determining the value of the
adjustment.

Debtor Annaliza Duarte testified that around the time of the
bankruptcy petition, January 17, 2010, the Property suffered from
mold problems, the bathroom sink leaked, and that sink leak had
caused floor discoloration. Debtor Victoriano Duarte testified
that around the time of the bankruptcy petition, the neighborhood
was very busy as it is located close to a highway and there were
many cars parked along the street. Victoriano Duarte also
testified that a park and school are located behind the Property
with no other houses obstructing access.

Chtchetinin testified that Chtchetinin believed the fair
market value of the Property was $395,000 as of January 17, 2010.
Chtchetinin based that conclusion upon a sales comparison analysis
based on comparable properties -- all of which had sold prior to
the court hearing but none of which had closed escrow at the time
of Debtors’ bankruptcy petition. Chtchetinin reviewed three
comparable properties between .11 and .49 miles from the Property
-- two of the comparable properties were bank owned properties sold
after a foreclosure and one sold through a private sale.
Chtchetinin determined that the value of the Property was $395,000
based on the sales comparison approach and was $381,200 based on

the cost approach.

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Chtchetinin is a licensed appraiser in the state of California
and Chtchetinin has worked as a real estate appraiser for 6 years.
Chtchetinin’s work is exclusively residential and he has worked
exclusively in Santa Clara County for the past three years.
Chtchetinin estimated that Chtchetinin has made over 2,500
appraisals. Chtchetinin testified that, unlike Ordaz who is
a trainee appraiser who works under the supervision of a licensed
or certified appraiser, Chtchetinin is qualified as a licensed
appraiser based on education and experience.

Chtchetinin explained that Chtchetinin had been engaged to
make a retrospective appraisal for the Giffords. Chtchetinin
testified that the residential tract where the Property was located
was fairly typical for a 1950’s tract with homes generally in the
configuration of three bedrooms and two bathrooms. Chtchetinin
recalled the price range for the area at the time in question to be
between $360,000 and $460,000.

The adjusted sales price of the three comparable properties
Chtchetinin used in his report ranged from $387,000 to $403,000.
Chtchetinin testified that these three comparables in his report
represented the mid-range of value where the Property fit based on
condition; some other properties of superior quality were selling
for $420,000 while some properties of lesser quality were selling
for $360,000. Chtchetinin described the Property as average
condition with some interior updates such as laminate flooring,
limestone floors in some areas, wood cabinets, and granite counter
tops. Chtchetinin criticized the Ordaz appraisal arguing that the

Ordaz appraisal had used comparables of worse condition and on a

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lower scale of value, particularly with respect to the inclusion of
a comparable that was listed as a complete “fixer-upper”.
Chtchetinin used sales which had not yet closed as of the
petition date in Chtchetinin’s retrospective appraisal explaining
that while the sales did not close before the petition date,
Chtchetinin verified that the contract prices of the comparable
sales were also the final sales prices by cross checking the
contract price with the post bankruptcy petition property closing
price on the Multi Listing Service website. Chtchetinin stated
that the Multi Listing Service search function did not have a
feature to filter out properties that had not closed escrow prior
to the bankruptcy petition date. Chtchetinin testified that if
such filtering were necessary, it would need to be done manually by
the appraiser. Chtchetinin acknowledged that it is possible for
events to occur between the date of contract and the date of
closing that could change the final closing price. However,
Chtchetinin stated that those events did not occur here and that
the contract prices were representative of the market prices at the

time of Debtors’ bankruptcy petition.

Il.
ANALYSIS
Debtors’ Motion requests this Court to determine the value and
status of the Giffords’ lien as wholly unsecured and void. Debtors
contend that the fair market value of the Property on the
bankruptcy petition date was less than the debt secured by US
Bank’s first priority trust deed, thus the Giffords’ Lien was

wholly unsecured at the time of bankruptcy. The Giffords oppose

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the Motion arguing the fair market value of the Property exceeded
US Bank’s first priority lien, thus Giffords’ second priority trust
deed was at least partially secured and entitled to the
“antimodification” provision of Bankruptcy Code section 1322 (b) (2).

Debtors seek to value the Giffords' 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). If the Court finds the Giffords’ Lien to be
wholly unsecured, as Debtors contend, then the Giffords are not the
“holder[s] of a secured claim” whose rights are subject to the

“antimodification” protection of Bankruptcy Code section 1322 (b) (2).

Zimmer v. PSB Lending Coporation (In re Zimmer), 313 F.3d 1220 (9th

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Cir. 2002). The consequence of such a finding is that Debtors could
provide for the Giffords’ claim through Debtors’ chapter 13 plan as
a general unsecured claim, rather than a secured claim. Zimmer,

313 F.3d at 1227. Conversely, if the Court finds the Giffords’ Lien
to be secured by even $1.00, the “antimodification” protection of
Bankruptcy Code section 1322(b)(2) applies and the claim must be
paid as a secured claim and cannot be modified by Debtors’

chapter 13 plan.

Bankruptcy Code section 506(a) (1) instructs that when a court is
requested to determine 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

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proper valuation of the house under Bankruptcy Code section 506(a) is

the fair market value. Taffi v. 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 the chapter 13 plan. Taffi, 96 F.3d at
1192.

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
stay in the Property, cure the loan owed to US Bank, and treat the
Giffords as general unsecured creditors.

For the purposes of granting or denying the Motion, this Court
does not need to determine the exact value of the Property. In re
Serda, 395 B.R. 450 (Bankr. E.D. Cal. 2008). The Court only needs to
determine whether or not the value of the Property at the time of
Debtors’ bankruptcy petition was greater than, equal to, or less than
the amount of the senior secured debt owed to US Bank. Serda, 395
B.R. at 453. Here, the amount owing to the first deed of trust
holder was no more than $387,435.63 on the bankruptcy petition date
and that sum included advances by that lender for payment of property
taxes. US Bank’s proof of claim in the amount of $387,435.63 was
submitted to the Court at the time of hearing and entered into
evidence without objection.

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

proof of claim. Serda, 395 B.R. at 454. The secured creditor has

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the ultimate burden of persuasion to demonstrate, by a preponderance
of the evidence, the value of the collateral which secures its claim.

In re Southmark Storage Associates Ltd. Partnership, 130 B.R. 9, 10

(Bankr. D. Conn. 1991).

Both parties’ expert witnesses used the sales comparable method
to estimate the fair market value of the Property at the time of
Debtors’ bankruptcy petition. The hearing on the matter lasted
roughly four hours wherein both experts and Debtors testified. The
Court considered all the evidence admitted at trial, including the
testimony of both experts. In addition, the Court prepared its own

statistical analysis based solely upon the appraisal reports

submitted by the two experts. (Attached as Exhibits A-J).?
Debtors’ expert, Ordaz, analyzed four comparable properties that
were located between .14 and .80 miles from the Property. The

properties Ordaz included in Ordaz’s report were all sold between
September 25, 2009, and January 13, 2010. Three of Ordaz’s
properties were bank-owned properties and one was sold through

a short sale. Ordaz emphasized during his testimony that all of his
comparables had closed escrow at the time of Debtors’ bankruptcy
petition. Based on these comparables, Ordaz concluded that the
Property had a fair market value of $370,000 on the petition date.
The Court calculated the average sales price of Ordaz’s four
comparable properties and found the average to be $375,091.00.
(Exhibit C). Debtors’ have presented evidence sufficient to overcome

the presumption of value within the Giffords claim.

2 The Court does not imply that the fair market value of any

property is purely a statistical calculation, but it recognizes
that such analysis can be instructive when confronted with
conflicting and multifaceted data.

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Giffords’ expert, Chtchetinin, analyzed three comparable
properties that were located .11 and .49 miles from the Property.
The properties Chtchetinin included in Chtchetinin’s report were all
sold in December 2009. However, unlike Ordaz, none of Chtchetinin’s
properties closed before Debtors’ bankruptcy petition date. Two of
Chtchetinin’s comparables were bank-owned properties and one was
a private sale. The private sale sold for the highest price.
Chtchetinin concluded that the fair market value of the Property was
likely $395,000 on the petition date. The Court notes that the
average of Chtchetinin’s comparables was also $395,000. (Exhibit C).

The difference between the first lien holder’s proof of claim
and both appraisers’ estimates of fair market value is very narrow.
Debtors contend that the fair market value, based on the sales
comparison approach, was $370,000; $17,435.68 below the amount owed
to the first lien holder. The Giffords respond that the fair market
value was actually $395,000; $7,564.34 above the amount of the first
lien holder. The Court’s statistical analysis of the combined data
presented by the experts proved to be even closer with an average of
all comparables of $383,623.43, an average excluding the highest and
lowest comparables of $383,100.80, and a median of $387,000 leading
differences of $3,812.20, $4,334.83, and $435.63, respectively.
(Exhibits A, B and F). The average of all comparables, the average
excluding the highest and lowest comparables, and the median are all
below the first lien holder’s proof of claim. Moreover, the Court
found the average selling price of the three closest properties by
distance to be $383,953.33 and the three properties with the sales
date closest to the petition date to be $383,548.00 leading to

differences of $3,482.30 and $3,977.63, respectively. (Exhibits D

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and EF). Again, both of these averages are below the first lien
holder’s proof of claim. Thus when the comparables are analyzed
statistically as a whole, the comaparables generally indicate average
and median values below that of the first lien holder’s proof of
claim. Based on the testimony at trial and this additional analysis,
the Court finds that the Giffords’ expert’s testimony insufficient to
persuade the Court that the preponderance of the evidence supports a
value above that of the first deed of trust holder. Rather, it
appears based on the fact four of the seven comparables are below the
value of the first lien holder’s proof of claim and the averages and
medians of the data as a whole are below the first lien holder’s
proof of claim, the preponderance of the evidence demonstrates that
the value of the Property was below the first lien holder’s proof of
claim.

The Giffords rely on a decision of the Bankruptcy Court for the
Eastern District of California which expressed concerns regarding the
inclusion of bank-owned properties within appraisal reports for

determining the fair market value of property. See Serda, 395 B.R.

at 454. The Court in Serda noted the potential different motivations
for sale between private party sales and bank-owned sales, stating
that banks had the motivation to liquidate inventory quickly for low
prices whereas private parties had the motivation to wait for higher
prices. However, the Ninth Circuit in Taffi stated, “Valuation must
be accomplished within the actual situation presented.” Taffi, 96
F.3d at 1192. Debtor’s expert, Ordaz, testified that bank-owned
property sales and short sales were the predominant form of sale

within the area of the Property. Giffords’ expert, Chtchetinin, also

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included two bank-owned properties -- out of the three comparables he
used within his appraisal report.

Based on Ordaz’s testimony that bank-owned property sales were
the predominant form of sale within the area and the fact that two
out of three of Chtchetinin’s comparables were bank owned properties,
the Court finds there is sufficient evidence to conclude that bank-
owned property sales are relevant in determining the fair market
value of the Property at the time of Debtors’ bankruptcy petition.
Allowing the sales prices of bank-owned properties to be considered
as comparables does not require any subjective determination of the
motivation of the parties. The advertised prices of bank-owned
properties would have been available to potential buyers and would
have shaped buyers’ price expectations because bank-owned properties
are also competing against owner occupied properties within the real
estate market. The appraiser merely includes the bank-owned property
sales along with any other relevant properties in the appraiser’s
value analysis. This is analogous to how bank-owned properties are
equally available on the real estate market for buyers. Because
bank-owned properties were the predominant form of transfer of real
estate within the area of the Property, willing buyers would have
considered these properties within buyers’ purchase calculations.
Therefore, it is appropriate to include bank-owned properties in
determining the fair market value of the Property because these types
of properties were available on the market and were actively
competing against private sales in the real estate market.

Even though there is the potential argument that bank owners of
foreclosed property are under different motivations than private

party owners of owner occupied homes, there is no objective method to

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determine the value of the potential difference of motivation. Ordaz
testified that it is not common appraisal practice to make
adjustments based on whether a home is owner-occupied or bank-owned
because of the impossibility of making an objective valuation of the
different motivations of the parties. A valuation of an adjustment
for the different motivations of the parties would require the
appraiser to devine the subjective intentions of the parties. Such
an adjustment is unworkable in appraisal practice and cannot be used
adjust value here. Moreover, two out of three of Chtchetinin’s
comparables were also bank-owned properties indicating that
Chtchetinin believed bank-owned properties were highly relevant to
the valuation of the Property. Therefore, based on testimony that
bank-owned properties predominated in the subject real estate market
and that both appraisers included bank-owned properties in their
respective appraisal reports, the Court finds sufficient evidence to
conclude that willing buyers would have certainly considered bank-
owned properties in their purchase calculations and making objective
adjustments for differences in sellers’ motivations is not practical
or even possible.

Debtors raised additional issues claiming that these issues
could have influenced the fair market value of the Property. The
expert appraisers differed on the appropriateness of using comparable
sales that did not close prior to the bankruptcy petition. As the
two experts disagreed, the Court frankly does not know whether it is
appropriate in the appraiser profession for Chtchetinin to rely on
these properties as comparables. However, for the purpose of this

decision only, with no precedential value intended, the Court will

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assume that the use of these properties as comparables is allowed in
the profession.

Neither party cited, and the Court did not find any law
expressly permitting or prohibiting such use and it appears that the
Serda decision may have used such sales. The Giffords’ expert
testified that all of the sales used in his report did eventually
close for the prices stated in the appraisal report. Debtors argued
that Debtors would not have known that these homes were sold for
these prices at the time of the bankruptcy petition and thus would
not have known -- in deciding how to price Debtors’ home for sale --
to consider those homes.

The Court’s only objective is to determine the fair market value
of the Property at the time of the bankruptcy petition. The Court
agrees with Debtors that unclosed sales -- which Debtors and other
parties in the market for homes at the time would. not have known --
are sales which could not have been used by Debtors to determine the
market price at the time of the bankruptcy petition. However, these
comparables are the only comparables used by the Giffords expert.
Because, even considering these comparables, this Court finds that
the fair market value of the Property at the time of Debtors’
bankruptcy petition was less than the amount of the senior secured
debt owed to US Bank, the Court will consider the unclosed
comparables, notwithstanding this Court’s reservations.

Debtors testified regarding the condition and surroundings of
the subject property. Debtors testified to the appearance of mold,
a leaking sink in one of the home’s bathrooms and that the water had
caused discoloration on the floor of the bathroom. Debtors also

testified the Property is located near a park and a school where the

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UNITED STATES BANKRUPTCY COURT

For The Northern District Of California

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for these factors. While the appearance of mold, leaks and water
discoloration are likely to have had a negative impact on the
potential selling price of the Property, the park and school may have
had positive impacts. Without additional evidence, any adjustment
based on these factors is speculative. The Court chooses to focus on
the comparables and the central tendency of the values found in the
appraisal reports.

Based on the evidence admitted at the hearing and the arguments
of counsel, the Court finds that the fair market value of the
Property at the time of Debtors’ bankruptcy petition was less than

$387,435.63, the amount of the senior secured debt owed to US Bank.

Iii.
CONCLUSION

For the foregoing reasons, Debtors’ Motion to determine the
value and status of the Giffords Lien as wholly unsecured and void is
granted. The Court finds that the value of the Property was less
than the amount secured by the first deed of trust. Accordingly, the
Giffords’ secured claim is wholly unsecured and is not entitled to
the protection of Bankruptcy Code section 1322(b) (2). Counsel for
Debtors shall prepare a proposed form of order, serve it on counsel

for the Giffords, and submit it to the Court.

coca: J 13, | vy

UNITED STATES BANKRUPTCY JUDGE

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eS AN Dn aA FSF WY NW

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Court Service List

Victoriano David Duarte
767 Lakehaven Dr
Sunnyvale, CA 94089

Annaliza Pugeda Duarte
767 Lakehaven Dr
Sunnyvale, CA 94089

Drew Henwood

Law Offices of Drew Henwood
41 Sutter St. #621

San Francisco, CA 94104

Benjamin R. Levinson

Law Office of Benjamin R. Levinson
46 N. Second Street, Suite A
Campbell, CA 95008

Devin Derham-Burk
P.O. Box 50013
San Jose, CA 95150-0013

Office of the U.S. Trustee / SJ
U.S. Federal Bldg.

280 S lst St. #268

San Jose, CA 95113-3004

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