Bannerman Holdings, LLC

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NORTH CAROLINA
SOUTHERN DIVISION
No. 	7:11-CV-00009-H
IN RE: BANNERMAN HOLDINGS, 	)
LLC, 	)
)
Debtor. 	)
)
____________________________)
)
SUNTRUST BANK, 	)
)
Appellant, 	)
)
)
v. 	)
)
BANNERMAN HOLDINGS, LLC, 	)
)
Appellee. 	)
ON APPEAL FROM THE UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
This 	matter 	is 	before 	the 	court 	on 	appeal 	from 	an 	order 	of
the 	United 	States 	Bankruptcy 	Court 	for 	the 	Eastern 	District 	of
North 	Carolina 	confirming 	the 	Debtor’s 	Chapter 	11 	plan 	over 	the
objection 	of 	Appellant, 	SunTrust 	Bank. 	The 	parties 	have
thoroughly 	briefed 	the 	issues 	on 	appeal 	and 	the 	matter 	is 	now
ripe for adjudication.
BACKGROUND
Bannerman 	Holdings, 	LLC 	(the 	“Debtor” 	or 	“Bannerman”), 	a
North 	Carolina 	Limited 	Liability 	Company 	located 	in 	Wilmington,
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North 	Carolina, 	is 	in 	the 	business 	of 	buying, 	selling, 	and
leasing 	real 	estate. 	SunTrust 	Bank 	(“Appellant” 	or 	“SunTrust”)
is 	Bannerman’s 	largest 	secured 	creditor. 	In 	2006, 	SunTrust
financed 	Bannerman’s 	acquisition 	and 	development 	of 	Bannerman
Station, 	a 	condominium 	development 	in 	downtown 	Wilmington.
Bannerman 	executed 	a 	note 	in 	favor 	of 	SunTrust 	in 	the 	amount 	of
$13,500,000.00, 	which 	was 	secured 	by 	a 	first-priority 	security
interest 	in 	the 	Bannerman 	Station 	property 	and 	a 	parking 	lot
(the 	“Parking 	Lot”). 	Bannerman 	was 	unable 	to 	pay 	the 	note 	in
full 	when 	it 	matured 	on 	March 	1, 	2008. 	SunTrust 	provided
Bannerman 	a 	two-year 	extension, 	but 	it 	ultimately 	remained
unable 	to 	repay 	the 	note 	and 	filed 	a 	Chapter 	11 	bankruptcy
petition on February 12, 2010.
Bannerman 	filed 	a 	Plan 	of 	Reorganization 	and 	subsequent
modifications 	(collectively, 	the 	“Plan”), 	which 	proposed 	in
pertinent 	part: 	(1) 	to 	satisfy 	SunTrust’s 	claim 	in 	full 	by
transferring 	to 	SunTrust 	eleven 	of 	the 	fifteen 	remaining 	unsold
condominium 	units 	in 	Bannerman 	Station 	and 	the 	Parking 	Lot; 	(2)
to 	satisfy 	the 	claims 	of 	all 	unsecured 	creditors 	and 	McKinley
Building 	Corporation 	(“McKinley”), 	a 	junior 	lien 	holder, 	by
transferring 	one 	condominium 	to 	McKinley; 	and 	(3) 	to 	retain 	for
Bannerman 	three 	condominium 	units, 	free 	and 	clear 	of 	all 	liens.
SunTrust 	objected 	to 	the 	Plan, 	and 	the 	bankruptcy 	court
subsequently 	held 	a 	three-day 	confirmation 	hearing, 	during 	which
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the 	bankruptcy 	court 	heard 	evidence 	concerning 	the 	value 	of 	the
condominium 	units. 	On 	October 	20, 	2010, 	the 	bankruptcy 	court
entered 	an 	order 	confirming 	Bannerman’s 	plan 	over 	the 	objection
of 	SunTrust. 	The 	bankruptcy 	court 	concluded 	that 	the 	plan 	was
fair 	and 	equitable, 	because 	the 	surrender 	of 	the 	eleven
condominiums 	and 	the 	Parking 	Lot 	provided 	SunTrust 	with 	the
indubitable 	equivalent 	of 	its 	claim, 	as 	contemplated 	by 	section
1129(b)(2)(A)(iii) of the Bankruptcy Code.
SunTrust 	sought 	from 	the 	bankruptcy 	court 	a 	stay 	pending
appeal, 	which 	was 	denied. 	SunTrust 	then 	sought 	from 	this 	court
a 	stay 	pending 	appeal, 	which 	was 	also 	denied. 	SunTrust 	filed 	a
notice 	appealing 	the 	bankruptcy 	court’s 	confirmation 	order 	on
January 	11, 	2011. 	This 	court 	has 	jurisdiction 	over 	the 	appeal
pursuant to 28 U.S.C. § 158(a).
COURT’S DISCUSSION
I. 	Standard of Review
The 	court 	will 	not 	set 	aside 	any 	findings 	of 	fact 	by 	the
bankruptcy 	court 	unless 	they 	are 	clearly 	erroneous. 	Fed. 	R.
Bankr. 	P. 	8013. 	“A 	finding 	of 	fact 	is 	clearly 	erroneous 	only
when 	‘the 	reviewing 	court 	on 	the 	entire 	record 	is 	left 	with 	the
definite 	and 	firm 	conviction 	that 	a 	mistake 	has 	been 	made.’” 	In
re 	Reg’l 	Bldg. 	Sys., 	Inc., 	320 	F.3d 	482, 	485 	(4th 	Cir. 	2003)
(quoting 	In 	re 	Morris 	Commc’ns, 	N.C., 	Inc., 	914 	F.2d 	458, 	467
(4th 	Cir. 	1990)). 	A 	bankruptcy 	court’s 	conclusions 	of 	law 	are
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reviewed 	de 	novo. 	Terry 	v. 	Meredith 	(In 	re 	Meredith), 	527 	F.3d
372, 375 (4th Cir. 2008).
The 	parties 	disagree 	as 	to 	the 	appropriate 	standard 	of
review 	in 	this 	case. 	SunTrust, 	relying 	on 	cases 	outside 	of 	the
Fourth 	Circuit, 	contends 	that 	the 	bankruptcy 	court’s
determination 	of 	whether 	the 	Plan 	provided 	it 	with 	the
indubitable 	equivalent 	of 	its 	claim 	is 	a 	mixed 	question 	of 	law
and 	fact, 	but 	that 	the 	ultimate 	determination 	of 	indubitable
equivalence 	is 	a 	question 	of 	law 	requiring 	statutory
construction. 	See, 	e.g., 	In 	re 	Arnold 	& 	Baker 	Farms, 	85 	F.3d
1415, 	1421(9th 	Cir. 	1996) 	(“Although 	the 	value 	of 	the 	land 	is 	a
finding 	of 	fact 	which 	we 	review 	for 	clear 	error, 	the 	ultimate
conclusion 	of 	indubitable 	equivalence 	is 	a 	question 	of 	law 	which
we 	review 	de 	novo 	because 	it 	requires 	analysis 	of 	the 	meaning 	of
the 	statutory 	language 	in 	the 	context 	of 	the 	Bankruptcy 	Code’s
‘cram 	down’ 	scheme.”). 	Bannerman, 	citing 	no 	case 	law, 	contends
that 	the 	indubitable 	equivalence 	determination 	is 	one 	of 	fact
that turns on the value of the property.
Although 	there 	is 	no 	authority 	directly 	on 	point, 	the
Fourth 	Circuit 	Court 	of 	Appeals 	has 	previously 	held 	that 	the
determination 	of 	indubitable 	equivalence, 	albeit 	in 	the 	context
of 	providing 	adequate 	protection 	under 	11 	U.S.C. 	§ 	361(3), 	“is 	a
question 	of 	fact 	rooted 	in 	measurements 	of 	value 	and 	the
credibility 	of 	witnesses.” 	In 	re 	Snowshoe 	Co., 	Inc., 	789 	F.2d
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1085, 	1088 	(4th 	Cir. 	1986); 	see 	also 	In 	re 	James 	Wilson 	Assocs.,
965 	F.2d 	160, 	172 	(7th 	Cir. 	1992) 	(“[T]he 	question 	whether 	the
interest 	received 	by 	a 	secured 	creditor 	under 	a 	plan 	of
reorganization 	is 	the 	indubitable 	equivalent 	[under 	11 	U.S.C. 	§
1129(b)(2)(A)(iii)] 	of 	his 	lien 	is 	one 	of 	fact, 	In 	re 	Snowshoe
Co., 	789 	F.2d 	1085, 	1088 	(4th 	Cir. 	1986), 	and 	our 	review 	is
therefore 	deferential.”); 	In 	re 	Criimi 	Mae, 	Inc., 	251 	B.R. 	796,
799 	(Bankr. 	D. 	Md. 	2000) 	(noting 	that 	creditor 	conceded 	that
indubitable 	equivalence 	under 	11 	U.S.C. 	§ 	1129(b)(2)(A)(iii) 	is
a 	question 	of 	fact 	and 	citing 	In 	re 	James 	Wilson 	Assocs. 	and 	In
re 	Snowshoe 	Co.). 	The 	court 	sees 	no 	reason 	that 	a 	different
standard 	of 	review 	would 	apply 	to 	an 	indubitable 	equivalence
determination 	based 	on 	whether 	it 	was 	made 	in 	the 	context 	of
adequate 	protection 	or 	plan 	confirmation. 	That 	being 	said, 	the
court 	need 	not 	decide 	that 	issue 	today, 	because 	even 	under 	the
most 	deferential 	standard 	of 	review, 	the 	bankruptcy 	court’s
decision must be reversed.
II. 	Equitable Mootness
Bannerman 	argues 	that 	this 	appeal 	is 	equitably 	moot 	and
should 	be 	dismissed 	without 	consideration 	of 	the 	bankruptcy
court’s 	order. 	SunTrust 	counters 	that 	equitable 	mootness 	does
not 	apply 	in 	this 	case 	because 	the 	court 	can 	provide 	SunTrust
with 	effective 	relief 	without 	disturbing 	the 	core 	provisions 	of
the Plan.
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“The 	doctrine 	of 	equitable 	mootness 	represents 	a 	pragmatic
recognition 	by 	courts 	that 	reviewing 	a 	judgment 	may, 	after 	time
has 	passed 	and 	the 	judgment 	has 	been 	implemented, 	prove
‘impractical, 	imprudent, 	and 	therefore 	inequitable.’” 	In 	re
U.S. 	Airways 	Group, 	Inc., 	369 	F.3d 	806, 	809 	(4th 	Cir. 	2004)
(quoting 	Mac 	Panel 	Co. 	v. 	Va. 	Panel 	Corp., 	283 	F.3d 	622, 	625
(4th 	Cir. 	2002)). 	“Within 	the 	context 	of 	a 	bankruptcy
proceeding, 	a 	court 	may 	dismiss 	an 	appeal 	as 	equitably 	moot
‘when 	it 	becomes 	impractical 	and 	imprudent 	to 	upset 	the 	plan 	of
reorganization 	at 	this 	late 	date.’” 	Id. 	Factors 	to 	consider 	in
determining 	whether 	an 	appeal 	is 	equitably 	moot 	are: 	“(1)
whether 	the 	appellant 	sought 	and 	obtained 	a 	stay; 	(2) 	whether
the 	reorganization 	plan 	or 	other 	equitable 	relief 	ordered 	has
been 	substantially 	consummated; 	(3) 	the 	extent 	to 	which 	the
relief 	requested 	on 	appeal 	would 	affect 	the 	success 	of 	the
reorganization 	plan 	or 	other 	equitable 	relief 	granted; 	and 	(4)
the 	extent 	to 	which 	the 	relief 	requested 	on 	appeal 	would 	affect
the 	interests 	of 	third 	parties.” 	Id. 	Having 	carefully
considered 	these 	factors, 	the 	court 	concludes 	that 	this 	appeal
is not equitably moot.
Although 	SunTrust 	failed 	to 	obtain 	the 	stay 	it 	sought, 	this
court’s 	decision 	denying 	that 	stay 	was 	based 	on 	a 	finding 	that
SunTrust 	did 	not 	show 	it 	was 	likely 	to 	suffer 	irreparable 	harm
absent 	a 	stay 	of 	the 	bankruptcy 	court’s 	order. 	In 	re 	Bannerman
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Holdings, 	LLC, 	No. 	5:10-cv-532-H 	(Jan. 	26, 	2011 	Order 	Denying
Stay 	at 	3) 	[DE 	#15]. 	Bannerman 	had 	argued, 	in 	opposition 	to 	the
motion 	for 	stay, 	that 	in 	the 	event 	the 	bankruptcy 	court 	was
reversed, 	“SunTrust 	will 	have 	access 	to 	$1,292,264.56 	worth 	of
the 	Debtor’s 	property 	to 	satisfy 	its 	claim” 	because 	“the 	Debtor
could 	transfer 	the 	three 	units 	that 	it 	retained 	to 	provide
additional 	collateral 	as 	this 	Court 	may 	require.” 	Id. 	(Debtor’s
Resp. 	to 	Stay 	Motion 	at 	8-9) 	[DE 	#8]. 	Bannerman 	cannot 	now
complain 	that 	the 	court 	is 	unable 	to 	provide 	relief 	to 	SunTrust
without 	a 	complete 	unraveling 	of 	the 	Plan. 	The 	only 	interests
that 	are 	necessarily 	impacted 	by 	a 	reversal 	of 	the 	bankruptcy
court’s 	order 	are 	those 	of 	Bannerman, 	and 	the 	relief 	SunTrust
seeks 	may 	be 	granted 	without 	upsetting 	the 	Plan 	provisions 	with
respect to third parties.
III. 	Indubitable Equivalence
SunTrust 	argues 	that 	the 	bankruptcy 	court 	erred 	(1) 	in
concluding 	that 	the 	Plan 	provides 	it 	with 	the 	indubitable
equivalent 	of 	its 	claim 	pursuant 	to 	11 	U.S.C. 	§
1129(B)(2)(A)(iii); 	and 	(2) 	in 	valuing 	the 	property. 	The 	court
need 	not 	reach 	the 	second 	issue, 	because 	it 	finds 	the
indubitable 	equivalence 	question 	dispositive 	of 	this 	appeal.
See 	In 	re 	Arnold 	& 	Baker 	Farms, 	85 	F.3d 	at 	1422 	(concluding 	that
bankruptcy 	court’s 	valuation 	was 	not 	clearly 	erroneous, 	but 	that
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value 	of 	property 	did 	not 	provide 	the 	indubitable 	equivalent 	of
the secured claim).
As the bankruptcy court correctly explained:
Because 	at 	least 	one 	impaired 	class 	has 	accepted
the 	plan, 	the 	court 	may 	confirm 	the 	plan
notwithstanding 	SunTrust’s 	objection 	if 	the 	plan 	does
not 	discriminate 	unfairly 	and 	is 	fair 	and 	equitable 	to
SunTrust. 	11 	U.S.C. 	§ 	1129(b). 	A 	secured 	creditor’s
treatment 	may 	be 	deemed 	fair 	and 	equitable 	if 	it
satisfies 	one 	of 	the 	three 	criteria 	set 	forth 	under 	§
1129(b)(2)(A). 	The 	debtor 	contends 	that 	its 	treatment
of 	SunTrust 	provides 	“for 	the 	realization 	by
[SunTrust] 	of 	the 	indubitable 	equivalent 	of 	[its]
claims.” § 1129(b)(2)(A)(iii).
. . . .
The 	focus 	of 	the 	inquiry 	in 	this 	case 	is 	whether
the 	partial 	surrender 	of 	collateral 	proposed 	by 	the
debtor 	grants 	SunTrust 	the 	indubitable 	equivalent 	of
its 	claim. 	It 	is 	generally 	understood 	that 	when 	a
secured 	creditor 	receives 	all 	of 	the 	property 	to 	which
its 	lien 	attaches, 	the 	creditor 	has 	received 	the 	full
value 	– 	the 	“indubitable 	equivalent” 	– 	of 	its 	monetary
claim, 	because 	“common 	sense 	tells 	us 	that 	property 	is
the 	indubitable 	equivalent 	of 	itself.” 	Matter 	of
Sandy 	Ridge 	Dev. 	Corp., 	881 	F.2d 	1346, 	1350 	(5th 	Cir.
1989). 	When 	a 	debtor’s 	plan 	calls 	for 	surrender 	of 	a
portion 	of 	the 	property 	in 	full 	satisfaction 	of 	the
debt, 	however, 	the 	assessment 	becomes 	more
complicated.
(Order 	Confirming 	Plan 	(“Conf. 	Order”) 	at 	5 	[DE 	#2-38].) 	The
bankruptcy 	court 	next 	undertook 	a 	thorough 	valuation 	analysis
and 	determined 	that 	the 	value 	of 	the 	eleven 	condominiums 	and 	the
Parking 	Lot 	Bannerman 	proposed 	to 	surrender 	to 	SunTrust 	under
the 	Plan 	was 	$4,779,925.00. 	(Id. 	at 	7-16.) 	Finally, 	the
bankruptcy 	court 	concluded 	that 	the 	$4,779,925.00 	in 	proposed
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surrendered 	property 	provided 	SunTrust 	with 	the 	indubitable
equivalent 	of 	its 	$4,642,660.44 	claim: 	“The 	court 	finds 	that
based 	upon 	what 	it 	deems 	to 	be 	a 	conservative 	approach 	to
valuation 	and 	the 	circumstances 	of 	this 	case, 	the 	property 	to 	be
surrendered 	has 	an 	‘excess 	value’ 	of 	over 	$137,000, 	which
suffices 	to 	satisfy 	the 	indubitable 	equivalent 	standard 	of 	§
1129(b)(2)(A)(iii).” 	(Id. 	at 	16-17.) 	Having 	carefully
considered 	the 	bankruptcy 	court’s 	order 	and 	the 	evidence 	before
it 	at 	the 	confirmation 	hearing, 	the 	court 	finds 	that 	the
bankruptcy court’s ruling was clearly erroneous.
A. 	The Test for Indubitable Equivalence
The 	bar 	for 	a 	finding 	of 	indubitable 	equivalence 	is
exceedingly high:
This 	burden 	is 	more 	than 	a 	mere 	preponderance 	of 	the
evidence 	and 	more 	than 	even 	beyond 	a 	reasonable 	doubt,
but 	rather 	the 	indubitable 	equivalence 	of 	a 	cash
payment 	on 	the 	date 	of 	confirmation. 	The 	burden 	is
akin 	to 	a 	clear 	and 	convincing 	standard. 	Where 	the
creditor 	is 	earmarked 	to 	receive 	part 	of 	its
collateral, 	any 	such 	plan 	will 	be 	subject 	to 	extremely
close 	scrutiny 	to 	insure 	that 	the 	creditor 	will
actually 	receive 	the 	indubitable 	equivalent 	of 	its
secured claim.
In 	re 	Prosperity 	Park, 	LLC, 	No. 	10-31399, 	2011 	WL 	1878210, 	at 	*4
(Bankr. 	W.D.N.C. 	May 	17, 	2011) 	(internal 	citations 	omitted).
The 	concept 	of 	indubitable 	equivalence 	found 	in 	the 	Bankruptcy
Code 	was 	taken 	from 	Judge 	Learned 	Hand’s 	opinion 	in 	In 	re 	Murel
Holding 	Corp., 	75 	F.2d 	941, 	942 	(2d 	Cir. 	1935). 	See 	In 	re 	Sandy
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Ridge 	Dev. 	Corp., 	881 	F.2d 	1346, 	1350 	(5th 	Cir. 	1989) 	(citing
124 	Cong. 	Rec. 	H 	11089 	(daily 	ed. 	September 	28, 	1978) 	(statement
of 	Rep. 	Edwards), 	reprinted 	in 	1978 	U.S. 	Code 	Cong. 	& 	Admin.
News 	6436 	at 	6475.) 	Judge 	Hand 	reasoned 	that 	a 	judge 	could
“equitably 	and 	fairly” 	provide 	adequate 	protection 	to 	an
objecting 	creditor 	where 	the 	debtor 	declined 	to 	satisfy 	the
creditor 	through 	traditional 	means, 	e.g., 	maintenance 	of 	the
creditor’s 	liens, 	sale 	of 	the 	collateral, 	or 	payment 	of 	the
value 	of 	the 	liens. 	In 	re 	Murel 	Holding 	Corp., 	75 	F.2d 	at 	942.
However, 	Judge 	Hand 	cautioned 	that 	“[i]n 	construing 	so 	vague 	a
grant, 	we 	are 	to 	remember 	not 	only 	the 	underlying 	purposes 	of
the 	section, 	but 	the 	constitutional 	limitations 	to 	which 	it 	must
conform.” 	Id. 	He further explained:
It 	is 	plain 	that 	‘adequate 	protection’ 	must 	be
completely 	compensatory; 	and 	that 	payment 	ten 	years
hence 	is 	not 	generally 	the 	equivalent 	of 	payment 	now.
Interest 	is 	indeed 	the 	common 	measure 	of 	the
difference, 	but 	a 	creditor 	who 	fears 	the 	safety 	of 	his
principal 	will 	scarcely 	be 	content 	with 	that; 	he
wishes 	to 	get 	his 	money 	or 	at 	least 	the 	property. 	We
see 	no 	reason 	to 	suppose 	that 	the 	statute 	was 	intended
to 	deprive 	him 	of 	that 	in 	the 	interest 	of 	junior
holders, 	unless 	by 	a 	substitute 	of 	the 	most
indubitable equivalence.
Id. 	(emphasis 	added). 	Therefore, 	to 	make 	a 	finding 	that 	a
creditor 	has 	been 	provided 	with 	the 	indubitable 	equivalent 	of
its 	claim, 	there 	must 	be 	“no 	doubt 	that 	the 	secured 	creditor
receives 	consideration 	equal 	to 	its 	claim 	in 	value 	or 	amount.”
In 	re 	Philadelphia 	Newspapers, 	LLC, 	559 	F.3d 	298, 	326 	(3d 	Cir.
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2010) 	(noting 	that 	Webster’s 	Dictionary 	defines 	“indubitable” 	as
“not 	open 	to 	question 	or 	doubt” 	or 	“too 	evident 	to 	be 	doubted”).
Said 	another 	way, 	where 	there 	is 	considerable 	doubt 	as 	to 	the
underlying 	value 	of 	the 	property 	to 	be 	surrendered, 	the 	risk
that 	the 	creditor 	will 	not 	realize 	the 	value 	of 	its 	claim 	is 	too
great and the indubitable equivalence standard will not be met.
B. 	Analysis
In 	this 	case, 	the 	valuation 	evidence 	presented 	to 	the
bankruptcy 	court 	was 	wide 	ranging. 	The 	bankruptcy 	court 	noted
that 	the 	parties 	introduced 	“evidence 	of 	eleven 	appraisals,
generated 	by 	three 	different 	appraisers 	and 	performed 	between
July 	2008 	and 	August 	2010[.]” 1 (Conf. 	Order 	at 	3.) 	The
appraisals 	for 	the 	fifteen 	unsold 	condominiums 	that 	were
considered 	by 	the 	bankruptcy 	court 	were 	conducted 	between
December 	16, 	2009 	and 	August 	12, 	2010 	and 	ranged 	in 	value 	from
$3,450,000 	to 	$4,540,000. 	(Id. 	at 	8.) 	Appraiser 	Hector 	Ingram
issued 	two 	appraisals: 	the 	first 	valued 	the 	condominiums 	as 	of
December 	16, 	2009 	at 	$3,450,000 	(Id. 	at 	3), 	and 	the 	second
valued 	the 	condominiums 	as 	of 	June 	30, 	2010 	at 	$3,575,000
(Appellant’s 	Br. 	at 	6). 	Appraiser 	Earl 	Worsley 	also 	valued 	the
1 The 	appraisals 	submitted 	with 	respect 	to 	the 	condominiums
were 	commissioned 	by 	SunTrust. 	(Conf. 	Order 	at 	3.) 	SunTrust
contends 	that 	the 	bankruptcy 	court 	overstated 	the 	number 	of
appraisals 	and 	that 	there 	were 	actually 	three 	appraisals 	of 	the
condominiums 	plus 	revisions. 	At 	the 	confirmation 	hearing,
testimony 	on 	valuation 	was 	presented 	by 	three 	appraisers 	and
Bannerman’s member-manager, Todd Toconis.
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condominiums, 	first 	at 	$4,540,000 	and 	later 	at 	$4,000,000 	in 	a
corrected 	appraisal. 	(Conf. 	Order 	at 	8, 	9 	n.5.) 	Other 	variable
factors 	in 	the 	appraisals 	included 	the 	following: 	the 	average
price 	per 	square 	foot 	ranged 	from 	$250 	to 	$325 	(id. 	at 	13); 	the
discount 	rate 	ranged 	from 	12% 	to 	15% 	(id. 	at 	8); 	and 	the
entrepreneurial discount ranged from 10% to 20% (id.).
The 	wide-ranging 	valuations 	presented 	to 	the 	bankruptcy
court, 	even 	among 	SunTrust’s 	own 	appraisers, 	are 	indicative 	of
the 	uncertainty 	in 	the 	value 	of 	this 	particular 	property. 	See
In 	re 	Arnold 	& 	Baker 	Farms, 	85 	F.3d 	at 	1422 	(“The 	large
disparity 	in 	the 	parties’ 	valuation 	of 	the 	same 	property
illustrates 	the 	obvious 	uncertainty 	in 	attempting 	to 	forecast
the 	price 	at 	which 	real 	property 	will 	sell 	at 	some 	uncertain
future 	date.”). 	This 	court 	recognizes, 	as 	did 	the 	bankruptcy
court, 	that 	“valuation 	is 	not 	an 	exact 	science, 	and 	the 	chance
for 	error 	always 	exists.” 	(Conf. 	Order 	at 	8 	(quoting 	In 	re
Simmons, 	113 	B.R. 	942, 	947 	(Bankr. 	W.D. 	Tex. 	1990)).) 	However,
as 	the 	uncertainty 	of 	the 	valuation 	increases 	so 	does 	the 	risk
of 	error. 	In 	the 	present 	case, 	the 	wide-ranging 	valuations 	are
indicative 	of 	uncertainty 	and 	weigh 	against 	a 	finding 	of
indubitable equivalence.
In 	addition 	to 	the 	fact 	that 	the 	valuation 	evidence
presented 	to 	the 	bankruptcy 	court 	was 	wide 	ranging, 	the
bankruptcy 	court 	made 	material 	adjustments 	to 	the 	appraisal
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evidence. 	The 	bankruptcy 	court 	took 	the 	average 	unit 	price 	of
$370,000 	from 	Worsley’s 	corrected 	appraisal, 	then
(1) “adjust[ed] 	the 	findings 	detailed 	in 	the 	appraisal 	reports
to 	reflect 	the 	value 	of 	only 	the 	units 	to 	be 	surrendered 	by 	the
debtor” 	(Conf. 	Order 	at 	9); 	(2) 	excluded 	or 	discounted 	three 	of
the 	five 	comparables 	used 	in 	the 	appraisal 	(id. 	at 	10-11); 	and
(3) 	eliminated 	a 	discount 	for 	entrepreneurial 	profit 	(id. 	at
12).
First, 	the 	bankruptcy 	court 	found 	it 	necessary 	to 	make
adjustments 	to 	the 	appraisal 	evidence 	because 	the 	evidence
presented 	did 	not 	reflect 	the 	value 	of 	the 	specific 	eleven
condominiums 	to 	be 	surrendered, 	but 	instead 	reflected 	the 	value
of 	all 	fifteen 	unsold 	condominiums. 	The 	bankruptcy 	court
recognized 	the 	problem 	this 	presented 	when 	it 	stated, 	“The
difficulty 	in 	employing 	any 	of 	the 	appraisals 	admitted 	into
evidence 	without 	substantial 	extrapolation 	is 	that 	none 	of 	them
offered 	a 	value 	on 	the 	specific 	units 	surrendered. 	And,
unfortunately, 	neither 	did 	the 	testimony 	of 	any 	of 	the
appraisers.” 	(Conf. 	Order 	at 	9.) 	The 	bankruptcy 	court 	went 	on
to 	caution 	future 	litigants 	against 	offering 	imprecise 	valuation
evidence: 	“This 	case 	offers 	a 	textbook 	example 	of 	the 	need 	to
present, 	in 	any 	dirt 	for 	debt 	case 	and 	especially 	in 	a 	‘partial
dirt’ 	for 	debt 	case 	like 	this 	one, 	evidence 	focused 	on 	the 	value
of 	the 	specific 	property 	to 	be 	surrendered.” 	(Id. 	at 	17
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(emphasis 	added).) 	Yet, 	while 	generally 	recognizing 	the
problem, 	the 	bankruptcy 	court 	appears 	to 	have 	not 	taken 	into
account, 	when 	conducting 	its 	indubitable 	equivalence 	analysis,
the 	uncertainty 	this 	“substantial 	extrapolation” 	added 	to 	its
valuation. 	Bannerman 	points 	out 	that 	the 	bankruptcy 	court
“devotes 	eight 	pages 	to 	explaining 	how 	it 	methodically 	reached 	a
conservative 	valuation 	of 	the 	property.” 	(Appellee’s 	Br. 	at 	13
[DE 	#16].) 	However, 	the 	extensive 	valuation 	analysis 	undertaken
by 	the 	bankruptcy 	court 	stands 	in 	stark 	contrast 	to 	its 	one
paragraph 	indubitable 	equivalence 	analysis, 	in 	which 	it 	failed
to 	acknowledge 	any 	uncertainty 	or 	risk 	that 	its 	calculation
overvalued 	the 	property. 	(Compare 	Conf. 	Order 	at 	7-14, 	with
Conf. Order at 16-17.)
Next, 	the 	bankruptcy 	court 	eliminated 	or 	discounted 	the
three 	lowest 	($232, 	$252, 	and 	$217 	per 	square 	foot) 	of 	the 	five
comparables 	used 	by 	Worsley 	and 	relied 	on 	the 	two 	highest
comparables 	($292 	and 	$302 	per 	square 	foot). 	(Conf. 	Order 	at
10-11; 	Appellant’s 	Br. 	at 	14-15.) 	The 	bankruptcy 	court
determined 	that 	the 	appropriate 	price 	per 	square 	foot 	was 	$263
and 	thoroughly 	explained 	its 	rationale 	for 	adjusting 	the
comparables. 	(Conf. 	Order 	at 	10-11.) 	However, 	it 	is 	not 	the
accuracy 	of 	the 	adjustment 	that 	is 	at 	issue 	here, 	it 	is 	the
inherent 	uncertainty 	that 	adjustments 	generally 	inject 	into 	a
valuation. 	The 	bankruptcy 	court 	recognized 	as 	much 	when 	it
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criticized 	Worley’s 	adjustments 	to 	comparables 	4 	and 	5. 	(See
Conf. 	Order 	at 	11 	(“Such 	large 	adjustments 	invariably 	increase
the risk of error in an appraisal valuation.”).)
Finally, 	the 	bankruptcy 	court 	eliminated 	the 	discount 	for
entrepreneurial 	profit. 	The 	bankruptcy 	court 	found 	that 	an
entrepreneurial 	discount 	was 	inappropriate 	given 	that 	SunTrust
had 	the 	option 	to 	market 	and 	offer 	financing 	on 	the 	condominiums
as 	single 	units 	as 	opposed 	to 	selling 	them 	in 	bulk 	to 	an
investor. 	(Conf. 	Order 	at 	12-13.) 	At 	the 	confirmation 	hearing,
SunTrust 	had 	not 	committed 	to 	a 	marketing 	plan, 	but 	the
bankruptcy 	court 	found 	it 	more 	likely 	than 	not 	that 	the
surrendered 	units 	would 	be 	sold 	individually. 	(Id. 	at 	12.)
Based 	on 	the 	appraisers’ 	testimony 	at 	the 	confirmation 	hearing
with 	respect 	to 	entrepreneurial 	profit, 	were 	SunTrust 	to 	now
sell 	the 	condominiums 	in 	bulk, 	it 	would 	most 	certainly 	be 	at 	a
value less than that calculated by the bankruptcy court:
Well, 	the 	entrepreneurial 	profit 	is 	the 	incentive
to 	make 	someone 	come 	out 	and 	buy 	all 	of 	these 	units.
You 	know, 	this 	is 	a 	three-and-a-half-million-dollar
purchase. 	In 	order 	to 	encourage 	someone 	to 	put 	that
kind 	of 	money 	down 	and 	then 	handle 	the 	risk 	of 	selling
out 	the 	units, 	as 	we've 	seen 	through 	our 	absorption
projections, 	it's 	pretty 	hit 	and 	miss 	how 	quickly
these 	units 	sell 	so 	there 	is 	some 	significant 	risk 	to
that. 	And 	that 	15 	percent 	[entrepreneurial 	discount]
we 	make 	the 	assumption 	would 	be 	enough 	to 	compensate
an 	individual 	to 	come 	in 	and 	buy 	the 	bulk 	number 	of
units and then handle the sales process.
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(Aug. 	26, 	2010 	Conf. 	Hr’g 	at 	47-48.) 	The 	complete 	exclusion 	of
any 	entrepreneurial 	discount 	further 	increased 	the 	risk 	that
SunTrust 	would 	not 	be 	fully 	compensated 	on 	its 	secured 	claim.
See 	In 	re 	Arnold 	& 	Baker 	Farms, 	85 	F.3d 	at 	1422 	(“If 	[the
creditor] 	subsequently 	sells 	the 	property 	for 	less 	than 	the
value 	calculated 	by 	the 	bankruptcy 	court, 	[the 	creditor] 	has 	no
recourse 	to 	the 	remaining 	collateral 	to 	satisfy 	the 	deficiency.
As 	a 	result, 	the 	distribution 	to 	[the 	creditor] 	may 	not 	be
‘completely compensatory.’”).
The 	valuation 	evidence 	submitted 	to 	the 	bankruptcy 	court
was 	wide 	ranging 	and 	each 	adjustment 	made 	injected 	further
uncertainty 	into 	already 	tenuous 	valuation 	evidence. 	See 	In 	re
Arnold 	& 	Baker 	Farms, 	85 	F.3d 	at 	1422 	(concluding 	that 	partial
dirt 	for 	debt 	plan 	did 	not 	provide 	creditor 	with 	indubitable
equivalent 	of 	its 	secured 	claim 	where 	the 	“evidence 	at 	trial
demonstrated 	that 	the 	value 	of 	the 	real 	property 	was 	far 	from
certain.”). 	Furthermore, 	each 	of 	these 	adjustments 	served 	to
increase 	the 	value 	the 	bankruptcy 	court 	placed 	on 	the
condominiums. 	(See 	Conf. 	Order 	at 	10 	(adjusting 	average 	unit
price upward from appraisal of $370,000 to $385,000).)
The 	court 	also 	finds 	troubling 	that 	one 	of 	the 	factors
relied 	on 	by 	the 	bankruptcy 	court 	in 	support 	of 	its 	indubitable
equivalence 	determination 	was 	“the 	market 	trend 	evidence 	for 	the
Wilmington 	area.” 	(Id. 	at 	17.) 	The 	bankruptcy 	court 	cited 	the
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testimony 	from 	Toconis, 	“that 	there 	was 	no 	new 	construction 	of
residential 	units, 	resulting 	in 	a 	shrinking 	inventory, 	and 	that
absorption 	rates 	increased 	from 	2009 	to 	2010.” 	(Id. 	at 	17,
n.14.) 	Worley, 	upon 	whose 	appraisal 	the 	bankruptcy 	court
founded 	its 	valuation, 	conceded 	in 	response 	to 	questioning 	that
the 	downtown 	Wilmington 	condominium 	market 	may 	have 	leveled 	off
and 	cannot 	continue 	to 	drop, 	as 	suggested 	by 	Bannerman, 	but 	he
concluded 	that 	the 	market 	is 	still 	“bouncing 	along 	the 	bottom.”
(Aug. 	20, 	2010 	Conf. 	Hr’g 	Tr. 	at 	86.) 	When 	later 	questioned
about this assessment, Toconis agreed:
Q: 	I 	think 	it 	was 	Mr. 	Worsley 	and 	perhaps 	Mr.
Ingram 	that 	talked 	about 	bumping 	along 	the 	bottom. 	In
your 	experience, 	Mr. 	Toconis, 	and 	what 	you 	see 	and
what you do every day, are we still on the bottom?
A: Yes, I believe we are still on the bottom.
Q: 	Okay. 	Which 	way 	are 	we 	heading? 	Are 	we 	still
bumping?
A: 	I 	think 	that 	we 	are 	bumping, 	but 	you 	have 	to
understand 	that 	Wilmington 	and 	specific 	New 	Hanover
County 	is 	a 	very 	limited 	land 	mass, 	unlike 	like
Raleigh 	here 	where, 	you 	know, 	you 	can 	just 	continue 	to
grow 	out 	and 	out 	and 	out. 	Wilmington 	doesn't 	have
anywhere 	to 	really 	grow 	to 	and 	the 	recession 	has
caused 	no 	new 	construction, 	no 	new 	building, 	no 	new
subdivision 	developments, 	no 	new 	condo 	projects, 	so
we're 	lucky 	in 	the 	fact 	that 	our 	inventory 	is 	slowly
decreasing 	and 	as 	that 	inventory 	decreases, 	home
values will go back up.
(Aug. 	27, 	2010 	Conf. 	Hr’g 	Tr. 	at 	62.) 	The 	court 	views 	none 	of
these 	statements 	as 	positing 	a 	favorable 	condition 	in 	the
current 	relevant 	market. 	The 	fact 	that 	a 	bad 	market 	is 	not
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getting 	worse 	or 	has 	shown 	some 	hope 	of 	future 	improvement 	is
cold 	comfort 	to 	a 	creditor 	being 	asked 	to 	forgo 	a 	portion 	of 	its
security 	in 	full 	satisfaction 	of 	its 	secured 	claim. 	See 	In 	re
Walat 	Farms, 	Inc., 	70 	B.R. 	330, 	334 	(E.D. 	Mich. 	1987) 	(“[N]o
matter 	how 	hot 	the 	market 	for 	real 	estate 	may 	become 	in 	the
future, 	the 	market 	for 	farm 	real 	estate 	here 	and 	now 	is 	not 	such
which 	would 	permit 	us 	to 	hold 	that 	the 	value 	of 	the 	land 	being
offered is the indubitable equivalent of Equitable’s claim.”).
The 	bankruptcy 	court 	concluded 	that 	a 	$137,000 	margin
between 	its 	estimated 	value 	of 	the 	property 	to 	be 	surrendered
and 	SunTrust’s 	claim 	was 	sufficient 	to 	satisfy 	the 	indubitable
equivalence 	standard. 	Bannerman 	argues 	that 	no 	margin 	of 	error
or 	equity 	cushion 	is 	required 	when 	a 	bankruptcy 	court 	uses 	a
conservative 	valuation. 	See 	In 	re 	Atlanta 	S. 	Bus. 	Park, 	Ltd.,
173 	B.R. 	444, 	451 	n.5 	(“[I]t 	would 	be 	inappropriate 	to 	value
conservatively 	the 	property 	and 	require 	the 	Debtor 	to 	provide 	a
margin 	of 	error 	of, 	for 	example, 	thirty 	percent. 	Both 	these
measures 	serve 	the 	same 	purpose 	of 	compensating 	a 	creditor 	for
the 	risk 	it 	will 	incur 	upon 	being 	forced 	to 	accept 	the
collateral 	in 	lieu 	of 	cash 	payments.”). 	It 	is 	worth 	noting 	that
in 	Atlanta 	Southern 	Business 	Park 	the 	debtor 	compensated 	the
creditor 	with 	both 	a 	partial 	surrender 	of 	the 	secured 	creditor’s
collateral 	and 	cash. 	173 	B.R. 	at 	451. 	There 	is 	no 	uncertainty
in 	the 	value 	of 	cash. 	Furthermore, 	the 	secured 	creditor 	in
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Atlanta 	Southern 	Business 	Park 	was 	to 	receive 	a 	total 	of
$812,957.90 	in 	real 	property 	and 	cash 	on 	its 	$663,150.23 	claim,
id. 	at 	451-52, 	which 	actually 	provided 	a 	22% 	equity 	cushion 	and
distinguishes 	Atlanta 	Southern 	Business 	Park 	from 	the 	present
case.
Most 	certainly, 	there 	are 	cases 	where 	the 	conservative
nature 	or 	lack 	of 	uncertainty 	of 	a 	valuation 	leaves 	no 	doubt
that 	the 	value 	of 	the 	proposed 	property 	to 	be 	surrendered 	is 	the
indubitable 	equivalent 	of 	the 	creditor’s 	secured 	claim. 	See 	In
re 	May, 	174 	B.R. 	832, 	836 	& 	840 	(Bankr. 	S.D. 	Ga. 	1994) 	(finding
indubitable 	equivalence 	on 	1.5% 	margin 	where 	both 	parties’
appraisers 	were 	in 	“complete 	agreement” 	as 	to 	the 	value 	of 	the
units 	to 	be 	surrendered). 	This 	is 	not 	such 	a 	case. 	The
$137,000 	(less 	than 	3%) 	margin 	of 	error 	here 	is 	far 	too 	slim
given 	(1) 	the 	wide-ranging 	valuation 	evidence; 	(2) 	the
“substantial 	extrapolation” 	the 	bankruptcy 	court 	found 	necessary
in 	order 	to 	value 	the 	condominiums; 	and 	(3) 	the 	unfavorable
conditions 	of 	the 	relevant 	market. 	It 	is 	worth 	repeating 	that
“indubitable” 	means 	“not 	open 	to 	question 	or 	doubt.” 	In 	the
present 	case, 	the 	court 	is 	left 	with 	substantial 	doubt 	that 	the
value 	of 	the 	proposed 	property 	to 	be 	surrendered 	is 	the
indubitable equivalent of SunTrust’s secured claim.
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CONCLUSION
For 	the 	foregoing 	reasons, 	the 	bankruptcy 	court’s 	order
confirming 	the 	Debtor’s 	Chapter 	11 	plan 	is 	VACATED 	and 	the 	case
is 	REMANDED 	to 	the 	bankruptcy 	court 	for 	further 	proceedings
consistent 	with 	this 	order. 	Debtor’s 	motion 	for 	oral 	argument
[DE #18] is DENIED. 	The clerk is directed to close this case.
This 30th day of September, 2011.
___________________________________
MALCOLM J. HOWARD
Senior United States District Judge
At Greenville, NC
bfb
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