Case No. 06-10069-B-11, DC No. BMJ-1.United States Bankruptcy Court, E.D. California, Fresno Division.
July 14, 2006
Albert J. Berryman, Esq., of Baker, Manock Jensen, P.C., appeared on behalf of movants, Scripps Investments Loans, Inc., et al.
Estela O. Pino, Esq., of Pino Associates, appeared on behalf of respondent and debtor-in-possession, A Partners, LLC.
MEMORANDUM DECISION REGARDING MOTION FOR RELIEF FROM THE AUTOMATIC STAY
RICHARD LEE, Bankruptcy Judge
Before the court is a motion for relief from the automatic stay under 11 U.S.C. § 362(d)(1) and (2).[1] Scripps Investments Loans, Inc., et al. (“Scripps Investments”) wants permission, on behalf of itself and all junior lienholders, to proceed with the non-judicial foreclosure of various trust deeds against a commercial building known as the Helm Building (the “Helm Building” or the “Property”). The debtor-in-possession, A Partners, LLC, is a California limited liability company (“Debtor”). For the reasons set forth below, Scripps Investments’ motion will be granted as to the first and third priority trust deeds
Page 2
which it holds or controls. The request for relief from stay on behalf of all other entities holding liens or charges against the Helm Building will be denied. Scripps Investments also asks the court to waive the provisions of Fed.R.Bankr.P. 4001(a)(3), which automatically stays the effect of this ruling for 10 days unless the Rule is waived. Because Scripps Investments could potentially conduct a trustee’s sale of the first trust deed within 10 days after this ruling is entered, that request will only be granted in part.
This Memorandum Decision contains the court’s findings of fact and conclusions of law as required by Fed.R.Bankr.P. 7052. The bankruptcy court has jurisdiction pursuant to 28 U.S.C. § 1334
and 11 U.S.C. § 362. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G).
FACTS AND PROCEDURAL BACKGROUND The Helm Building.
The principal asset of the Debtor’s estate, and the focus of this motion, is the Helm Building. The Debtor purchased the Helm Building in 2003 for $1.55 million. The Debtor’s manager, Ronald Allison,[2] testified that the Debtor acquired the Property for less than its market value, but no evidence was offered as to the condition of the Property or the actual value at the time. Constructed in or about 1914, the Helm Building sits on Fresno’s downtown Fulton Mall, an area that is in need of and undergoing redevelopment. The Helm Building is a ten-story steel, concrete and brick structure with a basement. According to Mr. Allison, the Helm Building has, including the basement, approximately 82,500 gross square feet of space; approximately 70,000 square feet are “net rentable.” The Property sits on one of two adjacent 7,500 square foot lots. The second lot is vacant, but available
Page 3
for future development. The Helm Building has some on-site parking.
The Helm Building is undergoing a major renovation and is largely unrentable. Mr. Allison testified that the Debtor purchased the Helm Building for the purpose of redeveloping the Property. He believes that the Property is particularly suitable for occupancy by agencies of the federal government based on its location and configuration. The Debtor initially engaged the services of Mauldin-Dorfmeier Construction, Inc. (“MDC”) to begin renovation of the Helm Building. It is not clear from the record how much of that work was completed or how much the Debtor paid MDC for renovation work that was done. Mr. Allison testified that the electrical service has been upgraded. However, the record also reveals the following issues: the interior of the second, third, and fourth floors of the Helm Building has been demolished; all six floors above that are vacant and in need of substantial repairs before they can be occupied; three of the four elevators are non-functional and all of the elevators need to be replaced; MDC is no longer working on the Helm Building; MDC filed its own chapter 11 bankruptcy in 2005; and MDC holds a group of promissory notes for work it performed totaling more than $1.1 million secured by a deed of trust against the Property. The record is silent regarding a budget, a timetable, and a source of funds for the renovation project, although Mr. Allison testified, without specifics, that he believes the Debtor can get financing to complete the needed work.
The Helm Building currently has six retail tenants on the first floor who collectively pay a small irregular amount of rent to the Debtor.[3] All rent is cash collateral for the senior lien held by Scripps Investments, which has not consented
Page 4
to its use. The Debtor’s schedules report that at the commencement of this bankruptcy case, the Debtor had cash bank deposits totaling $145.95. On March 13, 2006, this court authorized the Debtor to borrow $40,000 from Mr. Allison on an unsecured basis (the “Motion to Borrow”). On June 29, 2006, this court authorized the Debtor to borrow an additional $40,000 from Mr. Allison on an unsecured basis. The Debtor needed the money to fund its operating expenses, including insurance, employee salaries, and utilities for the Helm Building. There was no money in the proposed budgets for any payments to secured creditors. Mr. Allison was personally funding the operations of the Debtor prior to the bankruptcy. The Debtor’s bankruptcy schedules list Mr. Allison as an unsecured creditor with an estimated claim in excess of $400,000.
The Helm Building is collateral for multiple obligations secured by three deeds of trust; all of the obligations are in default. Scripps Investments holds the “purchase money” promissory note secured by the first trust deed. It had a balance due as of January 26, 2006, in excess of $1.219 million and accrues interest at the daily rate of $625.70. The purchase money note first matured on September 1, 2003. Thereafter, the Debtor entered into a series of forbearance agreements, the last of which matured in late 2004. The Debtor made its last payment to Scripps Investments in January 2005, after which Scripps Investments commenced foreclosure. The Debtor has not made any payments to Scripps Investments since commencement of the bankruptcy case.
The second trust deed secures the obligations owed to MDC. MDC filed an amended proof of claim in this bankruptcy showing a balance due as of January 26, 2006, in excess of $1.149 million.[4] MDC’s representative, Alan Dorfmeier,
Page 5
confirmed the amounts stated in the amended proof of claim. Interest accrues on the debt to MDC at the rate of $354 per day. The Debtor has not made any payments to MDC since commencement of this bankruptcy.
The third trust deed secures the Debtor’s commercial guarantee of a debt owed by AB Parking Facilities, LLC (“AB Parking”) to Scripps GSB II, LLC (“Scripps GSB II”), a related entity to Scripps Investments.[5] This debt is also secured by a third trust deed against AB Parking’s property referred to in these proceedings as the Guarantee Buildings. That obligation has a principal balance as of January 26, 2006, in excess of $4.541 million, and accrues interest at the daily rate of $2,948,42. AB Parking is in serious financial trouble and it does not appear that AB Parking will be able to pay this obligation.[6] For that reason, the court must include the full amount secured by Scripps GSB II’s third trust deed in the total debt calculation.
Page 6
Finally, the court notes that the Debtor has not paid the 2004-2005 real property taxes for the Helm Building. The redemption amount of that obligation now exceeds $25,000. Neither has the Debtor paid the 2005-2006 property taxes. Those delinquent payments now exceed $21,000. As of the evidentiary hearing, the total debt secured by liens and charges against the Helm Building, with taxes and accruing interest, substantially exceeded $7 million.
Scripps Investments contends that the Helm Building has a fair market value of $1 million. It offered into evidence a written appraisal and the testimony of Gregg Palmer, a MAI certified commercial property appraiser. Conversely, the Debtor values the Helm Building at $15 million. The Debtor’s valuation is supported solely by the opinion testimony of Mr. Allison. The Debtor did not offer a third party appraisal to support its valuation.
APPLICABLE LAW
Scripps Investments moves for relief under § 362(d) which provides:
On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay —
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
(2) with respect to a stay of an act against property under subsection (a) of this section, if —
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization.
Pursuant to § 362(g), Scripps Investments has the burden of proof on the issue of the Debtor’s equity. The Debtor has the burden of proof on all other issues. Although the Debtor has the ultimate burden of proof on the “cause” issue, Scripps Investments must produce some evidence in the first instance to support the “cause” allegation. Tirey Distributing Company v. Sloan (In re Tirey Distributing Co.), 242 B.R. 717, 723 (Bankr. E.D. Okla. 1999) (quoting In re
Page 7
Tursi, 9 B.R. 450, 453 (Bankr. E.D. Pa. 1981)).
Scripps Investments moves for relief under both subsections 362(d)(1) and (d)(2). However, the grounds for relief are independent and relief can be granted under either subsection. The court is not required to determine under subsection 362(d)(1) whether the fair market value of the Helm Building is sufficient to adequately protect Scripps Investments’ interest in the Property if it finds that the value does not exceed the total liens and that relief is otherwise warranted under subsection 362(d)(2).
ANALYSIS AND CONCLUSIONS OF LAW There is No Equity in the Helm Building — § 362(d)2) (A).
The term “equity” in subsection 362(d)(2) is defined to mean the value of the subject property in excess of the total liens and charges. Stewart v. Gurley, 745 F.2d 1194, 1196 (9th Cir. 1984).
Looking first to the liens and charges against the Helm Building, the court has found, as set forth above, that the total liens and charges exceed $7 million. Therefore, to prevail under subsection 362(d)(2)(A), Scripps Investments needs only to establish, by a preponderance of the evidence, that the value of the Helm Building does not exceed $7 million. When the values are conflicting, the Bankruptcy Code only requires the court to determine whether the Debtor has equity in the Property, the court is not required to determine how much. Here, the parties’ respective valuations differ by $14 million, a ratio of 15 to 1. The total liens fall squarely in the middle of the competing valuations. The court does not have to make a finding as to the actual value of the Helm Building unless that finding is necessary to the court’s decision; unless it appears that the actual value is close to the total liens and charges and might affect the outcome one way or the other.
One of the most puzzling aspects of this case lies in the fact that the Debtor
Page 8
did not produce a professional appraiser to corroborate Mr. Allison’s opinion of the Helm Building’s value. Scripps Investments’ valuation was supported by the testimony of a MAI certified appraiser. Mr. Allison offered his opinion of value as a representative of the owner of the Helm Building pursuant to Fed.R.Ev. 701.
Mr. Palmer testified as an expert witness pursuant to Fed.R.Ev. 702. Mr. Allison was permitted to testify as a percipient witness, not an expert. Mr. Allison’s opinion of value differed from Mr. Palmer’s opinion by a factor of 15 to 1. Based on the extraordinary difference between the parties’ respective positions, the court must carefully scrutinize the methods by which the competing opinions were derived. The court must determine how much weight to give the competing testimonies. However, the parties’ valuations are so far apart, the court cannot selectively weigh and apply various portions of each testimony to derive a value that lies somewhere in the middle. If the court is persuaded that one of the opinions is correct, or approximately so, then it must also conclude that the other is completely out of the proverbial “ball park.” Mr. Allison’s testimony is subject to the same critical analysis as that of an independent appraiser. When the owner of property is unable to provide a detailed explanation of how he or she arrived at a lump-sum value for the property, the testimony may be insufficient to establish in the court’s mind an “actual belief . . . derived from the evidence” as to the validity of the owner’s opinion. Russell, Bankruptcy Evidence Manuel § 701.2 at page 1218 (West 2006 edition), quoting In re Brown, 244 B.R. 603, 612 (Bankr. W.D.Va. 2000).
Mr. Allison testified that his opinion of value is based on his experience in commercial property leasing and development, his familiarity with other buildings in the area, and his general knowledge of redevelopment activity in downtown Fresno. Mr. Palmer’s appraisal was based, in part, on a detailed comparison of “comparable sales” of other commercial buildings in downtown Fresno. At the conclusion of Mr. Palmer’s testimony, it was clear to the court what methods,
Page 9
procedures and specific facts he used to derive a value for the Property. Mr. Allison’s valuation was not supported by any specific factual analysis. Indeed, much of his testimony was focused more on trying to discredit Mr. Palmer’s appraisal. While it does appear that Mr. Allison has an extensive base of knowledge regarding the Helm Building and the downtown redevelopment industry, he was unable to “connect the dots”; that is, he was unable to pull together a detailed explanation of how he arrived at the lump-sum value for the Property which he asks the court to accept.
Mr. Allison testified generally that other developers are acquiring properties in the downtown area for commercial redevelopment, but he offered no empirical data by which the court could compare those other projects to the Helm Building. Mr. Allison testified that the Helm Building could have a gross rental stream of $304,176 per year once it is fully renovated and occupied, but he offered no evidence to establish (1) how and when the Helm Building will achieve its full income potential, (2) how the projected “gross” income would equate to “net” income, and (3) how the estimated income stream would translate into a calculation of the Property’s present value.
In contrast, Mr. Palmer’s analysis was set forth in a written report and he testified at length regarding the information in that document and the basis for his conclusions. Mr. Palmer testified that he did not use the “income” approach to value the Helm Building; he relied on other accepted valuation methods because approximately 90% of the Property is currently vacant and produces no income. The Debtor had an opportunity to vigorously cross-examine Mr. Palmer regarding his methods and conclusions, and various inconsistencies and errors in the appraisal. Those inconsistencies and errors may affect the weight which the court would give to Mr. Palmer’s appraisal and could affect the outcome in a close contest, but this is not a close contest. The defects in Mr. Palmer’s appraisal do not affect the admissibility of his testimony, and they were not sufficient to cause
Page 10
the court to reject his testimony altogether.
At trial, the court asked Mr. Allison why he had not produced a professional appraisal to corroborate or provide more support for his opinion of the Property’s value. He responded, in essence, that he did not have sufficient cash to pay the estimated cost, $15,000, of a professional appraiser and that he had “better things to do with the money.” Both of these answers strike the court as implausible. Mr. Allison has requested and received permission from this court to personally loan $80,000 to the Debtor to pay for operating expenses. Mr. Allison testified at trial that he had the funds to build a multi-story parking structure on the vacant land adjacent to the Helm Building if given an opportunity to do so. Mr. Allison represented in support of the Debtor’s Motion to Borrow, in March 2006, that he was then actively engaged in a search for refinancing. Mr. Allison and Mr. Briggs both testified at this hearing that they have been negotiating with an unnamed third party investor to purchase a major interest in the Debtor, which could close escrow within 60 days. It is difficult for the court to believe that the Debtor can be actively engaged in negotiating a multimillion dollar financing deal, and be within 60 days of closing escrow with a bona fide investor, and that no one has yet commissioned a professional appraisal of the Debtor’s assets.
The dramatic difference between the parties’ competing valuations causes the court to consider what it can and should infer from the Debtor’s decision not to produce a professional appraisal. When a party to litigation fails to call an available witness whose testimony could be expected to favor him, the court can draw a “missing witness” inference that the witness would have exposed facts unfavorable to the party. Bohm v. The Horsley Company (In re Groggel), 333 B.R. 261, 303-04 (Bankr. W.D. Pa. 2005), citing United States v. Busic, 587 F.2d 577, 586 (3rd Cir. 1978) (other citations omitted). “The missing witness inference is inapplicable unless the information possessed by the absent witness is both material, that is relevant to the case, and non-cumulative.” Id. at 304. When it is
Page 11
shown that a witness was not called for reasons that are reasonable and proper, no unfavorable inference is permitted Id. at 304, citing 29 Am.Jur.2d, Evidence § 247 (other citation omitted). Similarly, the missing witness inference is not permitted if a party has good reason to believe the opponent has failed to meet its burden of proof, Id. at 304, citin Int’l Union, UAW v. N.L.R.B., 459 F.2d 1329, 1338 (D.C. Cir. 1972) (other citation omitted).
An inference is a “deduction of fact that may be logically and reasonably drawn from another fact or group of facts found or otherwise established in an action.” Giacalone v. Malget (In re Malget), 165 B.R. 933, 937 (Bankr. S.D. Cal. 1994), citin Cal.Ev.Code § 600(b) (West 1994).
Inferences are an indispensable tool of logical analysis and the finder of fact may draw reasonable inferences that are supported by evidence of sufficient probative value to form a rational basis for the court’s conclusion. The inference “must be drawn by reason from the facts on which it purports to rest.” In re Malget, 165 B.R. at 937, quoting Dreijer v. Girod Motor Company, 294 F.2d 549, 554 (5th Cir. 1961).
Here, the Debtor knew when this motion was first filed in late March 2006, that Scripps Investments was relying upon a professional appraisal to prove its case. The Debtor, through Mr. Allison, had the financial ability to retain and produce its own expert witness to value the Property, but apparently chose not to. Since Mr. Allison’s opinion was based on generalities, the testimony of an expert based upon specific facts and accepted appraisal methods would have been highly relevant to the case and non-cumulative. The Debtor could not have reasonably believed that the court would totally reject Mr. Palmer’s appraisal, thus leaving Scripps Investments unable to sustain its burden of proof. The Debtor did not object to Mr. Palmer’s qualifications to testify as an expert witness, or attempt to exclude his appraisal at trial. Instead, the Debtor relied upon its efforts to impeach and totally discredit Mr. Palmer in hopes that the court would find Mr. Allison’s
Page 12
testimony to be more believable. The Debtor contends that the value of the Helm Building is 1,000 times the estimated cost of an appraisal that could have helped to establish that value. While it was not improper for the Debtor to defend this motion without a professional appraisal, Mr. Allison’s statement that he “had better things to do with the money” strikes the court as an unreasonable explanation for attempting to do so, considering the magnitude of what was at stake for the Debtor.
The Debtor’s strategic decision not to produce an appraisal in opposition to this motion leads the court to logically deduce that the Debtor was not able to find an appraiser who would agree with Mr. Allison’s valuation, and/or that the Debtor already had access to an appraisal which did not support Mr. Allison’s opinion. Neither of those facts, standing alone, is directly probative of the Property’s value. However, when Mr. Allison’s testimony is subjected to the same critical analysis as Mr. Palmer’s, either of those inferences would tend to impeach Mr. Allison’s testimony and mitigate the weight which the court can give to his opinion.
Based on all of the testimony and evidence presented, and given the choice between two irreconcilable values, the court is persuaded that the fair market value of the Helm Building does not exceed $7 million. The court is not persuaded that the value of the Property even exceeds the debt secured by the first and second trust deeds, approximately $2.3 million, excluding for argument sake the third priority obligation to Scripps GSB II that is cross-collateralized with the Guarantee Buildings. The court is not persuaded that Mr. Allison’s lump-sum valuation is based on an unbiased analysis of the Helm Building’s present condition and the current market for “redevelopment” properties. Mr. Palmer’s appraisal may have contained some errors and omissions, but his conclusion was based on empirical data. Mr. Palmer was retained and paid by Scripps Investments to provide an appraisal, but he is also a licensed professional. There was no evidence to suggest that he skewed the data or manipulated the facts to achieve a particular result. In
Page 13
light of the huge gap between Mr. Palmer’s appraisal and the secured debt, over $6 million, the court is not persuaded that the questionable aspects in Mr. Palmer’s appraisal were material. Even if Mr. Palmer missed the mark by 100%, that would only lead to a valuation of $2 million, which is still less than the debts secured by the first and second liens and would not affect the outcome of this motion.
The Helm Building is Not Necessary to an EffectiveReorganization — § 362(d)(2)(B).
When a creditor establishes that the chapter 11 debtor does not have equity in its property within the meaning of § 362(d)(2)(A), the burden shifts to the debtor to establish the second prong of the § 362(d)(2) inquiry, that the property is nevertheless “necessary to an effective reorganization.” § 362(d)(2)(B). “What this requires is not merely a showing that if there is conceivably to be an effective reorganization, this property will be needed for it; but that the property is essential for an effective organization that is in prospect.” (emphasis original.) United Sav. Assn. of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 375-76, 108 S.Ct. 626, 633, 98 L.Ed.2d 740 (1988). This means that there must be “a reasonable possibility of a successful organization within a reasonable time.” Id. at 376. (citation omitted.) The debtor’s burden to make this showing increases as the exclusivity period expires. Id.
After the U.S. Supreme Court issued the Timbers‘ decision, the Ninth Circuit BAP refined the “effective reorganization” test, recognizing that after the expiration of the exclusivity period, “the debtor must offer sufficient evidence to indicate that a successful reorganization within a reasonable time is `assured'” Sun Valley Newspapers, Inc. v. Sun World Corporation (In re Sun Valley Newspapers Inc.), 171 B.R. 71, 75 (9th Cir. BAP 1994), citing In re Holly’s Inc., 140 B.R. 643, 700 (Bankr. W.D. Mich. 1992).
A chapter 11 plan cannot be based upon a visionary scheme See § 1129(a)(11); Pizza of Hawaii, Inc. v. Shakey’s, Inc. (In re Pizza of Hawaii, Inc.),
Page 14
761 F.2d 1374, 1382 (9th Cir. 1985).
After the debtor fails to confirm a chapter 11 plan, the bankruptcy court is not required to hold a hearing on every subsequent plan and disclosure statement before it can grant relief from the automatic stay under § 362(d)(2). “All that is required is that the court determine if a successful reorganization is possible within a reasonable period of time.”In re Sun Valley Newspapers, Inc., 171 B.R. at 74.
Just prior to expiration of the exclusivity period in this case, the Debtor filed a chapter 11 plan and a disclosure statement. The hearing to approve the disclosure statement has not yet occurred. However, the proposed plan is based on two assumptions, neither of which appear to be realistic: (1) that upon confirmation, the Debtor can service the restructured debt with income from the operation of its business, which includes rental income from the Helm Building, and (2) that the Debtor can permanently enjoin, through confirmation of the plan, any effort by Scripps Investments and its related entities to foreclose against the Guarantee Buildings.[7] The problems with the proposed plan include, inter alia, the facts that (1) the plan fails to demonstrate an adequate means for implementation (§ 1123(a)(5)), i.e., that the Debtor has financing and a timetable to renovate and fully lease the Property and generate sufficient cash to satisfy the liens, and (2) the
Page 15
Debtor cannot restructure the senior debt against the Guarantee Buildings through its chapter 11 plan. First Federal Bank of California v. Cogar (In re Cogar), 210 B.R. 803, 812 (9th
Cir. BAP 1997) (the senior lienholder does not have a claim against the estate of the junior lienholder that could be modified through the junior lienholder’s chapter 11 plan, even if the plan provides for transfer of the underlying real property to the debtor).
At the hearing of this matter, Mr. Allison and Mr. Briggs testified, in essence, that the Debtor’s reorganization will require a significant infusion of new capital. The Debtor’s counsel acknowledged that the proposed plan will have to be amended to address purported “recent developments” in the Debtor’s efforts to find new financing. For purposes of this motion, the court therefore deems the present chapter 11 plan to be withdrawn. The exclusivity period has now expired and there is no plan before the court for confirmation. Without an actual plan to consider, the court must determine from the evidence presented if a successful reorganization within a reasonable period of time appears certain. The Debtor bears the burden of proof on this issue.
Based on the evidence, and the record of this case, the court simply cannot find for the Debtor on this issue. Mr. Allison testified that the Debtor is close to a “deal” with a purported investor to infuse a large amount of new capital into the business. But Mr. Allison would not disclose any of the terms and details of the purported deal, including the name of the investor, and the conditions for closing the escrow. Nothing has been filed in this case to seek approval of a new financing arrangement under § 364. Nothing was offered to show that the Debtor has developed a formal business plan. Mr. Allison testified that the Helm Building will produce a significant income stream in the form of rent from prospective new tenants, but he was not able to show how or when the renovations might be completed and ready to accept new tenants. Mr. Allison’s hope to rent the Helm Building to government tenants is still in the request-for-proposal (RFP) stage.
Page 16
Mr. Allison failed to show that the Debtor has a realistic operating budget, or that the anticipated gross income stream will translate into net income that would be sufficient to service the restructured debt. How and when the Debtor might be in a position to actually rent the Helm Building, and its ability to do so profitably, are at this point matters of pure conjecture. Any chapter 11 plan which presents the Helm Building as a properly capitalized, fully rented, and profitable business operation is, at this time, little more than a “visionary scheme.” The Debtor’s evidence falls far short of showing that a successful reorganization is assured, or even likely, within a reasonable period of time.
Scripps Investments Cannot Seek Relief From the Automatic Stayon Behalf of Third-Party Junior Lienholders.
Scripps Investments is in a position to conduct the trustee’s sale on its first trust deed once relief from the automatic stay is granted. Yet Scripps Investments also asks the court to grant relief for the benefit of all junior lienholders such that they might also commence and complete judicial or non-judicial foreclosure proceedings against the Helm Building. By implication, this would include the second trust deed held by MDC. The request will be granted only as to the first and third priority trust deeds.
This motion for relief from the automatic stay is a “contested matter” within the meaning of the Federal Rules of Bankruptcy Procedure. Under Fed.R.Bankr.P. 9014(a), a contested matter may be decided by motion, as opposed to an adversary proceeding. However, Rule 9014(c) incorporates many of the rules for adversary proceedings into contested matters. One of those is Fed.R.Bankr.P. 7017, which makes Fed.R.Civ.P. 17 applicable here. Rule 17(a) states that, “[e]very action shall be prosecuted in the name of the real party in interest.”
One of the main purposes of Rule 17(a), known as the “Real Party in Interest” rule, is to protect litigants from suits by persons who do not hold, by substantive law, the rights to be enforced; those who do not have the power to
Page 17
make binding decisions regarding prosecution, compromise and settlement. 10 Collier on Bankruptcy, (15th Ed. Revised), ¶ 7017.02, pg. 7017-2. The “Real Party in Interest” rule applies to motions for relief from the automatic stay. Roslyn Savings Bank v. Comcoach Corporation (In re Comcoach Corp.), 698 F.2d 571, 573 (2nd Cir. 1983).
Here, Scripps Investments holds and controls, either directly or as manager of Scripps GSB II, the power to enforce, prosecute, compromise and settle the obligations secured by the first and third trust deeds against the Helm Building. At trial, for reasons which the court accepts, Scripps Investments declined to commit as to the order in which it will actually foreclose those liens. However, MDC is a separate entity and it holds the rights to enforce or compromise the obligations secured by the second trust deed. MDC is not a party to this contested matter and has not joined in the request for relief. Indeed, MDC filed a written opposition to this motion which states in pertinent part:
MDC, as creditor and junior lienholder, is continuing to evaluate how to proceed in this matter to liquidate its notes and lien against the Helm Building for the benefit of its creditors. At present, MDC has not determined how to proceed and has not authorized Scripps or anyone else to proceed on its behalf in the A Partners bankruptcy case. Moreover, MDC does not adopt the valuations or other allegations set forth by Scripps in the Motion. The issue of valuation is of significant importance not only to A Partners, LLC, but to its creditors and the creditors of MDC. MDC reserves the right to proceed as it sees fit in light of the best interests of its creditors and its estate.
The court can find no authority for the proposition that a senior lienholder may seek relief from the automatic stay on behalf of one or more third party junior lienholders. The relief granted in this ruling will only apply to the first and third trust deeds.
Waiver of Rule 4001(a)(3).
Federal Rule of Bankruptcy Procedure 4001(a)(3) provides that an order granting a motion for relief from an automatic stay is stayed until the expiration of 10 days after the order is entered, unless the court orders otherwise. Scripps
Page 18
Investments requests that the court waive the application of this rule because the Debtor is not paying Scripps Investments for the interest which will accrue during the stay. Rule 4001(a)(3), which was added by the 1999 amendments to the Federal Rules of Bankruptcy Procedure, recognizes that motions granting relief from the automatic stay can have enormous consequences for the parties involved and can often dictate the success or failure of the entire bankruptcy case. Rule 4001(a)(3) enables the debtor, or other party who opposes relief from stay, to seek a stay pending appeal of an adverse ruling. 9 Collier on Bankruptcy,
(15th Ed. Revised), ¶ 4001.04A, pg. 4001-18. “[W]ithout a stay pending appeal, appeals from such orders can often become moot if the party granted relief proceeds with a sale or some other action that cannot be easily undone.” Id. at pg. 4001-19. For that reason, the court is reluctant to make any ruling which prematurely terminates the Debtor’s appellate remedies.
Scripps Investments published a notice of sale under Cal.Civ. Code § 2924(f)(b) for its first trust deed before commencement of this bankruptcy. That sale date has been continued pending a ruling on this motion. In theory, Scripps Investments will be in a position to conduct a trustee’s sale soon after this ruling is entered. The timing and delay inherent in the State’s statutory foreclosure scheme will not give the protection here that is intended by Rule 4001(a)(3). Scripps Investments’ request to waive Rule 4001(a)(3) is appropriate only to the extent that Scripps Investments may need to take some action to enforce the first and third priority liens, so long as the foreclosure sale itself does not take place until at least 10 days after entry of the accompanying order.
CONCLUSION
Based on the foregoing, the court finds and concludes that the Debtor has no equity in the Helm Building. The court is not persuaded that the Helm Building is necessary to an effective reorganization. Scripps Investments’ motion for relief
Page 19
from the automatic stay will be granted as to the first and third priority trust deeds only. The motion will be denied without prejudice as to all other liens.
Scripps Investments’ motion to waive the 10-day stay provision of Fed.R.Bankr.P. 4001(a)(3) will be granted in part. Scripps Investments may proceed to enforce the first and third priority liens under applicable law, so long as the foreclosure sale does not take place until at least 10 days after entry of the accompanying order.
Page 1