Plaza De Retiro, Inc.

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
PLAZA DE RETIRO, INC.
Debtor. No. 11-09-10974 SA
MEMORANDUM OPINION IN SUPPORT OF ORDER
APPROVING BORROWING UNDER §364(d)
Trustee’s motions for borrowing under §364(d) (docs 247 and
264) and the objections thereto of post petition secured creditor
William Himes (respectively docs 266 and 276)and construction
lien claimant R.F. Gallegos Construction, Inc. (respectively docs
263 and 273) came before the Court for a trial on October 22-23,
2009. The Court will grant the motions on the terms set out in
the motions for the borrowing of $100,000 by Centinel Bank.1
Background
This is a trusteed chapter 11 case. Trustee originally
filed her motion (doc 247) seeking authority to borrow $200,000
from St. Andrews Ventures, Ltd., to sustain the operations of the
continuing care retirement community Plaza de Retiro until she
could obtain confirmation of a plan (doc 283; disclosure
This Court has jurisdiction of the subject matter and of	1
the parties herein by virtue of 28 U.S.C. §§1334 and 157; this is
a core proceeding pursuant to 28 U.S.C. §157(b)(2)(D), and these
are findings of fact and conclusions of law as may be required by
Fed.R.Bankr.P. 7052.
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statement docs 284 and 285). The first motion was	2
amended/supplemented by the second motion (doc 264), in which the
Trustee sought instead to borrow $100,000 from Centinel Bank.
Zions First National Bank, Mission Oaks National Bank, R.F.
Gallegos Construction, Inc. and William Himes all objected.
Trustee and the two other banks reached a settlement essentially
granting those banks the potential stay relief similar to that to
be granted to Centinel, and so Zion’s and Mission Oaks withdrew
their objections.3
The borrowing terms include giving Centinel a non-primeable
first lien on the so-called Pond property, and it is the granting
of the priming lien that has occasioned the dispute. Centinel	4
already had the first lien on the property (actually the first
two positions, not accounting for any claim for real estate
taxes, for its two mortgages) totaling approximately $550,000.
Gallegos Construction has the second position based on a
prepetition construction lien in a claimed amount of about
$191,000. The third position is that of Mr. Himes, who asserts a
Interested party SBSEA Ventures, LLC has also filed a plan	2
and disclosure statement. Docs 288 and 289. Objections to both
disclosure statements are due on November 24, 2009 and the
hearing on objections to both is scheduled for December 10, 2009.
The Court made no ruling at trial, nor does it rule now,	3
on whether such an agreement for stay relief needs to be noticed
out to creditors pursuant to Fed.R.Bankr.P. 4001(d).
Other provisions of the proposed borrowing order include	4
that this new loan could not be primed or modified.
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claim of about $68,000 for his post-petition lending. The three	5
claims thus currently total about $809,000. The additional	6
borrowing would bring the total to about $909,000, making the
Gallegos Construction lien junior to about $650,000 and the Himes
lien junior to about $841,000.
Trustee’s argument for approval of the borrowing was based
on her assertion that the Pond property was worth about
$2,500,000. Thus she argued that the junior liens of Gallegos
Construction and Himes, to be made more junior by the borrowing,
were still fully protected by the considerable equity in the
property. And she argued that she could not borrow under any	7
Himes specifically sought to prove up his claim in this	5
proceeding. Trustee objected on the basis that this proceeding
was not noticed up for that purpose. The Court reiterates its
ruling at trial that the maximum effect of Himes’ proof during
this trial is that Himes may argue that his claim is established
for future purposes by invoking the doctrine of collateral
estoppel or issue preclusion. Trustee’s position was to argue
for the borrowing by granting, only for purposes of the hearing
on the borrowing motion, the maximum amount that might be claimed
as secured by Gallegos Construction and Himes. The Court adds
that it refrained from fully questioning Himes when he was
testifying about the returned insurance premium check,
particularly concerning the declining daily balances shown for
August 7-13 (Himes exhibit 2-3) which led to the “check reversal”
on August 13 of the insurance premium check.
During Trustee’s testimony, the Court quickly calculated	6
the total as about $801,000, and announced that out loud.
Obviously that figure was incorrect, a fact which the parties may
have tacitly acknowledged among themselves by not using it during
the trial.
The Himes claim is also secured by a first and only lien	7
on the estate’s Colfax County real property, a lot in Angel Fire
which Himes, as the designated representative of the then debtor
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better terms. And she argued there was considerable urgency in	8
obtaining a decision on the motions (hopefully approving them).9
Analysis
Section 364(d) of the Bankruptcy Code provides as follows:
(d)(1) The court, after notice and a hearing, may
authorize the obtaining of credit or the incurring of
debt secured by a senior or equal lien on property of
the estate that is subject to a lien only if--
(A) the trustee is unable to obtain such credit
otherwise; and
(B) there is adequate protection of the interest of the
holder of the lien on the property of the estate on
which such senior or equal lien is proposed to be
granted.
(2) In any hearing under this subsection, the trustee
has the burden of proof on the issue of adequate
protection.
Trustee supported her assertion of value with the testimony
and broker’s opinion of value (BOV), Trustee exhibit 1, of Leon
Mellow, the manager of the Grubb & Ellis real estate office in
Santa Fe. The Court ruled that Mellow could testify as an expert
about the value of the three Taos real estate parcels, including
in possession, valued at $25m.
The Court finds the evidence was conclusive on this latter	8
issue; Trustee clearly testified that she could not obtain
funding elsewhere that enabled her to go forward with the sale,
and Himes did not provide any evidence that the alleged SBSEA
lending was a reasonable alternative. In any event, the Court
accepts the testimony of Mr. Aaron, that essentially the SBSEA
proposal is a management proposal, not really a funding proposal.
Ms. Whitten testified that on Thursday, October 29, a	9
payroll was due, and the employees would not work if they were
not paid. This testimony was not really challenged. Similarly,
the challenges to Trustee’s urgent need for funds were not even
remotely sustained by the questioning of Trustee and her
witnesses on the operating reports.
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the Pond property, and admitted into evidence the BOV. There	10
was little testimony about the other two Taos parcels (though
they were addressed in the BOV) and basically no testimony about
the amounts of the liens against the other two parcels, so that
in effect the trial mostly centered on the Pond property, its
value and the liens against it.
Himes pointed out several deficiencies in the BOV as a
whole. It provided no valuation whatever, affirmative or
negative, of the medical facility. It did not use the market
data approach because Mellow could not find any comparable
properties. Overall, the BOV is clearly not an appraisal, which,
after stripping out the usual boilerplate, would have had several
pages of data and comparative analysis rather than the one page
this BOV has.
Concerning the Pond property, only two units were under
construction, rather than three, meaning that $16,000 should be
deducted from the value. And the miscounting itself calls
somewhat into question the accuracy of the BOV as a whole.
The Court assumes that, given the short amount of time	10
that Trustee had to come up with evidence of value, she could not
obtain an appraisal, and thus had to rely on the BOV. Trustee
also pointed out that with the purchase offer from Colinas Health
Care, Inc. out on notice (Motion of the Chapter 11 Trustee to
Sell Substantially All of the Assets of the Estate Pursuant to 11
U.S.C. §363, doc 292), Trustee was essentially seeking bridge
financing until that sale can be consummated in, say, February
2010. Neither of these factors figure into the Court’s decision;
the borrowing motions and the evidence in support thereof must
stand or fall on their own.
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Mellow did not go into and inspect the 3600 square foot older
home, of a 1930's vintage, which he valued at $100/square foot.
He did not find comparable sales. And when he and his team
sought comparable data by talking with brokers, what they
gathered was offering prices, not completed sales. They did this
because they did not have access to the Multiple Listing Service
in Taos.
The Court reiterates its ruling pursuant to Fed.R.Evid. 702
that Mr. Mellow qualified as an expert and that his report met
the three-part standard set out in Rule 702. An expert’s
qualifications and the expert’s report need not be perfect to be
admissible. In re McElroy, 339 B.R. 185, 187 (Bankr. C.D. Ill.
2006) (expert had “the bare minimum of qualifications necessary
to be considered an expert [to value vehicles] under Rule 702 of
the Federal Rules of Evidence.”) . The Court finds that while
there certainly are defects in the report, such as the
miscounting of the units under construction , it still provides	11
a reliable enough guide to value that it will do for these
purposes. Were Trustee entering into a contract to purchase the
property, an appraisal, and a much closer inspection, would
undoubtedly be warranted, to assure the exact dollar figure. But
This issue was not raised on cross examination of Mellow.	11
Rather, Himes raised it in his direct testimony, when Mellow had
already been excused as a witness and thus was not available to
respond to this criticism. The Court assumes that Himes was
correct given his role as manager of the property for years.
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here the purpose is to obtain a range of value, the lower limit
of which will serve as adequate protection for the junior
lienholders. As such, the number need not be precise to the
dollar so much as it needs to be comfortably more than the amount
of all the liens taken together. Additionally, Mellow’s
testimony was that purchasers in the industry use BOVs to decide
what properties to continue to investigate for purchase. Thus a
BOV, while not as good as an appraisal, is still useful.
Mellow’s reasoning for not adding or subtracting value for
the medical facility made sense. Himes, in challenging that
decision, suggested that maybe the medical facility was a
significant detriment. However, he provided no evidence to
support that position. Once Trustee established the
admissibility of the BOV and the values it contained, the burden
shifted to Himes to come forward with evidence of his own to
counter Trustee’s evidence. He did not do that concerning the
medical facility.
Valuing a home in Taos that members of the Himes family are
living in at $100/square foot seems to this Court eminently
reasonable if not quite conservative. In so ruling, the Court in
effect takes judicial notice of a fact which can easily be
established; namely, that residential housing within a few blocks
of the plaza is worth at least $100/square foot. Alternatively,
Mellow is an experienced real estate broker, albeit much more on
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the commercial side, and his opinion that the value of such a
property is conservatively worth $100/square foot constitutes
evidence of that fact.
Obtaining values by collecting asking prices is certainly
less reliable than obtaining agreed to prices. However, it is
unlikely that someone asking, say, $2,000 per month for a rental
property is likely to accept $500. Thus the asking prices most
likely constitute a useful value from which to derive a final
albeit smaller number. At the same time, Mellow testified that
he had discounted the values for the four completed units,
totaling $960,000, and for the home, valued at $360,000, so that
those values were not the full retail values.
It certainly would have been more helpful had Mellow and his
team been able to find sales of comparable properties. However,
Himes pointed out no comparable sales that could have been used,
only expressing incredulity instead. This defect in any event is
not fatal, since the BOV relies heavily on the income approach
for valuation. Mellow’s experience and market watching resulted
in using a capitalization rate ranging between 10% and 14%.
Given that, as he testified, capitalization rates had risen
across the country to 9% to 9.5%, selecting a range between 10%
and 14% was reasonably conservative, and well supported by the
evidence.
Himes also pointed out that the 12 building lots, valued at
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$60,000 each, cannot be built on without more serious development
work with the city. The Court does not dispute that, but the
likely effect of those bureaucratic hurdles is lessened by the
successful efforts of Himes himself in obtaining the current
status of the lots as building sites.
Finally (and this is not a defect), the BOV itself warns
twice that the great amount of deferred maintenance and
obsolescence throughout the complex could result in a significant
reduction in value. This candid warning gives the Court some
concern, and because it is not quantified, the Court has further
reduced the overall value of the Pond property because of it.
Taking into consideration all the foregoing, the Court finds
that the Pond property has an absolute minimal value of between
$1,250,000 (that is, half of the value contained in the BOV) and
$1,500,000, and more likely the higher figure. That is, the
Court finds that if the Pond property were put up for sale (it is
a separate tract from the main campus), it would net at least
$1,250,000, and more likely $1,500,000, if not more. So even
taking the lower figure of $1,250,000, the $191,000 lien of
Gallegos Construction is backed by $409,000 of equity, for a
conservative equity cushion of 214%. Himes’ $68,000 lien is
backed by $341,000, for an equity cushion of 501%. And were
Himes lien amount first reduced by, say, $20,000, from the
liquidation of the $25,000 Angel Fire property on which Himes as
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a first and only lien, the remaining $48,000 lien would be
protected by a 710% equity cushion.12
In MBank Dallas, N.A. v. O’Connor (In re O’Connor), 808 F.2d
1393 (10 Cir. 1987), one of the seminal cases on adequate	th
protection, the Tenth Circuit ruled that debtors in possession
could use cash collateral to drill new gas wells if debtors
delivered to the creditor replacement liens in the well proceeds
and other monthly income of the debtors. The court held that
adequate protection is a factual matter to be decided on a case
by case basis. Id. at 1396-97. The court also ruled that the
provisions of §361 do not provide an exclusive list of adequate
protection options. Id. at 1396 n. 4.
In order to encourage the Debtors’ efforts in the
formative period prior to the proposal of a
reorganization, the court must be flexible in applying
The Court recognizes that these calculations are somewhat	12
simplistic, and that a financial expert (or University of Chicago
economist) would undoubtedly discount the value of the equity
cushions due to lack of “command and control”. See In re
Campbell Sod, Inc., 378 B.R. 647, 654-55 (Bankr. D. Kan. 2007)
(withdrawn from publication because it was intended to be
unpublished). For example, how the senior $650,000 lien of
Centinel Bank is dealt with could affect how much of the equity
cushion turns out to be genuinely and reasonably available to the
junior lien holders. It is not as if, for example, Gallegos
Construction is in first position on a property worth $841,000.
This is doubly true for a small lien at the bottom of the
priority ladder, on which lien even marginal or incremental
variations in the amount of the senior liens or the value of the
collateral can have a hugely magnified effect. Nevertheless, the
comparatively large equity cushions in this instance provide
sufficient assurance that the Gallegos Construction and Himes
lien positions are well protected regardless of what Centinel
might do with its much larger senior lien.
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the adequate protection standard. In doing so,
however, care must be exercised to insure that the
vested property rights of the secured creditor and the
values and risks bargained for by that creditor prior
to bankruptcy are not detrimentally affected.
Id. at 1398. (Citation omitted.) Utilizing this standard, the
court declined to reverse the bankruptcy court decision which
permitted debtors to use $721,000 of cash collateral in return
for a replacement lien on an income stream of $10,000 per month
and on the considerable income from the wells to be drilled if
they did not turn out to be dry holes. Id.13
The objecting parties cite Resolution Trust Corporation v.
Swedeland Development Group, Inc. (In re Swedeland Development
Group, Inc.), 16 F.3d 552 (3 Cir. 1994) for the proposition	rd
that the prepetition secured creditor (and, in this case, the
postpetition secured creditor Himes) must be provided the same
level of protection as if there had been no post petition priming
lien. The Court agrees with the principle announced and with its
application to the facts of that case, in which the debtor sought
to provide adequate protection to the creditor by essentially
offering it less collateral than it already had and by subjecting
It is true that Trustee’s plan is a liquidating plan –	13
sell the operation – rather than reorganization, and beyond that,
Trustee seeks to sell the operation even without a plan.
Nevertheless, the underlying principle remains the same: all
creditors - administrative, priority, secured, unsecured – stand
to benefit more quickly from a sale rather than a potential
foreclosure and closing of the facility, if the sale does not go
through and neither plan is confirmed.
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the creditor to the risks of the reorganization. “Congress did
not contemplate that a creditor could find its priority position
eroded and, as compensation for the erosion, be offered an
opportunity to recoup dependent upon the success of a business
with inherently risky prospects.” Id. at 567. The considerable
equity cushion in this case distinguishes it from Swedeland
Development.
The objecting parties also cite In re Mosello, 195 B.R. 277
(Bankr. S.D.N.Y. 1996) for the proposition that, as Campbell Sod,
378 B.R. at 653, points out, a finding of adequate protection
must be based on a firm factual predicate. 195 B.R. at 292
(denying motion for priming loan based on lack of any facts
showing that primed creditor would become anything but an
unsecured creditor as a result ). As with Swedeland	14
Development, the principle is correct and was correctly applied
by the New York court to the facts of that case, but the facts of
the Mosello case differ radically from the facts in this case.
Gallegos Construction argues that by virtue of the Fifth
Amendment to the United States Constitution, its lien cannot be
Stated concisely, the debtors’ position is	14
that expenditure of the MAC loan proceeds to
develop the Thornwood Property will result in
an increase in value of the Property greater
than the amount of the loan, and that this
increase in value alone constitutes “adequate
protection” in compliance with section
364(d)(1)(B).
Id. at 288.
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primed at all without a replacement lien in other collateral, or
a cash payment. Gallegos Construction argues that an equity
cushion, no matter how large, is completely impermissible,
reasoning that priming its lien takes something away from it,
thereby diminishing it, which can only be done if Gallegos
Construction is compensated. While it is certainly true that the
United Supreme Court has interpreted the Constitution to require
that property rights such as liens be carefully respected, it has
not thereby made property liens completely inviolate. E.g.,
Wright v. Union Central Life Ins. Co., 304 U.S. 502, 518 (1938)
(“Property rights do not gain any absolute inviolability in the
bankruptcy court because created and protected by state law. Most
property rights are so created and protected. But if Congress is
acting within its bankruptcy power, it may authorize the
bankruptcy court to affect these property rights, provided the
limitations of the due process clause are observed.”). What
Gallegos Construction is entitled to is not a lien frozen in time
and place but rather payment of its debt, and the assurance that
its lien can and will result in payment. Thus an equity cushion
can suffice as adequate protection for a borrowing motion
(assuming the cushion is sufficiently large). Campbell Sod, 378
B.R. at 653, citing In re Stanley Hotel, Inc., 15 B.R. 660, 664
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(D.Colo. 1981). Indeed, the entire premise of a case such as	15
United Savings Assoc. of Texas v. Timbers of Inwood Forest
Associates, Ltd., 484 U.S. 365 (1988) (adequate protection and
reorganizability in §362 context) is that a claim
(under)secured by a lien can be denied “realization ... of the	16
indubitable equivalent” of the collateral until confirmation.
Id. at 377. Gallegos Construction conceded that that was the
case for liens in a §362 context but not for liens in a §364
context. Gallegos Construction provided no case law in support
of that distinction and contrary to Campbell Sod. And the Court
finds nothing in §§361-365 of the Code, which deal with liens and
adequate protection in various contexts, upon which to base such
a distinction.
Appropriately, neither objecting party has argued that the
priming lien will cause the loss of “command and control”. See
Campbell Sod, 378 B.R. at 654-55. That is because Centinel has
always had the senior lien position, and thus continues to have
As noted in the earlier footnote, Campbell Sod was	15
withdrawn from the bound volume of the West Bankruptcy Reporter
because the court that decided it did not want the case to be
published. However, that does not prevent this Court from using
it anyway, based on the common sense and clear reasoning that the
opinion contains in addressing a similar borrowing motion.
Obviously the objecting parties’ liens differ from those	16
in Timbers of Inwood, in that they are oversecured. But the
Court cites Timbers of Inwood for the proposition that liens are
not completely inviolate under the Constitution or the statute,
contrary to the argument of Gallegos Construction.
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the command and control that lenders find so desirable.
The objecting creditors also vigorously argued that there
had been inadequate notice of the relief being sought, and that
the requirements of Fed.R.Bankr.P. 4001(c) and NMLBR 9013-1 had
not been met. The Court finds that these objections are not well
taken.17
First, the Court agrees that the notice was not nearly as
good as it might have been. Nevertheless, taking the motion (doc
247) and the amended motion (doc 264) together, Trustee has met
the requirements of providing adequate notice to the objecting
parties. Reading the first motion which was filed under §363(c)
and included the BOV, all creditors were effectively put on
notice that Trustee wanted to borrow $200,000 under fairly
onerous terms, that she valued the Pond property at $2,500,000,
that she wanted to prime Gallegos Construction and Himes (¶5.5,
at page 2) – effectively asking for §364(d) relief - and that she
was unable to obtain credit solely as an administrative expense.
Doc 247. The follow-up motion, doc 264, was not noticed out to
the creditor body as a whole, but it asked for only half the
amount sought by the first motion. Since from the perspective of
unsecured creditors, it should make little difference where the
lien was placed on the estate’s collateral, and it would benefit
The Court orally ruled on the morning of October 23 that	17
the borrowing motion did not need to be, or to be accompanied by,
an adversary proceeding.
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them in a general sense if Trustee borrowed only half of what she
had asked for originally, there was no need renotice the
creditors as a whole about the change. As to Gallegos
Construction and Himes, the inclusion of the BOV with the first
motion and the specification in both the first and second motions
that the priming lien would be placed on the Pond property served
as sufficient notice (if only barely) that Trustee sought a
ruling that the equity cushion would provide adequate protection
to junior liens. The concept of an equity cushion is a
commonplace in bankruptcy, and clearly Trustee was not offering
any other form of adequate protection. Thus it should have
occurred to both objecting parties that they should be prepared
to argue the issues of equity and equity cushion, and in fact
Gallegos Construction did recognize it. Doc 273, ¶ 11 at page 4.
Fed.R.Bank.P. 4001(c) sets out a detailed list of items to
be included in borrowing motions under §364(c) and (d), including
among others a copy of the credit agreement and a form of
proposed order. The motions were filed on September 17 and
October 1 respectively, and the objections concerning non-
compliance with the rules was raised for the first time at trial
on October 22.
The credit agreement did not exist at the time (and
apparently still does not); rather, the parties essentially
incorporated a term sheet into the motion itself. No proposed
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form of order was attached either; clearly Trustee and Centinel
are awaiting this Court’s ruling before submitting such a draft
order. And the motions, especially the amended motion, did not
set out the details of the various liens, their amounts and
priorities, etc. The considerable lacunae in the motions and the
notice were obvious to both objecting creditors, yet neither of
them raised the issue in either of the objections that either of
them filed. Presumably they did not object because they were
well aware of the various parties’ lien positions on the Pond
property and therefore in effect did not need to be told that
kind of information. Whatever the reason, however, their failure
to promptly raise the issue of noncompliance with Rule 4001(c)
precluded Trustee from being aware that the non-compliance would
be an issue and thus from fixing the problem timely with a second
amended motion. Clearly Trustee, who has the burden of proof on
the issue of adequate protection, also has the burden of
complying with the rules to the extent needed to ensure the issue
is raised sufficiently to be fairly contested. The Court has
already ruled that the issue of the equity cushion as adequate
protection was sufficiently noticed to the objecting parties; the
failure to object in writing to the non-compliance with the rules
bespeaks the knowledge of the objecting creditors of the other
background details that the rules are designed to provide to
creditors not already in the know, and effectively constitutes a
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waiver. Although the Court certainly does not condone failing to
comply with the rules generally, in this case it appears that no
one who might genuinely claim to be harmed is objecting. Perhaps
this is because the details that the rule requires, including the
form of the order and the credit agreement, suggest that a
relatively simple borrowing motion such as this was not the
target of the rules. Regardless, the Court cannot find that the
objecting creditors were materially prejudiced in contesting the
relief requested, and therefore the Court will grant the
requested relief over these objections raised for the first time
at trial.18
Conclusion
Trustee has made a (barely) sufficient showing that she has
complied with §364(d) and with the notice requirements to obtain
the requested relief. The Court will enter an order approving
the borrowing from Centinel Bank on the terms set out in the
motion (doc 264). Trustee’s counsel shall submit a form of order
approved as to form by counsel for Gallegos Construction, Himes,
Centinel Bank and any other party who attended the hearing and
NMLBR 9013-1(a) provides as follows:	18
Form of Motions. The title of a motion shall describe
the relief sought.
Both motions were clearly denominated borrowing motions under
§364; this is sufficient to comply with the rule. The objection
that the motions do not say they are asking for stay relief is
accurate, but the objection, raised at trial for the first time,
is too late, and in any event does not identify any material harm
to an objecting party.
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wishes to sign off.
James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: October 27, 2009
COPY TO:
Linda S. Bloom
Trustee
PO Box 218
Albuquerque, NM 87103-0218
Chris W Pierce
Hunt & Davis, P.C.
P.O. Box 30088
Albuquerque, NM 87190-0088
James A Askew
PO Box 1888
Albuquerque, NM 87103-1888
William F. Davis
6709 Academy NE, Suite A
Albuquerque, NM 87109
Thomas D Walker
500 Marquette Ave NW Ste 650
Albuquerque, NM 87102-5309
Clifford C Gramer, Jr
3733 Eubank Blvd NE
Albuquerque, NM 87111-3536
Alice Nystel Page
PO Box 608
Albuquerque, NM 87103-0608
Walter L Reardon, Jr
3733 Eubank Blvd NE
Albuquerque, NM 87111-3536
Nathan C. Sprague
PO Box 27047
Albuquerque, NM 87125-7047
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Case 09-10974-trc11 Doc 301 Filed 10/27/09 Entered 10/27/09 16:29:51 Page 19 of
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