FOR THE NORTHERN DISTRICT OF CALIFORNIA
PETALUMA BOULEVARD REDEVELOPMENT No. 92-11019
Debtor. R.S. #92-303
Memorandum of Decision
The debtor is a real estate developer. Its primary asset is a large commercial development
project in Petaluma, California. Its primary creditor is Bank of San Francisco, which holds the
debtor's note with a balance now owing of about $5.4 million. The Bank's note is secured by
a deed of trust to the project; there are no other significant liens on the project.
Now before the court is the Bank's motion for relief from the automatic stay. The Bank has
introduced appraisal testimony that the project is worth only about $3.3 million. It argues that
it is not adequately protected, that there is no equity in the property, and that there is no feasible
reorganization in prospect. The court finds that the Bank is wrong on all three of these
The Bank offered the opinion of two appraisers that the property is only worth about $3.3
million. The debtor offered two appraisers who testified that the property is worth about $9
million. As is almost always the case when there is such a wide divergence between appraisals,
the less credible valuations stand out as being based on biased assumptions. The Bank's
appraisers reached their conclusions by resolving every discretionary or judgmental factor
squarely against the debtor. These included disregarding the best comparable sale; estimating
a five-year time required for development; estimating a five-year appreciation rate of only two
percent per year, not compounded; overestimating the area of unusable land; and deducting $2
million in present funds for an assessment, years in the future, which would significantly add
to the value of the land. Since the Bank's appraisers clearly made no attempt to take a balanced
and reasonable approach, the court gives them no credibility.
The most convincing witness was appraiser King, called by the debtor. His testimony
reflected professional competence, thorough familiarity with the property, and common sense.
Moreover, the fact that his initial appraisal was prepared in 1989 and was not commissioned
as the result of bankruptcy proceedings gives his testimony added credibility. The court finds
from his testimony, as well as the corroborating testimony of the debtor's other appraiser, that
the property is currently worth $8 million.
II. Feasibility of Reorganization in Prospect
The debtor's project at one time was progressing smoothly. The debtor obtained the required
annexation by the city of Petaluma, and an Environmental Impact Report was completed which
showed no reason why the project should not be completed. The fly in the ointment was a
lawsuit brought by a citizen's group against the city, alleging that the EIR was insufficient.
Trial was held in May of this year, and the matter has been under submission in the state court
since then. A decision is expected shortly.
The court does not find, as urged by the Bank, that the environmental lawsuit makes the
debtor's plan unfeasible. Even if the city loses the lawsuit, the only result might be a delay in
the project while a new or revised EIR is prepared. The evidence was undisputed that the city
wants the debtor's development and is prepared to do whatever it takes to bring it about.
Moreover, even if the debtor is not capable of dealing with the delays caused by the the
lawsuit, a feasible plan is still possible. Contrary to the Bank's assertions, a negotiated sale is
a perfectly proper type of plan of reorganization. In re Del Rio Development, Inc.
, 35 B.R.
127, 128 (9th Cir.BAP 1983). While the debtor might be forced to discount the value of the
property if the lawsuit goes against it, the project would still be worth far more than the amount
owed to the Bank.
III. Adequate Protection
The Bank did not present any testimony that land values are currently depreciating, nor is
that the court's general understanding of property values in the Petaluma area. The Bank's own
appraisers testified to at least a two percent increase in value per year. No senior liens have
been placed on the property since the bankruptcy petition was filed. The Bank would therefore
be adequately protected even without the equity cushion of about $2.6 million which the court
The Bank's motion is substantially without merit. The only question is whether the court
should deny it outright or set a time limit on the debtor to obtain confirmation of a plan or
otherwise resolve this case. Since the court heard an unusual amount of testimony for a relief
from stay motion and accordingly has a fairly good idea of all aspects of the case, it feels
comfortable setting a reasonable deadline.
The Bank stated its "willingness" to give the debtor four or five months to sell the property.
Given the nature of the development and the amount of equity this court has found, this is an
entirely unreasonable period of time. See In re Can-Alta Properties, Ltd.
, 87 B.R. 89, 92 (9th
Cir.BAP 1988). Considering all the facts and circumstances of this case, the court believes that
twelve months is an appropriate length of time for the debtor to put something together.
Accordingly, the court will enter an order giving the Bank relief from the stay as of July 15,
1993, unless a plan of reorganization has been confirmed by that date. The Bank may apply
for rehearing if the state court renders a final decision barring (but not just temporarily
delaying) the debtor's project. The debtor may apply for additional time to close a pending
Counsel for the debtor shall submit an appropriate form of order, which counsel for the
Bank has approved as conforming to this decision.
Dated: July 15, 1992 _______________________