Bankruptcy Court Memorandum on Relief from Stay Motion

Case 1:09-bk-13356-KT Doc 1561 Filed 07/08/10 Entered 07/08/10 12:36:31 Desc
Main Document Page 1 of 12

1 FILED & ENTERED
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JUL 08 2010
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4 CLERK U.S. BANKRUPTCY COURT
Central District of California
BY cetulio DEPUTY CLERK
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8 UNITED STATES BANKRUPTCY COURT
9 CENTRAL DISTRICT OF CALIFORNIA
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In re: Case No: 1:09-bk-13356-KT

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Chapter: 11
MERUELO MADDUX PROPERTIES, INC., et.
(Jointly Administered)
14 al.,
15
MEMORANDUM ON THE CHAMLIAN’S
16 Debtors and Debtors-in Possession.
SECOND MOTION FOR RELIEF FROM THE
17 AUTOMATIC STAY – GRANTING IN PART
AND DENYING IN PART
18

19 Affects the following Debtor: Date: April 22, 2010/ June 18, 2010
20 Time: 9:30 a.m.
Meruelo Maddux Properties –
2131 Humboldt Street, LLC Location: Courtroom 301
21 (1:09-bk-013371) 21041 Burbank Blvd.
Woodland Hills, CA
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23

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Vahan and Anoush Chamlian (the “Chamlians”) filed a motion for relief from stay with
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respect to real property located at 2131 Humboldt Street, Los Angeles, California 90031 (the
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“Property”). The Chamlians are the holders of a deed of trust on the Property to secure
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payment of a debt in the amount of $7,712,192.50 as of March 29, 2010. The note that
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memorializes the debt matures in January 2011 (the “Note). Monthly payments under the Note
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are $37,916.66. No payments have been made to the Chamlians under the Note since
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January 2009.
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The Property is owned by an entity known as Meruelo Maddux Properties- 2131
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Humboldt Street, LLC (“MMP-Humboldt”). MMP-Humboldt is one of 54 related debtors that
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filed petitions under chapter 11 on March 26, 2009 and March 27, 2009. These related cases
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have been administratively consolidated under Meruelo Maddux Properties, Inc. (“MMPI”),
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SV 09-13356 KT (together, hereinafter known as the “Debtors”).
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The Chamlians seek relief under 11 U.S.C. §362(d)(1) on the grounds that their interest
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in the Property is not adequately protected because there is no adequate equity cushion and
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because MMP-Humboldt is not making payments to compensate for a declining fair market
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value of the Property. The Chamlians also seek relief under 11 U.S.C. §362(d)(2) on the
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grounds that MMP-Humboldt has no equity in the Property and the Property is not necessary
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for an effective reorganization.
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This is the Chamlian’s second motion for relief from stay. Earlier, in October 2009, the
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Chamlians filed a motion for relief from stay on the grounds that the value of the Property was
17 declining and that, just prior to the commencement of the Debtors’ cases, the Debtors refused
18 to accept an offer to purchase the Property for a price equivalent to $40 a square foot, or
19 $8,590,000, for the parcels subject to the Chamlian’s lien. That motion was denied on the
20 grounds that the evidence demonstrated that there was an equity cushion in the Property
21 sufficient to defeat relief under both sections 362(d)(1) and (d)(2).
22 The motion first came on for hearing on April 22, 2010. Based on the dispute between
23 the parties, the matter was set for trial. The evidentiary hearing was held on June 18, 2010.
24

25 Description of the Property
26 MMP-Humboldt owns six parcels of real property covering approximately 6.0 acres
27 located adjacent to the Chinatown and Civic Center areas of downtown Los Angeles. The
28 Property consists of two of the six parcels that comprise the largest portion of the total land

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owned by MMP-Humboldt. MMP-Humboldt’s remaining four parcels, which are
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unencumbered, are improved with industrial buildings that generate income for the Debtors.
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MMP-Humboldt’s land is contiguous with other real property owned by a related debtor,
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Meruelo Maddux Properties- 306-330 North Avenue 21, LLC, which is also developed with
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industrial buildings. The industrial buildings that were previously on the Property have been
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demolished down to their foundations and the Property remains vacant.
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The Property consists of nearly 5 acres of mostly flat land. There are no lease
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encumbrances. It is located next to the I-5 Freeway in a mixed-use area. Located
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immediately across the I-5 Freeway is a newly built high-density condo/apartment complex.
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The Property is zoned as MR2-1 for industrial development.
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The Valuations
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The Chamlians filed an appraisal prepared by Tupper W. Lienke in support of their
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current request for relief (the “Appraisal”). Mr. Lienke testified on behalf of the Chamlians to a
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fair market value as of November 18, 2009 of $7,090,000, which equates to $33 per square
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foot. Richard Meruelo, the Chief Executive Officer of MMPI and an officer of MMP-Humboldt,
17 testified on behalf of MMP-Humboldt and the Debtors to a fair market value of at least
18 $10,512,500, which equates to $49 per square foot. This court has previously found
19 Mr. Meruelo to be competent to testify as an expert on real estate development and the value
20 of real estate in the downtown Los Angeles area.
21 The valuations of both Mr. Lienke and Mr. Meruelo are based on land sale
22 comparables. Mr. Lienke used five sales, three in Los Angeles, one in Vernon, and one in
23 Commerce, and seven listings in Vernon and Commerce. Mr. Meruelo critiqued Mr. Leinke’s
24 comparables and adjustments. Mr. Meruelo also pointed to a recent appraisal by Mr. Shustak
25 of a similar property located approximately one mile away from Humboldt and to the
26 comparables used by Mr. Shustak. Mr. Shustak was appointed by the court to appraise
27 several of the Meruelo Maddux properties involved in these related cases. Mr. Lienke, in turn,
28 offered his criticism of the Shustak appraisal and Mr. Meruelo’s opinions.

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Discussion of the Testimony
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Mr. Lienke had significant data that he obtained from traditional appraisal resources.
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Unlike traditional appraisers, Mr. Meruelo’s valuation expertise is a result of over 20 years of
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buying, selling, and developing real estate in the area in which the Property is located. As a
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result, Mr. Meruelo had specific information about the history and present circumstances of
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nearly every property brought to the court’s attention. An example of this actual involvement in
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the market at issue is demonstrated by the fact that of the five comparable sales in Mr.
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Leinke’s appraisal, a Meruelo Maddux entity was involved as the buyer, the seller, or an
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investment/development partner in three of them.
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The experts agreed that the real estate market took a major hit in the fall of 2008. As a
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result, there are fewer sales to mine for comparable data unless one goes back into sales that
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took place before the fall of 2008. Two of Mr. Lienke’s comparables pre-date the crash, one in
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August of 2007 and one in March of 2008. Similarly, 5 of 6 of Mr. Shustak’s land sale
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comparables predate the fall of 2008. Mr. Lienke took account of this timing factor by
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discounting the sales price by 2% per month from the sale. Mr. Meruelo did not agree to the
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percentage or the propriety of applying it on a straight-line basis. His view is that the value of
17 the Property has been stable or rising since March 2009.
18 Putting aside the adjustments for time, a significant portion of the disagreement
19 between Mr. Lienke and Mr. Meruelo are over the adjustments for differences in the
20 comparables, e.g., location, size, topography and demolition, and what those adjustments
21 should be.
22 The court considered each of the sales and listings offered by Mr. Lienke, his rationale
23 for choice and adjustments, and the information about those properties offered by Mr. Meruelo.
24 The court concluded, among other things that Comp. #2 should be given little or no weight
25 because of the characteristics of that property, including the fact that it is a peninsula in the
26 Jordan Downs public housing project with significant soil contamination issues that limit its use.
27 In addition, the Lienke appraisal does not discuss the same day resale of this property from a
28 Meruelo Maddux entity to the public housing authority for at least $6 more per square foot.

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Further, Mr. Meruelo offered additional information about the forces driving the sale to the
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public housing authority, which casts doubt on its use as a comparable for valuing the
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Humboldt Property. The court also concluded that Mr. Lienke’s adjustment for the location of
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Comp. #1 was not justified.
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A primary difference in the evaluation of comparables to the Property was consideration
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of its development potential. The Property is zoned for industrial development. All of Mr.
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Lienke’s land sale comparables are similarly zoned. However, Mr. Meruelo testified that the
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location of the Property gives it much greater potential for development as a commercial or
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residential property.
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In particular, he testified about several positive features. Unlike Mr. Lienke’s
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comparables, the Property has excellent visibility from the freeway and proximity to a high-
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density residential development. In addition, the Property is located within 1500 feet of a mass
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transit stop on the Gold Line that puts it into a zoning potential category known as a “transit
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oriented development site.” Mr. Meruelo asserted that this proximity enhances the likelihood of
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a zoning variance to allow development by so-called “big box” retailers. He testified that
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Meruelo Maddux has received inquiries from Costco and Lowes expressing interest in the
17 Property for commercial development and an inquiry from the developer of the residential
18 property across the I-5 Freeway. This proximity to transit is a characteristic not shared by any
19 of the comparables offered by Mr. Lienke.
20 A second potential plus factor in the value of the Property is the fact that it is adjacent to
21 other parcels owned by MMP-Humboldt and other Meruelo Maddux entities. Meruelo Maddux
22 owns the entire block on which the Property sits, approximately 8-1/2 acres in all. While it is
23 difficult to know how much weight to give to this feature, it is a plus in considering the potential
24 for sale to third parties for development.
25 The Shustak appraisal offered further information. Whether either party agrees with
26 Mr. Shustak’s bottom line or not, this appraisal of a vacant, level, 4-acre industrial parcel
27 approximately one mile away from the Property found a value of $48 per square foot as of
28 February 12, 2010. Both Mr. Lienke and Mr. Meruelo offered testimony on the only two

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comparables listed in the Shustak appraisal that post-date the real estate crash. One, a sale to
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the City of Los Angeles in October 2009 of a 6-acre vacant property in downtown Los Angeles
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(Albion) for a recreation area, that sold for the equivalent of $66.21 per square foot. The other
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is a listing for a vacant 6-acre industrial property in downtown Los Angeles adjacent to
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Interstate 10 (Mission) for the equivalent of $85.00 per square foot. This latter property has
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been on the market since September 2008.
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Mr. Lienke and Mr. Meruelo also testified about property at 501 South Hewitt, sold in
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September 2009 at $44 per square foot and recently resold to the DWP for a maintenance
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yard at over $50 per square foot. It is Mr. Lienke’s view that sales to government or public
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entities are over-market sales because the buyer has a specific use in mind and is willing to
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pay over the fair market value to achieve its goal. Mr. Meruelo disagreed, citing his experience
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in dealing with government and public entity buyers on several sales/condemnation
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transactions. The court is not persuaded that it should disregard or discount sales to
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governmental or public entities on the grounds that they tend to pay over-market price. There
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is no data from which the court could draw this conclusion and the government’s ability to force
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a condemnation action undercuts this notion.
17 Finally, there was an offer on the Property itself as recently as three days before the
18 commencement of these bankruptcy cases. The proposed buyer is a church in the
19 neighborhood that wished to buy the Property and an adjacent parcel for $12,500,000.
20 Although Mr. Lienke was not aware of this offer, it was introduced by the Chamlians in
21 connection with their prior relief from stay motion. Mr. Meruelo testified that the Debtor is still
22 talking with the church about a sale to the church. Mr. Meruelo testified that the church’s offer
23 for the Property is $8,600,000, which is approximately $40 per square foot.
24

25 Reconciliation of Testimony/Findings and Conclusions
26 The paucity of closed sales of similar properties in close proximity to the subject
27 Property complicates the valuation process. Differences between properties require
28 adjustments. Those adjustments, in turn, are not only subject to dispute but also can result in

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large differences in valuation based on small changes in the applicable assumptions.
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Distinctions based on the identity of a potential buyer also rest on assumptions not easily, if
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ever, subject to proof. One thing that the number of sales does demonstrate is that the market
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is slow, evidence of the stand off between buyers and sellers in a tough economy that is not
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finance-friendly.
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Adequate Protection – 11 U.S.C. §362(d)(1)
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Ongoing interest and negotiations with the church as to the Property set its value at a
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minimum of $8,600,000, or $40 per square foot. Assuming that the debt to the Chamlians
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accrues at the rate of $38,000 per month, they are protected by this value of the property for
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approximately 20 months, if the market is stable. If the market is declining as proposed by Mr.
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Lienke, then the margin of protection at this value may be as little as 4-1/2 months.
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However, based on a review of all of the evidence, including updates to the date of
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hearing, the court finds and concludes that the fair market value at this time is no less than $46
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per square foot, a value that equates to $9,878,500. Assuming the debt accrues at
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approximately $38,000 a month, this translates into an equity cushion of about 8%.
17 The court is not convinced that the Property has or will continue to decline in value at
18 the rate of 2% per month both before and after March 2009, although it is worth noting that
19 consideration of Mr. Lienke’s comparables left his assumption on this issue in place. Given the
20 revitalization of the downtown area exemplified by LA Live as a sports and entertainment
21 venue, the recent development of medium and upscale residential units, the continued
22 upgrades to mass transit access in and out of the downtown area from other communities, and
23 the limited area to which there is access from multiple freeways, the downtown Los Angeles
24 real property market is likely to stabilize sooner rather than later notwithstanding the general
25 economic malaise.
26 Even if the market continues a decline at 2% per month, the Chamlians are protected
27 for approximately 9 to 10 months by the value of the Property and the payment of ongoing
28 taxes.

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Section 362(d)(1) provides for relief from stay “for cause, including the lack of adequate
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protection of an interest in property of such party in interest.” Adequate protection is not the
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sole inquiry under Section 362(a)(1). Instead, the court is directed to consider whether there is
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“cause” for relief from stay. “Cause” may involve more than an analysis of traditional concepts
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of adequate protection alone.
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In this case, the following considerations are relevant in the analysis of “cause” under
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Section 362(d)(1). Valuation of real property is an inexact science, the risk of which will always
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fall more heavily on one side than on another. In this case, the Debtors are moving forward
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with their disclosure statement and confirmation of a plan but there is no certainty about when
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this process will conclude. This case is now fifteen (15) months old and the Property is a non-
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performing asset. In the meantime, the debt continues to accrue because no payments have
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been made for 18 months.
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Therefore, as of December 1, 2010, the Chamlians shall have relief from stay to
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commence foreclosure proceedings under state law, provided that no sale shall take place
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until on or after March 26, 2011, unless one of the following has taken place:
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1. confirmation of a plan of reorganization providing for treatment of the
17 Chamlian’s claim;
18 2. commencement of adequate protection payments to the Chamlians at
19 the non-default rate under the Note;
20 3. further order of the court.
21 The treatment of the Chamlian’s claim under a confirmed plan will supercede the relief granted
22 pursuant to the order on this motion.
23

24 Debtor’s Equity and Necessity for an Effective Reorganization
25 The Debtor has equity in the Property. Therefore, the court need not analyze the
26 necessity of this Property for an effective reorganization. Even so, the court notes that Mr.
27 Meruelo satisfied the second prong of Section 362(d)(2) as well. While it is true that the
28 Debtors could reorganize in theory with any number of surviving properties without depending

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solely on any one of them, the Debtors cannot reorganize if all were lost because of this
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theory. Where that balance tips in favor of any one property is not before the court in the
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determination of this motion.
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In this particular case, the Property is part of a larger set of parcels ripe for
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development, some of which are owned by this Debtor, MMP-Humboldt, and some of which
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are owned by a related entity. While the Debtors may conclude that sale of something less
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than all of the parcels in this grouping is prudent, the current evidence shows that the Property
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is necessary for an effective reorganization.
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Conclusion
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Relief is granted under Section 362(d)(1) on the terms set forth above. Relief is denied
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under Section 362(d)(2). The Chamlians are directed to lodge a form of order consistent with
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the relief set forth herein.
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26 DATED: July 8, 2010
United States Bankruptcy Judge
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NOTE TO USERS OF THIS FORM:
2 1) Attach this form to the last page of a proposed Order or Judgment. Do not file as a separate document.
2) The title of the judgment or order and all service information must be filled in by the party lodging the order.
3 3) Category I. below: The United States trustee and case trustee (if any) will always be in this category.
4) Category II. below: List ONLY addresses for debtor (and attorney), movant (or attorney) and person/entity (or
attorney) who filed an opposition to the requested relief. DO NOT list an address if person/entity is listed in category I.
4

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NOTICE OF ENTERED ORDER AND SERVICE LIST
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Notice is given by the court that a judgment or order entitled MEMORANDUM ON THE CHAMLIAN’S
7 SECOND MOTION FOR RELIEF FROM THE AUTOMATIC STAY – GRANTING IN PART AND DENYING
IN PART was entered on the date indicated as AEntered@ on the first page of this judgment or order and will
8 be served in the manner indicated below:
9
I. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (ANEF@) B Pursuant to controlling
10 General Order(s) and Local Bankruptcy Rule(s), the foregoing document was served on the following
person(s) by the court via NEF and hyperlink to the judgment or order. As of 7/8/10, the following person(s)
11 are currently on the Electronic Mail Notice List for this bankruptcy case or adversary proceeding to receive
NEF transmission at the email address(es) indicated below.
12

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14 Service information continued on attached page
15 II. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this judgment or order
was sent by U.S. Mail to the following person(s) and/or entity(ies) at the address(es) indicated below:
16

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18 Service information continued on attached page
19 III. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment or
order which bears an AEntered@ stamp, the party lodging the judgment or order will serve a complete copy
20 bearing an AEntered@ stamp by U.S. Mail, overnight mail, facsimile transmission or email and file a proof of
service of the entered order on the following person(s) and/or entity(ies) at the address(es), facsimile
21 transmission number(s) and/or email address(es) indicated below:
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Service information continued on attached page
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ELECTRONIC SERVICE INFORMATION
2 Michael C Abel mca@dgdk.com
Robert Abiri rabiri@abiriszeto.com
3 John J Bingham jbingham@dgdk.com
Peter Bonfante peterbonfante@bsalawfirm.com
4 Julia W Brand jwb@dgdk.com
Jennifer L Braun jennifer.l.braun@usdoj.gov
5 Martin J Brill mjb@lnbrb.com
George T Busu george.busu@limruger.com
6 Andrew W Caine acaine@pszyjw.com
Howard Camhi hcamhi@ecjlaw.com
7 Gary O Caris gcaris@mckennalong.com, pcoates@mckennalong.com
James E Carlberg jcarlberg@boselaw.com
8 Sara Chenetz chenetz@blankrome.com
Jacquelyn H Choi jchoi@swjlaw.com
9 Ronald R Cohn rcohn@horganrosen.com
Enid M Colson emc@dgdk.com, ecolson@dgdk.com
10 Michaeline H Correa mcorrea@jonesday.com
Brian L Davidoff bdavidoff@rutterhobbs.com, calendar@rutterhobbs.com;jreinglass@rutterhobbs.com
11 Aaron De Leest aed@dgdk.com
Daniel Denny ddenny@gibsondunn.com
12 Lisa Hill Fenning Lisa.Fenning@aporter.com, Jean.Kellett@aporter.com
Michael G Fletcher mfletcher@frandzel.com, efiling@frandzel.com;shom@frandzel.com
13 Barry V Freeman bvf@jmbm.com, bvf@jmbm.com
Donald L Gaffney dgaffney@swlaw.com
14 Thomas M Geher tmg@jmbm.com
Bernard R Given bgiven@frandzel.com, efiling@frandzel.com;shom@frandzel.com;bgiven@frandzel.com
15 Barry S Glaser bglaser@swjlaw.com
Michael I Gottfried mgottfried@lgbfirm.com, msaldana@lgbfirm.com
16 John A Graham jag@jmbm.com
Ofer M Grossman omglaw@gmail.com
17 Jodie M Grotins jgrotins@mcguirewoods.com
Peter J Gurfein pgurfein@lgbfirm.com
18 Cara J Hagan carahagan@haganlaw.org
Asa S Hami ahami@sulmeyerlaw.com
19 Brian T Harvey bharvey@buchalter.com, IFS_filing@buchalter.com
David W Hercher dave.hercher@millernash.com
20 William W Huckins whuckins@allenmatkins.com, clynch@allenmatkins.com
Natasha L Johnson natasha.johnson@dlapiper.com
21 Lance N Jurich ljurich@loeb.com, kpresson@loeb.com
Alexandra Kazhokin akazhokin@buchalter.com, salarcon@buchalter.com;ifs_filing@buchalter.com
22 William H. Kiekhofer wkiekhofer@mcguirewoods.com
Andrew F Kim kim-a@blankrome.com
23 Michael S Kogan mkogan@ecjlaw.com
Tamar Kouyoumjian tkouyoumjian@sulmeyerlaw.com
24 Duane Kumagai dkumagai@rutterhobbs.com, calendar@rutterhobbs.com
Lewis R Landau lew@landaunet.com
25 David E Leta dleta@swlaw.com, wsmart@swlaw.com
Katherine Lien katie.lien@sbcglobal.net, katielien@gmail.com
26 Steven K Linkon slinkon@rcolegal.com
Richard Malatt rmalatt@gmail.com
27 Elmer D Martin elmermartin@gmail.com
Elissa Miller emiller@sulmeyerlaw.com, asokolowski@sulmeyerlaw.com
28 Iain A W Nasatir inasatir@pszjlaw.com, jwashington@pszjlaw.com

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1 Jennifer L Nassiri jnassiri@venable.com
Lawrence Peitzman lpeitzman@pwkllp.com
2 Eric S Pezold epezold@swlaw.com, dwlewis@swlaw.com
Christopher E Prince cprince@lesnickprince.com
3 Michael H Raichelson mhr@cabkattorney.com
Dean G Rallis Jr drallis@sulmeyerlaw.com
4 Craig M Rankin cmr@lnbrb.com
Michael B Reynolds mreynolds@swlaw.com, kcollins@swlaw.com
5 Kirsten A Roe kroe@wthf.com, dfunsch@wthf.com
Martha E Romero Romero@mromerolawfirm.com
6 Victor A Sahn vsahn@sulmeyerlaw.com
Zev Shechtman zshechtman@dgdk.com
7 Jeffrey S Shinbrot jeffrey@shinbrotfirm.com, sandra@shinbrotfirm.com
Stephen Shiu sshiu@swlaw.com
8 Daniel H Slate dslate@buchalter.com, rreeder@buchalter.com;ifs_filing@buchalter.com
Surjit P Soni surjit@sonilaw.com, teresa@sonilaw.com
9 Tracie L Spies tracie@haganlaw.org
James Stang jstang@pszjlaw.com
10 Derrick Talerico dtalerico@loeb.com, kpresson@loeb.com;ljurich@loeb.com
John N Tedford jtedford@dgdk.com
11 James A Timko jtimko@allenmatkins.com
Alan G Tippie atippie@sulmeyerlaw.com, jbartlett@sulmeyerlaw.com
12 United States Trustee (SV) ustpregion16.wh.ecf@usdoj.gov
Rouben Varozian rvarozian@bzlegal.com
13 Jason L Weisberg jason@gdclawyers.com
William E Winfield wwinfield@nchc.com
14 Jasmin Yang jyang@swlaw.com

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Bankruptcy Court Memorandum on Relief from Stay Motion

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