Baxter
Filing
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OPINION on Appeal. The Bankruptcy Courts decision to dismiss this case without prejudice is affirmed. (Signed by Judge Lynn N Hughes) Parties notified. (ghassan, 4)
U NITED S TATES D ISTRICT C OURT
S OUTHERN D ISTRICT OF T EXAS District Court
United States
Southern District of Texas
ENTERED
In re
Debra Densey Baxter,
Appellant.
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April 07, 2020
David J. Bradley, Clerk
Bankruptcy 14-32988
Civil Action H-15-1628
Opinion on Appeal
1.
Background.
A debtor filed for bankruptcy under Chapter 13. The Bankruptcy Court
dismissed her case – without prejudice – because she did not propose a payment
plan in good faith. The debtor appealed.
2.
The Lots.
Debra Densey Baxter bought nine lots in Bryan, Texas, at a foreclosure
sale in 1999.
Erasmo Contreras thought that he had superior title to the lots. While
their suit for title was pending in state court, Contreras installed water lines and
sewage pipes under the land and paid the taxes.
In 2007, the court held that Baxter owned the lots. She was ordered to
pay Contreras $78,068.20 plus interest for the taxes and improvements.
Baxter filed for Chapter 13 bankruptcy in 2014. The bankruptcy court
dismissed her case because she was trying to minimize the value of her assets –
a violation of the debtor’s good faith requirement for confirmation.
3.
Bankruptcy.
Bankruptcy under Chapter 13 allows debtors with regular income to keep
their property and pay their debts over time. The court must approve the debtor’s
repayment plan.
For secured debts, a debtor’s plan must (a) be approved by the creditor,
(b) surrender the collateral securing the claim to the creditor, or (c) pay the
creditor at least the full present value of the collateral.1 The third option is called
a cram-down – it can be approved by the court over the objection of a secured
creditor.
A strip down is different – it means assigning value to a secured claim by
bifurcating it into secured and unsecured components.2 The claim is split into (a)
a secured amount equal to the value of the collateral and(b) an unsecured
amount for the rest of the claim.
Contreras had a $78,068.20 judgment lien on Baxter’s lots. Baxter’s
proposed a cram-down plan that bifurcated Contreras’s claim into (a) $30,364.56
secured and (b) $48,118.43 unsecured. She proposed to pay the secured portion
in full and 21% of the unsecured portion. Contreras objected. The court
evaluated her plan in light of Contreras’s objection.
The Bankruptcy Court needed to determine the value of the lots to see if
the proposed plan fairly compensated Contraras for his interest. Contraras’s lien
would be secured and paid in full up to the value of the land. The court held two
hearings to hear testimony on the value of the lots.
1
11 U.S.C. §1325(a)(5)(2012).
2
11 U.S.C. §506(a)(2012).
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A.
Linda Praytor.
At the first hearing, Baxter called Linda Praytor – a licensed broker – to
testify about the value of the lots.
The bankruptcy court questioned Praytor’s valuation method before
allowing her to testify.
Important data was missing from her report: (a) she left the distance
column empty on the first three comparable sales; (b) she made no adjustments
for the size of the properties that she compared to Baxter’s; (c) she valued the
Baxter’s property as if it had no water or sewage, when it had both. Her report
says that it cannot be used as an appraisal.
Based on these mistakes, the court found that her opinion on the value
of the lots was unreliable.
Baxter argues that the court should accept any relevant testimony about
the value of the land. It need not. The court’s job is to estimate – as closely as
possible – the value of the land. It may accept the evidence that it thinks is
reliable.
The bankruptcy court properly rejected Praytor’s testimony. While
Praytor has experience in the real estate market, her opinion was flawed.
Praytor used wide parameters to value comparable properties because few
sales had been made in the area. She did not include the distance from Baxter’s
property on three of the comparable properties. She did not adjust the values for
the size of the lots. She valued the lots as if they did not have sewage and water
connections when they did.
Praytor’s opinion on the value of the lots was unreliable. The bankruptcy
court properly denied her testimony.
B.
Ted Whitmer.
The bankruptcy court gave Baxter a second chance to give a fair valuation
of the land. Baxter offered the appraisal of Ted Whitmer – a licensed appraiser,
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attorney, and professor. The court found that Whitmer was qualified to testify
about the value of the lot.
The Uniform Standards of Professional Practice gives an appraiser
instructions for calculating the fair market value of real estate. The Uniform
Standards require an appraiser – among other things – to evaluate the highest
and best use of the property when valuing real property.
During voir dire, Whitmer read the instructions that Baxter gave him.
The instructions told Whitmer to ignore the highest and best use of the
property. Whitmer even said that his opinion on value would not qualify as fair
market value because he did not consider the highest and best use of the
property.
The bankruptcy court found Baxter’s instructions so limiting that he
could not give a fair market value of the lots.
The bankruptcy court properly rejected Whitmer’s opinion on value.
Whitmer’s appraisal was too limited by his instruction, resulting in a value
substantially less than he would have gotten had he done a standard appraisal.
This manipulation of the standard fair market value by Baxter gave the court
another artificially depressed value for the lots.
Whitmer’s testimony was also properly rejected.
4.
The Value of the Lots.
Baxter insists that the value of the lots depends only on her proposed use
of the property. She says that the bankruptcy court erred by requiring a value that
reflects the highest and best use of the lots. In her mind, her exact, current use
is all that matters for value.
Baxter owns nine lots. Baxter, her children, her ex-husband, and her
friend live on some of the lots and the rest are vacant. Everyone living on the lots
pays her some rent. She would like the land to be valued accordingly.
In a cram-down case – where the debtor elects to keep the collateral
instead of surrendering it to the creditor – the property must be valued at the
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price a willing buyer would pay to obtain like property from a willing seller.3 It is
not the liquidated value of the property, as Baxter argues; it is the fair market
value. The fair market value incorporates the highest and best use standard that
Whitmer would have used in his appraisal. That does not mean the property will
be valued at its optimum use, but that the use will be reflected in the overall
market value.
Baxter gave no evidence of the fair market value of the lots. The opinions
she gave – from Praytor and Whitmer – carved away value from the lots,
artificially reducing their value.
A debtor cannot minimize her estate by using it in a way that is not
economic, forcing her creditors to take lower distributions. This is not the first
time Baxter has done this. She filed for bankruptcy four times since 2006; in this
case, she was given two chances to give reliable evidence on value over a period
of thirteen months. She never did.
The bankruptcy court found that Baxter did not propose her repayment
plan in good faith.4 She attempted – twice – to minimize the value of her estate.
It denied confirmation and dismissed her case.
The court’s job was to determine the fair market and rental value of the
property. Without it, the court could not determine if Baxter’s plan fairly repaid
Contreras.5 Not having received competent evidence, it could not confirm the
reorganization plan.
The bankruptcy court’s decision is sound. A debtor is not afforded
endless opportunity to present valuation evidence. Baxter had ample time and
opportunity to propose a plan in good faith.
Bankruptcy under Chapter 13 allows debtors to keep their property in the
face of creditors attempting to repossess it; in return, the debtor has an obligation
3
Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997).
4
11 U.S.C. §1325(a)(3) (2012).
5
11 U.S.C. §1325(a)(5) (2012).
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to propose a plan in good faith. The plan must fairly compensate the creditors.
Baxter repeatedly depressing the value of her land to pay Contreras less is an
attempt to exploit this rule.
5.
Conclusion.
Debra Baxter did not present reliable evidence about the value of her
property – information that was essential to confirm her plan. Instead, she gave
two opinions that – at her direction – depressed the value of the land so that she
could pay Contreras less. Soliciting testimony that artificially reduces the value
of land is a violation of the debtor’s duty to act in good faith.
The Bankruptcy Court’s decision to dismiss this case without prejudice
is affirmed.
Signed on April 7, 2020, at Houston, Texas.
______________________________
Lynn N. Hughes
United States District Judge
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