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2 FILED & ENTERED

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MAR 08 2021

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5 CLERK U.S. BANKRUPTCY COURT Central District of California 6 BY g h a l t c h i DEPUTY CLERK

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UNITED STATES BANKRUPTCY COURT

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CENTRAL DISTRICT OF CALIFORNIA

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LOS ANGELES DIVISION

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11 In re: Case No.: 2:18-bk-12429-NB 12 Dana Hollister, Chapter: 11 13

14 MEMORANDUM DECISION DENYING 15 Debtor(s) DEBTOR’S FINANCING MOTION

16 Hearing/Trial: Date: February 25, 2021 17 Time: 9:00 a.m. Place: Courtroom 1545 255 E. Temple Street 18 Los Angeles, CA 90012 19 20 The above-captioned Debtor argues that, on the facts of this case, a third lien is 21 “indubitably equivalent” to a second lien. It is not.1 22 (1) Background 23 Approximately three years ago, on March 6, 2018 (the “Petition Date”), Debtor 24 filed her chapter 11 petition. Debtor's principal asset, known as The Paramour, consists 25 of a main house and some guest houses on over four acres in the hills of the Silver 26 Lake neighborhood of Los Angeles. 27 1 Unless the context suggests otherwise, a “chapter” or “section” (“§”) refers to the United States Bankruptcy 28 Code, 11 U.S.C. § 101 et seq. (the “Code”), a “Rule” means the Federal Rules of Bankruptcy Procedure or other federal or local rule, and other terms have the meanings provided in the Code, Rules, and the parties’ filed papers. 1 Bobs LLC (“Bobs”) currently holds a second lien on The Paramour. Debtor’s 2 motion (the “Financing Motion,” dkt. 1335) seeks to borrow $7 million secured by a 3 priming lien pursuant to § 364(d) (the “Priming Loan”). That would put Bobs in third 4 position. 5 (2) Debtor is desperate to stop the sale of The Paramour 6 The goal of the $7 million Priming Loan is to stop the sale of The Paramour. The 7 sale process has been triggered by Debtor’s failure to make a final payment under a 8 settlement agreement with other creditors, pursuant to which an “Agent” is now required 9 to sell The Paramour. See Term Sheet (dkt. 547, and Fin. Motion, dkt. 1335, Ex. 13), 10 p. 5, ¶ “7.f.”; Orders (dkt. 528, 557, 1330); Broker Empl. App. (dkt. 1366). 11 Debtor estimates that any sale of The Paramour would render the bankruptcy 12 estate administratively insolvent because of huge capital gains tax liability. See Reply 13 (dkt. 1357), pp.13:18-21, 14:2-8. In addition, Debtor seeks to save the property for use 14 as her home, and to continue its current use as a site for weddings, events, filming, and 15 transient occupancy, or possibly develop it for other purposes. See, e.g., Fin. Motion 16 (dkt. 1335), Ex. 7 at Bates pp. 599-601. 17 (3) Debtor relies on an allegedly huge equity cushion 18 The estimated closing statement projects that junior lienholders would need to be 19 paid roughly $3.7 million to stop the sale. The remainder of the proposed $7 million 20 Priming Loan, after brokerage fees and other expenses, would pay $1 million of 21 administrative expenses (Debtor’s counsel and other professionals), $500,000.00 to 22 replenish a fund that was designated for payment of unsecured creditors, $400,000 to 23 the current first lienholder (“Select” or “SPS”), $550,000.00 to a friendly junior lienholder, 24 and $559,300.00 to prepay interest on the $7 million Priming Loan for 12 months. Fin. 25 Motion (dkt. 1335), p. 4:3-12 & Ex. 2. 26 The prepaid interest is necessary because Debtor has insufficient cash flow to 27 pay interest on the proposed $7 million Priming Loan, let alone make adequate 28 protection payments to Bobs or pay down any of her debts. Debtor hopes that in a year 1 she will be able to start making interest only payments of $46,608.33 per month on the 2 $7 million Priming Loan. 3 As Bobs points out, “[t]here are no projections attached to the motion nor any 4 reconciliation of her cash flow requirements without this loan much less adding $46,000 5 per month to her obligations.” Bobs Opp. (dkt. 1349), p. 10:9-11. Debtor’s accountant 6 states only that “I looked at the Debtor’s revenue and expenses from the inception of 7 the case through early 2020 … [and] in late 2020 during which Covid restrictions were 8 reduced,” and based on that “look[],” “I believe that a monthly payment of $46,608.33 is 9 within her means ….” Fin. Motion (dkt. 1335), p. 6:22-24 and at Bates p. 64:17-28. 10 Debtor also provides a list of alleged bookings of The Paramour, but that list is 11 meaningless without detailed projections of resulting gross revenues, expenses, and net 12 income. See also id. Ex. 26. 13 Bobs also points out that in prior years, according to Debtor’s own reporting, she 14 did not earn sufficient income from The Paramour to service the debt. See Bobs Opp. 15 (dkt. 1349), p. 11:6-16. In other words, Debtor offers only her hope that she will earn 16 vastly more from The Paramour in future than she has ever done before. 17 Alternatively, Debtor’s counsel suggested at oral argument that she might 18 develop a boutique hotel on the property. But she offers no explanation of who would 19 fund that development, nor any evidence that a boutique hotel would be legally 20 permissible notwithstanding zoning and other restrictions. Cf. Appraisal (3/11/20), Fin. 21 Motion (dkt. 1335), Ex. 10 at Bates pp. 825, 987 (PDF pp. 3 & 75 of 134) (property 22 zoned for single family use, with limited building height; and The Paramour has been 23 designated as historic-cultural monument, which "limits the allowable changes to the 24 exterior of the improvements"). 25 Another theoretical approach, according to representations of Debtor’s counsel at 26 oral argument, would be to subdivide the property into as many as 48 plots and develop 27 single family homes on those plots. Again, Debtor provides no evidence about who 28 would fund that development, or that it is legally permissible. Cf. id. ("the maximum 1 number of units that can be feasibly developed on this site under existing zoning [is] up 2 to 35 homes ... but architectural/engineering studies would likely reduce this number 3 due to circulation/access and possibly slope issues"). 4 No time frame is provided for any of these possible strategies to exit this 5 bankruptcy case. See generally Fin. Motion (dkt. 1335), p. 3:20-22 & n. 1 (proposed 6 financing is only an “interim” measure). Regardless how long it might take Debtor to 7 start paying Bobs, she asserts that meanwhile Bobs is adequately protected by an 8 allegedly huge equity cushion above its interest in The Paramour, based on “Debtor’s 9 estimate of value at $40 million.” Fin. Motion (dkt. 1335), p. 21:27 (emphasis added). 10 According to Debtor, that value results in an equity cushion so enormous that 11 Bobs’ proposed third priority lien will be the “indubitable equivalent” of its existing 12 second priority lien. That is what Debtor must show under the applicable statutory 13 provisions. 14 (4) Statutory provisions 15 This Bankruptcy Court "may authorize" Debtor to borrow funds secured by a lien 16 that is senior to existing liens "only if - (A) the [debtor in possession, acting as a trustee 17 under §§ 1101(1) and 1107(a),] is unable to obtain such credit otherwise [i.e., without a 18 priming lien]; and (B) there is adequate protection of the interest of the holder of the 19 [senior] lien ...." § 364(d)(1) (emphasis added). Debtor "has the burden of proof on the 20 issue of adequate protection." § 364(d)(2). 21 "[S]uch adequate protection may be provided by - (1) ... cash payment[s] 22 [inapplicable because Debtor is not offering any such payments] ...; (2) ... an additional 23 or replacement lien [also inapplicable] ...; or (3) granting such other relief, other than 24 entitling such entity to compensation allowable under section 503(b)(1) of this title as an 25 administrative expense, as will result in the realization by such entity of the indubitable 26 equivalent of such entity's interest in such property." § 361 (emphasis added). Debtor 27 relies on the emphasized language. 28 1 (5) Legal interpretation of "indubitable equivalent" 2 The Court of Appeals for the Ninth Circuit has construed the term "indubitable 3 equivalent," albeit in the different context of "cram down" under § 1129(b)(2)(A)(iii). The 4 Ninth Circuit has held that construction of that term is an issue of law. In re Arnold & 5 Baker Farms, 85 F.3d 1415, 1421 (9th Cir. 1996). This Bankruptcy Court is not aware 6 of any reason why a different meaning would apply under § 361(3) than under 7 § 1129(b)(2)(A)(iii). 8 To the contrary, as Bobs has argued, the term "indubitable equivalent" is a very 9 distinctive phrase, so it is unlikely that Congress meant something different by it in 10 § 361 and § 1129. In addition, there is every reason to construe the same words to 11 mean the same thing in both § 361 and § 1129 because both sections address how to 12 assure that the present economic values of secured claims are not adversely affected. 13 See Arnold & Baker, 85 F.3d 1415, 1423 ("the Code requires ... that the creditor receive 14 the indubitable equivalent of its secured claim") (emphasis in original); In re Den-Mark 15 Construction, Inc., 406 B.R. 683, 702 (E.D.N.C. 2009) (under §§ 361 and 364, “the pre- 16 petition secured creditor should be provided with the same level of protection it would 17 have had if there had not been post-petition [priming] financing”) (citation and internal 18 quotation marks omitted). 19 Therefore, this Bankruptcy Court applies the definition quoted with approval by 20 the Ninth Circuit in Arnold & Baker. "Indubitable" means "too evident to be doubted." 21 Arnold & Baker, 85 F.3d 1415, 1421 (emphasis added) (quoting In re Arnold & Baker 22 Farms, 177 B.R. 648, 661-62 (9th Cir. BAP 1994), itself quoting In re Walat Farms Inc., 23 70 B.R. 330, 334 (Bankr. E.D. Mich. 1987)). See also In re Tempe Land Co., LLC, 2009 24 Bankr. Lexis 1137 at *4 (Bankr. D. Ariz. May 1, 2009) (applying “too evident to be 25 doubted” definition of “indubitable,” from Arnold & Baker, to reject proposed DIP 26 financing under §§ 361 and 364); In re Pac. Lifestyle Homes, Inc., 2009 Bankr. Lexis 27 711 at *24-25 (Bankr. W.D. Wash. Mar. 16, 2009) (applying “too evident to be doubted” 28 1 definition, from Arnold & Baker, to reject proposed use of cash collateral under §§ 361 2 and 363(c)). 3 (6) The parties’ arguments 4 Debtor argues:

5 Within the Ninth Circuit, an “equity cushion” has been characterized as the “classic” form of adequate protection which, standing alone, is often sufficient 6 to satisfy the statutory standard even in circumstances where no mortgage payments have been made. In re Mellor, 734 F. 2d 1396, 1400 (9th Cir. 7 1984). 8 As further outlined in Mellor, Id. at p. 1401, … [j]unior liens or 9 encumbrances are not relevant to [the] determination [of whether there is an equity cushion protecting the subject lien]. [Fin. Motion (dkt. 1335), pp. 20:24- 10 21:5] 11 Debtor asserts that, under Mellor, a 20% equity cushion is de facto adequate 12 protection and that Bobs’ equity cushion is far above 20%, so Bobs is adequately 13 protected regardless whether “Debtor’s estimate of value at $40 million is correct.” Fin. 14 Motion (dkt. 1335), p. 21:27-22:2. Debtor also argues that § 364(d) would be read out 15 of existence if lienholders could not be primed. 16 But, as Bobs points out, it is one thing for a debtor to obtain a priming lien to 17 improve the collateral, or to make adequate protection payments while pursuing a 18 feasible exit strategy, but it is another thing for Debtor to propose the $7 million Priming 19 Loan with none of such protections. See, e.g., Tempe, 2009 Bankr. Lexis 1137 at *3 20 (rejecting proposed $7.9 million priming loan which would “see only about $1.4 to $2.0 21 million actually used in the existing project”); Pac. Lifestyle Homes, 2009 Bankr. Lexis 22 711 at *34-35 (rejecting proposed use of cash collateral to develop homes when “there 23 is no guaranty that the homes will sell, or will sell in a timely manner, sufficient to 24 compensate the Lenders for the loss of approximately eight million dollars in cash that is 25 available to them today”). 26 As Bobs argues, “[f]or a priming lien, the proposal must provide the secured 27 creditor with the same level of protection it would have had had there not been 28 postpetition [priming] funding.” Bobs Opp. (dkt. 1349), p. 7:1-4. See In re Swedeland 1 Development Group, Inc., 16 F.3d 552, 564-66 (3rd Cir. 1994); In re Plabell Rubber 2 Products, Inc., 137 B.R. 897 (Bankr. N.D. Ohio 1992). Compare In re San Clemente 3 Estates, 5 B.R. 605, 609-612 (Bankr. S.D. Cal. 1980) (cited with approval in Mellor, 734 4 F.2d 1396, 1400) (denying relief from automatic stay due to equity cushion of “over 5 65%” combined with (i) tentative agreements for pre-sale of lots, (ii) likely extension of 6 subdivision permit, and (iii) residual value of property and refund from city even if such 7 extension were denied). 8 To be clear, this Bankruptcy Court agrees with Debtor that, theoretically, a 9 sufficiently huge equity cushion might mean that in practical terms a third priority lien is 10 every bit as protected as a second priority lien, even without adequate protection 11 payments, replacement liens, additional liens, improvement of the collateral, or any exit 12 strategy supported by realistic projections. See Reply (dkt. 1357), pp. 5:26-6:3. In fact, 13 this Bankruptcy Court has declined to sustain Select’s objection to the Financing Motion 14 because conceivably Debtor could establish that Select is adequately protected, after 15 considering its extra $12.5 million equity cushion (the approximate amount of Bobs’ 16 claim). 17 But as against Bobs, Debtor has not shown any way that the equity cushion 18 could be large enough, and stable enough. Debtor "has the burden of proof on the 19 issue of adequate protection" (§ 364(d)(2)) and she has failed to carry that burden. 20 (7) Debtor has failed to “do the math” 21 As Debtor correctly notes, the existence of an equity cushion is determined by 22 starting with the value of the property, deducting senior liens or encumbrances, and 23 assessing whether there is sufficient remaining equity to protect the lien in question. 24 Fin. Motion (dkt. 1335), p. 21:1-5. But Debtor has failed to do that calculation: she has 25 not compared (a) the protection of Bobs’ interests without the proposed $7 million 26 Priming Loan (“Scenario One”) with (b) the protection of Bobs’ interests if that Priming 27 Loan were to be approved (“Scenario Two”). Cf. Fin. Motion (dkt. 1335), p. 6:6-9:3. 28 1 Debtor’s failure to do the math is fatal to the Financing Motion. On its face, a 2 third lien is not equivalent to a second lien absent extraordinary circumstances, and in 3 any event the burden is on Debtor to establish that they are “indubitabl[y] equivalent.” 4 So Debtor had to make some initial showing that, if proved at trial, would be sufficient to 5 grant her motion. Debtor has not made any such showing. See generally Swedeland, 6 16 F.3d 552, 566 (reversing bankruptcy court’s order approving priming lien when cash 7 flow projections were “deficient as they did not provide for a reasonable developer's 8 profit nor discount the projected eight-year cash flow to present value”). 9 Alternatively, this Bankruptcy Court provides the following analysis to illustrate 10 how Bobs’ proposed third lien demonstrably is not equivalent to its existing second lien. 11 This Bankruptcy Court emphasizes that the following analysis is solely for illustrative 12 purposes.2 13 (8) Valuation of The Paramour 14 Bobs asserts that The Paramour is worth “no more than $17 million and likely 15 closer to $12 million.” Bobs Opp. (dkt. 1349) p. 12:9-10 (emphasis added). That is a 16 world apart from “Debtor’s estimate of value at $40 million.” Fin. Motion (dkt. 1335), 17 p. 21:14-15 & p. 21:27 (emphasis added). 18 Debtor’s estimate has several weaknesses. Those weaknesses might be 19 understandable in the circumstances of this case, but they mean that any valuation in 20 the $40 million range that she proposes must be subject to a substantial margin of error. 21 (a) Debtor’s lack of market valuation 22 Bobs contends: 23 2 At the above-referenced hearing Debtor requested a certification for a direct appeal to the Ninth Circuit. 28 24 U.S.C. § 158(d)(2). As set forth on the record at that hearing, this Bankruptcy Court concludes that it must make such a certification, because denial of the Financing Motion “involves a question of law as to which there is no 25 controlling decision of the [Ninth Circuit] or of the Supreme Court of the United States” – namely, whether the “too evident to be doubted” standard warrants denial of a proposed priming loan without any evidentiary hearing. 26 Alternatively, the matter involves “a matter of public importance” because of the potentially far reaching impact of priming loans. Of course, the Ninth Circuit still must authorize any direct appeal; it might prefer to let lower courts 27 address the issues before rendering its own ruling; and nothing in this Bankruptcy Court’s certification should be construed as favoring a direct appeal – this Bankruptcy Court is simply following its understanding of the statutory 28 directive for certification. 1 To argue that this property is worth even $20 million is pure hopeful speculation. As the Ninth Circuit said in In re Arnold & Baker Farms, 85 F.3d 2 1415, 1421 (9th Cir. 1996), “Experience has taught us that determining the value of real property at any given time is not an exact science. Because 3 each parcel of real property is unique, the precise value of land is difficult, if 4 not impossible, to determine until it is actually sold.” [Id.] (quoting the BAP's opinion at 177 B.R. at 661-62). [Bobs Opp. (dkt. 1349), p. 13:9-14 (emphasis 5 added by Bobs).] Bobs is correct that a sale is the preferred valuation method. But as noted above 6 a sale of The Paramour likely will trigger very large capital gains taxes, possibly 7 rendering the estate administratively insolvent. 8 Another marketplace solution would be to refinance the property with a loan 9 sufficient to pay at least Bobs’ lien and senior liens. But Debtor asserts that she has 10 been unable to find any better refinancing than the proposed $7 million Priming Loan, 11 despite her allegedly diligent attempts. 12 Another marketplace solution would be to find an equity investment in a dollar 13 amount sufficient to pay Bobs and senior liens. But Debtor asserts that this has not 14 been possible to date. 15 Debtor has presented very thin evidence of any efforts to obtain a refinancing or 16 equity investment. It is also unclear what terms she considered “unacceptable,” as 17 pointed out by Bobs and Select. See Fin. Motion (dkt. 1335), pp. 19:18-20:14; and id. at 18 Bates pp. 39:15-40:4, 42:25-43:2, 56:25-57:2, 59:14-23 (Debtor’s vague allegations). 19 But those things are disputed factual issues. This Bankruptcy Court presumes, 20 solely for purposes of this discussion, that Debtor could explain why the refinancing 21 market and equity investors would not invest enough to pay off Bobs and Select, 22 despite the allegedly enormous value of The Paramour. 23 In any event, Debtor seeks a valuation by this Bankruptcy Court. She concedes 24 that this is less reliable than valuation by the market, but she asserts that this 25 Bankruptcy Court has a duty to conduct an evidentiary hearing. 26 27 28 1 (b) Past valuations have varied dramatically 2 According to Debtor, she purchased The Paramour in 1998 for $2.25 million 3 (after being in contract for a lengthy period). Then the property may have soared in 4 value, based on appraisals for $12.1 and $16.9 million in 2006 and 2009, respectively. 5 But then the property may have dropped drastically in value based on a 2011 appraisal 6 for $6.5 million. Thereafter, the property may have soared in value again, up to an 7 appraisal a few days ago for $48 million. See Reply (dkt. 1357), Ex. 31, pp. 44-45 (at 8 PDF p. 49) (summarizing numerous appraisals). 9 Of course, the appraisals could be mistaken. In addition, it is conceivable that 10 they were intentionally skewed, as Debtor has suggested. The point is only that there is 11 a very wide range of past valuations over time, which reinforces the potential difficulties 12 in any court valuation. 13 True, this Bankruptcy Court regularly values residential and other properties. 14 This Bankruptcy Court is quite willing to value The Paramour, all the more so because it 15 appears to present unique and interesting challenges. But this Bankruptcy Court also 16 recognizes that there is a margin of error in any court finding of value. 17 (c) Valuation of extremely high end “estate homes” is particularly inexact 18 As is typical, the appraisals look to other properties that allegedly are comparable 19 (“comps”). Some appraisers (notably Mr. D’Angelo, the appraiser most cited by Debtor) 20 use comps that literally are “all over the map”: from neighborhoods such as Bel Air, 21 Holmby Hills, and Brentwood. See, e.g., Fin. Motion (dkt. 1335), Ex. 7 at Bates pp. 605 22 & 618 (D’Angelo $44m Appraisal, 2018); id. Ex. 5, at Bates pp. 344 & 357 (D’Angelo 23 $36m Appraisal, 2017). But compare, e.g., Fin. Motion (dkt. 1335), Ex. 3 at Bates 24 p. 147 (closer comps, but much lower value of $17 million, in 2014). 25 Using such distant comps, in very different neighborhoods, violates the top three 26 mandates in valuing real estate: “location, location, location.” See, e.g., In re Whittaker 27 Memorial Hosp. Ass'n, Inc., 149 B.R. 812, 813 (Bankr. E.D. Va. 1993). 28 1 Normally any appraiser who used such comps would be laughed out of court. 2 But for present purposes this Bankruptcy Court presumes that such distant comps might 3 be necessary, because so few properties are sold in the price range that Debtor hopes 4 to establish for The Paramour. 5 For example, one appraisal states that (as of 2019) there were only "475 active 6 home listings priced above $10,000,000 in Los Angeles County" and [t]his declines to 7 131 home[s] priced in excess of $25,000,000." Fin. Motion (dkt. 1335), Ex. 10 at Bates 8 p. 878 (D’Angelo appraisal). No data is offered for homes in the $40 million range. 9 Nevertheless, even assuming for purposes of discussion that it is necessary to 10 use distant comps, that does not make such comps reliable. To the contrary, it makes 11 valuations based on such comps particularly inexact. 12 Similarly, the individual characteristics of extremely high end properties vary far 13 more than more regular homes. That is evidenced by this Bankruptcy Court’s review of 14 the appraisals in this case (as compared with appraisals in numerous other cases in 15 which this Bankruptcy Court has reviewed valuations over the years). 16 The Paramour has panoramic views of downtown Los Angeles, and a huge 17 amount of acreage (for Los Angeles), but the value of those things is difficult to quantify. 18 Some buyers prefer ocean views, or vistas of tree covered mountains. The amount of 19 land might not be attractive to any buyers who suspect that the land cannot be used as 20 they would like because of its slope, zoning, historical designation, or other reasons; but 21 conversely some buyers would value the property precisely because of its undeveloped 22 state. 23 Other characteristics of properties include how many bedrooms and bathrooms 24 the estate home has, or the total square footage. One such home might have a master 25 suite that “goes on for miles,” while another has two or three (relatively) smaller 26 bedroom suites in the same space, or detached guest houses, and each configuration 27 might appeal to or deter different buyers. 28 1 Amenities and upgrades also vary enormously. Different buyers might want an 2 elevator, a large wine room cooled without any vibrations from refrigeration, an “infinity” 3 or “plunge” pool with specific dimensions, or a tennis court with panoramic views. Some 4 buyers would be willing to add their own amenities, but others would not. 5 The point is not whether this Bankruptcy Court accepts what any appraiser 6 states. The point is that the individual characteristics of extremely high end properties 7 are difficult to value. 8 In sum, the relevant market appears to be particularly susceptible to the 9 individual proclivities of very wealthy buyers. None of this means that valuation by this 10 Bankruptcy Court is impossible. But it does mean that any valuation is subject to a very 11 large margin of error. 12 (d) Hypothetical, illustrative valuation, and margin of error 13 This Bankruptcy Court emphasizes that the purpose of the following math is only 14 to illustrate the sorts of calculations that Debtor has not shown, and to illustrate that 15 Bobs easily could be adversely affected if the Financing Motion were granted. In that 16 context, suppose that this Bankruptcy Court were to value The Paramour at the full 17 amount of Debtor’s $40 million estimate. What margin of error would apply to that 18 valuation? 19 Recall that Debtor must prove an equity cushion large enough that Bobs’ 20 proposed third lien position will be the “indubitable equivalent” of its current second lien 21 position. In other words, after accounting for the margin of error, Debtor would have to 22 establish at trial that the equivalence between the proposed third lien and the current 23 second lien is “too evident to be doubted.” 24 For purposes of illustration, suppose a 20% margin before this Bankruptcy Court 25 could find that the “too evident to be doubted” standard was met. That is a very modest 26 adjustment relative to the range of values argued by the parties (from $12 million to $48 27 million). It is also a modest margin on which to base a finding of “indubitable” 28 equivalence, considering all the uncertainty generated by using distant comps, in very 1 different neighborhoods, with very different characteristics from The Paramour. 2 Nevertheless, this discussion assumes (in Debtor’s favor) that the margin of error would 3 be no greater than 20%. 4 Applying this 20% margin of error to the hypothetical $40 million valuation results 5 in a $8 million margin of error ($40 million x 0.2 = $8 million). In other words, for 6 purposes of the following calculations this Bankruptcy Court presumes that the 7 minimum value to meet the “too evident to be doubted” standard of indubitable 8 equivalence would be $32 million ($40 million - $8 million = $32 million). Again, this is 9 solely for purposes of illustration. 10 (9) Scenario One: adequate protection of Bobs’ interest without the $7 million 11 Priming Loan 12 Debtor estimates at least a year to market and sell The Paramour. See Reply 13 (dkt. 1357), p. 20:6-11. Suppose that by then the property has declined by 9% in value 14 (to match the rate of decline assumed in Scenario Two below), which equates to a 15 value of $29.1 million ($32m x 0.91 = $29.1m). Suppose further that, after interest and 16 other charges, Select is owed $5.4 million.3 Finally, suppose a net debt to Bobs, after 17 sale of other collateral, of $10.5 million,4 growing to $12.5 million owed to Bobs when 18 19 3 Select’s interest rate is equal to an index ("LIBOR") plus 1.875%. See Promissory Note, Fin. Motion (dkt. 1335), 20 Ex. 11 at Bates pp. 980-81, and Payoff Statement, Reply (dkt. 1357), Ex. 29, at Bates p. 36. This Bankruptcy Court cannot assume that interest rates will stay at their current levels, which Debtor admits are “at historic lows.” Fin. 21 Motion (dkt. 1335), p. 7:15-17. Therefore, in assessing the potential risk to Bobs, suppose that LIBOR were to 22 increase to a historically modest 4% and that Select’s average interest rate over the next year were to be roughly 6% (just under what it was at the inception of the loan). That would add $300,000.00 in interest ($4.5 million x 0.06 = 23 $300,000.00). After late charges, attorney fees, etc., the following illustrative calculations presume an additional $0.4 million, on top of the current $5 million, for a total hypothetical amount of $5.4 million owed to Select by the time Bobs 24 is paid (if the Financing Motion is not granted).

25 4 Bobs asserts that it is owed approximately $12.5 million. Debtor disputes some of that claim, but “adequate protection” would not be very adequate if it only protected the portion of a secured claim to which a debtor agreed 26 (without any court estimate). Debtor has not established that the claim can be estimated at anything less than the full $12.5 million. 27 Bobs’ $12.5 million claim is secured by The Paramour and one other property. In Debtor’s favor, assume that this other property is sold soon, for net proceeds of $2 million, leaving roughly $10.5 million secured by The Paramour. 28 But cf. Fin. Motion (dkt. 1335), pp. 24:23-26:24 (conceding “significant dispute” on this issue). 1 it is (hypothetically) paid a year from now.5 In this scenario, without the proposed $7 2 million Priming Loan, Bobs’ equity cushion would be roughly as follows:

3

SCENARIO ONE:

4 $ 29.1 million hypothetical value for purposes of “indubitable equivalent” test -$ 5.4 million, Select (1st lien) 5 -$ 12.5 million, Bobs (2nd lien) -$ 1.7 million for costs of sale ($29.1m x 0.06 = 1.7m)6 6 =$ 9.5 million equity cushion 7 In sum, Bobs’ second lien is protected in this Scenario One (i.e., without the $7 8 million Priming Loan) by a hypothetical $9.5 million equity cushion. 9 (10) Scenario Two: if Debtor’s Financing Motion were granted 10 (a) Delay 11 The picture would be very different if Debtor’s Financing Motion were granted. In 12 that situation the Agent would cease marketing The Paramour, and the one year 13 marketing period would not even begin until after Bobs were granted relief from the 14 automatic stay, or equivalent relief such as appointment of a chapter 11 or 7 trustee to 15 sell the property. 16 How long would it be before Bobs could seek such relief? It could be years. 17 Recall that Debtor has made no commitments to refinance, to find an equity 18 investor, or to meet any other benchmarks in any time frame. Nor has Debtor made any 19 commitments to Bobs that would be a basis for Bobs to assert a breach of promise. 20 To obtain any sort of relief Bobs most likely would have to show a decline in the 21 (hypothetical) equity cushion. This Bankruptcy Court cannot presume that Bobs could 22

23 5 Bobs asserts a 17% default rate of interest, and Debtor has not established otherwise. See Promissory Note ¶¶ 2-4(D) (Fin. Motion, dkt. 1335, Ex. 12 at Bates p. 1001). Therefore, the following illustrative calculations presume 24 that, in addition to the net $10.5 million secured by The Paramour, Bobs would claim roughly $1.8 million of additional interest for the year before Bobs is paid ($10.5 million x 0.17 = $1,785,000.00). Including late charges, attorney fees, 25 etc., the following illustrative calculations presume an additional $2 million owed to Bobs, on top of the current net $10.5 million, for a total hypothetical debt of $12.5 million owed to Bobs by the time Bobs is paid. 26 6 Like Debtor, this Bankruptcy Court uses a hypothetical 6% for costs of sale. See Reply (dkt. 1357), 27 p. 14:2-7. Debtor has not established that anything below that 6% would be appropriate in measuring Bobs’ projected equity cushion. See also Empl. App. (dkt. 1366), p. 5:8 and Ex. 1 at Bates p. 30, 28 Addendum ¶ 4.1 (proposed broker’s 4% commission, not including expenses, transfer taxes, etc.). 1 make that showing quickly. For purposes of illustration, assume that The Paramour 2 were to maintain its value for many months, and then suffer an unexpected and rapid 3 decline resulting in this Bankruptcy Court granting relief to Bobs. 4 Of course, this Bankruptcy Court recognizes that the situation could be much 5 more rosy. The value of The Paramour could increase, or Bobs theoretically could 6 obtain relief quickly and easily, before any threat to its equity cushion. But there would 7 be no point in “adequate protection” if it only protected Bobs’ lien when things went well. 8 This Bankruptcy Court must consider whether Bobs’ interest is protected if the 9 value of The Paramour were to decline and, for example, a sale of The Paramour 10 occurred two years from now. The actual period could be much longer but, in Debtor’s 11 favor, this Bankruptcy Court assumes only two years.7 12 (b) Possible loss of value in two years 13 How much might The Paramour decline in value in two years? Debtor cites 14 several appraisals by Mr. D’Angelo, who provides the highest valuations, and his 15 appraisals show a recent increase in value averaging 9% per year. What goes up can 16 go down. Applying a decline equivalent to 9% per year to the hypothetical $32 million 17

18 7 The delay could be anything – six months, 36 months, or any other time. The point is only that, until whatever future time Bobs is able to realize on its collateral, the equity cushion has to be large enough to protect Bobs against 19 a decline in value, or an increase in senior liens or Bobs’ own claim. In considering a future decline in value, keep in mind that, as some of the appraisals note, the market for 20 extremely high end estate homes does not necessarily track the rest of the real estate market, so it may be difficult to know for many months that this very high end market is in decline. At that point Bobs could file a motion for relief 21 from the automatic stay (or for other relief), but in all likelihood there would have to be discovery and a trial on 22 valuation. In addition, although a nonjudicial foreclosure can be completed in as little as a few months, nonjudicial 23 foreclosure is famous for producing far less than market values. See, e.g., BFP v. Resolution Trust Corporation, 511 U.S. 531, 536 & 561 n. 13 (1994) (foreclosure sale for 57% of fair market value; and noting 70% benchmark 24 previously used by lower courts for fraudulent transfer purposes). So this Bankruptcy Court will presume (again, in Debtor’s favor) that Bobs would seek to maximize value by pursuing remedies for a more orderly marketing and sale 25 process, such as seeking appointment of a trustee (§ 1104) or filing an action for judicial foreclosure and seeking appointment of a receiver to market and sell The Paramour, much as the Agent is doing now. That would take time. 26 In addition, Debtor could use various means to cause further delay. If the past is prologue, Debtor could engage in a lot of litigation. In addition, desperate debtors have been known to engage in all manner of schemes to delay the 27 loss of their properties. See, e.g., In re Vazquez, 580 B.R. 526 (Bankr. C.D. Cal. 2017). The point is, this Bankruptcy Court cannot presume that Bobs could obtain relief quickly, before any decline in 28 value of The Paramour, or before any increase in senior liens and Bobs’ own claim. 1 valuation, The Paramour could have a value of $26.5 million by the time Bobs could 2 force a sale.8 3 (c) Possible increases in senior liens, and Bobs’ claim 4 This Bankruptcy Court cannot assume that senior liens will be paid, especially 5 when Debtor has not been paying the existing liens and does not currently have the 6 cash flow to do so. See, e.g., Select Opp. (dkt. 1346), p. 6:1-3 & Ex. A; Bobs Opp. 7 (dkt. 1349), p. 8:5-6. Nor can this Bankruptcy Court assume that interest rates will stay 8 at their current levels, which Debtor admits are “at historic lows.” Fin. Motion (dkt. 9 1335), p. 7:15-17. Nor can this Bankruptcy Court assume that senior lienholders and 10 Bobs will have no attorney fees, or other costs and expenses allowable under § 506(b). 11 Suppose that by the time Bobs could obtain a sale of The Paramour, the 12 Priming Loan grew to $8 million from its original $7 million.9 Select's debt would 13 receive a $400,000.00 payment under the proposed financing; but after interest and 14 other charges Debtor could owe $5.2 million to Select.10 Debtor would owe 15 approximately $14.5 million to Bobs.11 16 8 The D’Angelo appraisals range from $36 million as of August 24, 2017 (Fin. Motion, dkt. 1335, Ex. 5, at Bates 17 pp. 274-400) to $48 million as of a few days ago. See Reply (dkt. 1357), Ex. 32, at Bates pp. 48-187. That is an increase of $12 million in just under three and a half years, or about 9% per year. (In rough figures: $36m x 1.09 = 18 $39m; $39m x 1.09 = $42.5m; $42.5m x 1.09 = $46m; $46m x 1.045 (the last half year) = $48m.) Applying the same rate of change (9%), the hypothetical $32 million value of The Paramour today could decline to 19 $26.5 million in two years. (In rough terms, using D’Angelo’s 9% annual rate of change would mean a decline from 100% to 91% each year: $32m x 0.91 = $29.1m; and $29.1m x 0.91 = $26.5m.) Such a “correction” would not 20 necessarily be unusual, after a period of “several years of rapid price appreciation.” D’Angelo Appraisal (3/11/20), Fin. Motion (dkt. 1335), Ex. 10 at Bates p. 879. 21

22 9 Suppose that Debtor does not pay interest on the proposed $7 million Priming Loan when such payments are due to commence in a year. The proposed Priming Loan bears interest at 7.99%, with default interest at 12.99%. 23 See Promissory Note, ¶¶ 2-4(D) (Fin. Motion, dkt. 1335, Ex.1 at Bates p. 71). Interest for a year at 12.99% on $7 million is $909,300.00. With late charges, attorney fees, and other costs and expenses, the following illustrative 24 calculations use a figure of an additional $1 million owed on the Priming Loan, on top of the $7 million principal, by the time Bobs can realize on its collateral, for a total of $8 million owed on the Priming Loan. 25 10 The $400,000 payment to Select would reduce its current $5 million claim to $4.6 million. But, as in Scenario 26 One above, suppose that Select’s average interest rate were 6%. This would add over $0.5 million ($4.6 million x 0.06 x 2 = $552,000), and after late charges, attorney fees, etc., the following illustrative calculations presume an 27 additional $0.6 million, on top of the post-financing $4.6 million, for a total of $5.2 million owed to Select.

28 11 As in Scenario One, suppose that Bobs’ net debt was $10.5 million with interest at 17%, but this time Bobs would go unpaid for two years instead of one. See Promissory Note ¶¶ 2-4(D) (Fin. Motion, dkt. 1335, Ex. 12 at 1 Bobs easily could be faced with the following situation if the Financing Motion 2 were granted (even with this Court’s many assumptions in Debtor’s favor):

3

SCENARIO TWO:

4 $ 26.5 million hypothetical value for purposes of “indubitable equivalent” test -$ 8.0 million, Priming Loan (1st lien) 5 -$ 5.2 million, Select (2nd lien) -$ 14.5 million Bobs (3rd lien) 6 -$ 1.6 million for costs of sale ($26.5m x 0.06 = $1.6m; see also Reply, dkt. 1357, p. 14:2-7) 7 = -$ 2.8 million equity cushion 8 This negative $2.8 million is a very far cry from the $9.5 million equity cushion 9 in Scenario One above. 10 (11) Summary of Scenario One and Scenario Two 11 The foregoing hypotheticals include a string of assumptions in Debtor’s favor. 12 They assume that the Paramour would be valued at $40 million – the full dollar amount 13 that Debtor has suggested. They assume only a 20% margin of error to establish 14 adequate protection “too evident to be doubted,” despite all the uncertainty in valuing 15 extremely high end estate homes. They assume that Bobs’ lien will be reduced by the 16 full $2.0 million net proceeds that Debtor hopes to achieve from selling other collateral. 17 They assume that Bobs could have cash in hand within two years, despite the lengthy 18 periods before Bobs could (A) plausibly file a motion for relief from the automatic stay 19 (or equivalent relief), (B) engage in discovery, (C) conclude an evidentiary hearing 20 and obtain such relief, (D) obtain appointment of a trustee or receiver to market and sell 21 The Paramour, (E) have the trustee or receiver select a real estate broker, and resolve 22 any disputes about that selection, (F) engage in what Debtor herself estimates would be 23 at least a year of marketing before the property could be sold, (G) close any such sale, 24 even though Debtor herself took several years to close her purchase of the property, 25 according to her counsel at oral argument, and (H) resolve any disputes over Bobs’ 26 Bates p. 1001). That results in roughly $3.6 million of additional interest ($10.5m x 0.17 x 2 = $3.57m). After 27 including late charges, attorney fees, etc., the following illustrative calculations presume an additional $4 million owed to Bobs, on top of the current $10.5 million (net of the other collateral being sold), for a total of $14.5 million owed to 28 Bobs. 1 claim and receive distributions out of any claims reserve. The hypotheticals assume 2 that any decline in value of the property would be no steeper than its recent (alleged) 3 increases in value (9% per year), despite the real estate market’s sudden plunges in the 4 past. The hypotheticals assume a variable rate on Select’s lien of only 6%, lower than 5 the original rate. 6 Even with all of those assumptions in Debtor’s favor, the math does not favor her 7 Financing Motion. An equity cushion of negative $2.8 million in one entirely possible 8 scenario after the proposed financing (Scenario Two) is nowhere near equivalent to a 9 $9.5 million equity cushion without the proposed $7 million Priming Loan (in Scenario 10 One). 11 In reality the situation is far less favorable to Debtor’s position. First, under the 12 “too evident to be doubted” standard this Bankruptcy Court could not justify making 13 numerous assumptions in Debtor’s favor (as the above discussion does). Second, the 14 hypotheticals make no adjustment due to the COVID-19 pandemic (according to some 15 appraisers, the pandemic has yet to affect the market for extremely high end estate 16 homes). Regardless of one’s politics or views about scientists and policy makers, it is 17 easy to conceive that real estate like The Paramour in dense urban neighborhoods 18 could go out of fashion for extremely wealthy buyers, especially if new variants of the 19 virus were to spread. 20 Nor does Debtor’s last-minute suggestion to reduce the $7 million Priming Loan 21 by $2.8 million change the analysis. At most that would increase to $0 Bobs’ equity 22 cushion in Scenario Two and, again, that is only with a string of assumptions in Debtor’s 23 favor. Even if Bobs theoretically could achieve an equity cushion above $0 in Scenario 24 Two, that would be nowhere near equivalent to the millions of dollars of equity cushion 25 in Scenario One. 26 Likewise, other adjustments do not materially change the analysis. For example, 27 even if this Court were to assume a valuation above the highest appraisal presented by 28 1 || Debtor, such as $50 million, this would only mean that The Paramour had skyrocketed 2 value and, as noted before, what goes up can go down (fast). 3 In sum, there is simply too large a gulf between Bobs’ proposed third lien, behind 4 || the proposed $7 million Priming Loan, and its existing second lien. Debtor has not met 5 || her burden to show how they are “indubitably equivalent.” To the contrary, this 6 || Bankruptcy Court’s own hypotheticals illustrate that they are not. 7 || (12) Conclusion 8 This Bankruptcy Court is hesitant to rule on the Financing Motion without an 9 || evidentiary hearing. But this Bankruptcy Court also is not prepared to force all parties 10 || into an expensive trial on valuation when such a trial is pointless under this Bankruptcy 11 || Court’s understanding of Ninth Circuit precedent. 12 Vast sums have been spent on litigation in this case — approaching $4 million of 13 || administrative expenses, according to Debtor's counsel at oral argument, not to mention 14 || attorney fees that do not qualify as expenses of administration. See a/so Fin. Motion 15 || (dkt. 1335) p. 11:8-26. Debtor has not met her burden to show how she could possibly 16 || prove at trial that Bobs’ proposed new third priority lien, behind the proposed $7 million 17 || Priming Loan, would be the “indubitable equivalent” of Bobs’ current second priority lien. 18 || Far from being "too evident to be doubted," Debtor’s assertion is demonstrably false. 19 For all of the above reasons, the Financing Motion will be DENIED by separate 20 || order. 21 22 Hit 23 24 Date: March 8, 2021 NGL, 25 United States Bankruptey Jude 26 27 28

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