UNITED STATES BANKRUPTCY COURT

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EASTERN DISTRICT OF CALIFORNIA

2 FRESNO DIVISION 3 4 In re ) Case No. 19-12388-B-13 ) 5 CHRISTOPHER A. MILAUCKAS and ) DC No. DRJ-2 ) 6 LAURIE MILAUCKAS, ) ) Date: November 19, 2019 7 Debtor. ) ) T Di em pe a: r t1 m: e3 n0 t p B. ,m J. udge Lastreto 8 ) Fifth Floor, Courtroom 13 ) 2500 Tulare Street, Fresno, CA 9 )

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11 RULING ON DEBTORS’ MOTION TO VALUE COLLATERAL

OF WEST COAST CAPTIAL GROUP AND JOHN COONIS

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13 14 INTRODUCTION

15 Chapter 13 debtors Christopher and Laurie Milauckas 16 (“Debtors”) ask the court to evaluate the value of their 17 residence in Tulare, California so they can confirm their 18 Chapter 13 Plan. Under their Plan, they propose to treat the 19 beneficiary of the second deed of trust encumbering their 20 residence, West Coast Capital Group, Inc. and John Coonis 21 (“Respondents”) as unsecured.1 After having considered the 22 exhibits, which have been admitted without objection, the 23 submitted declarations and the testimony at the evidentiary 24 hearing, the court values the residence at $130,000.00 and 25 grants the Debtors’ motion to value. 26 /// 27 /// 28

1 This means “stripping off the junior lien” in bankruptcy patois. 1 PERTINENT FACTS 2 The only contested issue in this motion is the value of the 3 bankruptcy estate’s interest in the Debtors’ residence. But for 4 context and important background, the following facts are 5 undisputed: 6 • When the Debtors filed their Chapter 13 case in June 7 2019, they proposed a Chapter 13 Plan. 8 • The Debtors’ residence is 762 Alpha Street, Tulare, 9 California (“Alpha Property”). 10 • The Debtors own the fee interest in the Alpha 11 Property. So, the fee interest is the estate’s 12 interest in the Alpha Property. 13 • The estate’s interest is encumbered by two deeds of 14 trust. The beneficiary of the first deed of trust is 15 the Bank of New York Mellon f/k/a, the Bank of New 16 York as trustee for CWABS, Inc. asset-backed 17 certificates, series 2004-7. This creditor filed a 18 proof of claim in the amount of $148,119.45. 19 • Respondents are the beneficiaries of the second deed 20 of trust. Respondents have filed a proof of claim in 21 the amount of $179,531.74. 22 • No evidence was presented that the Debtors have moved 23 from their residence and for purposes of this motion, 24 the Alpha Property is their principal residence. 25 • The Alpha Property was the Debtors’ residence when the 26 bankruptcy case was filed. The purpose of the 27 valuation asked in this motion is to pursue 28 confirmation of the Debtors’ Chapter 13 Plan. 1 • The proposed use of the property is the residence of 2 the Debtors. 3 4 THE EVIDENTIARY HEARING 5 The evidentiary hearing on this motion was held November 6 19, 2019. The Debtors and the Respondents were each represented 7 by counsel. The court ordered the hearing to proceed under the 8 “Alternate Direct Testimony Procedure” authorized by Local Rule 9 of Practice 9017-1. The Debtors called two witnesses: Michael 10 Toomey, a residential and commercial real estate appraiser 11 (“Toomey”) and Diane Biehle, an appraising associate under 12 Toomey’s supervision (“Biehle”). Respondents’ called one 13 witness: Rodney J. Palmer, a certified residential real estate 14 appraiser employed by Tony G. Palmer Appraisal Company 15 (“Palmer”). Here is the summary of the testimony. 16 17 Toomey Testimony 18 Toomey has been a licensed appraiser for more than 14 years 19 and has been in the business for approximately 20 years. For the 20 past two months, he has been self-employed. Biehle is his 21 associate and has worked with Toomey for a little over four 22 years. Biehle “developed” an appraisal dated March 14, 2019 23 which concluded that the value of the Alpha Property was 24 $130,000.00. In addition to an inspection, Biehle reviewed the 25 comparable sales. 26 All the appraisers agreed that the closest comparable sale 27 for the relevant period was a residence located a tenth of a 28 mile from the Alpha Property: 843 Milner Street in Tulare 1 (“Milner Property”). The Milner Property was purchased by an 2 investor who significantly refurbished and “flipped” the Milner 3 Property. Toomey reviewed three other comparable sales all 4 within in a tenth of a mile or less of the Alpha Property. The 5 Milner Property was purchased by the investor between five and 6 six months before Toomey’s March 2019 appraisal. 7 The Milner Property proved crucial to both the Toomey and 8 Palmer appraisals because of the similarity of the residences 9 and the property’s comparable condition. A month and a half 10 before the hearing, Toomey and Biehle spoke with the purchaser 11 of the Milner Property who told them he invested over $50,000.00 12 to refurbish the Milner Property before its sale for 13 $205,000.00. Toomey personally inspected the Alpha Property then 14 and noted several conditions requiring remodeling or repair 15 including possible wood rot in an upstairs bathroom. Toomey also 16 reviewed a home inspection report conducted by H & L Home 17 Inspections. The inspection was conducted about three weeks 18 before the hearing. The inspection revealed exterior evidence of 19 wood rot and water intrusion. The shake roof reflected excessive 20 moss or algae and appeared to be at the end of its useful life. 21 Sunlight was visible through the roof from the attic. 22 Discoloration was noted in the upstairs bathroom as well as a 23 broken shower pan. The report also discussed cracks in the 24 fireplace and other signs of deterioration in the immediate 25 area. 26 Toomey testified that the seller of the Milner Property 27 confirmed that the Milner Property was the same age as the Alpha 28 Property and was the same model. Toomey also testified he 1 estimated the Alpha Property would require between $40,000.00 2 and $50,000.00 of improvements because of its poor condition. He 3 confirmed that none of the comparable sales (with the exception 4 of the earlier sale of the Milner Property before refurbishment) 5 involved properties in the same condition as the Alpha Property. 6 Though he had a lot of experience, Mr. Toomey’s demeanor as 7 a witness suggested he was unsure of many basic facts. For 8 example, he needed to “look-up” the address of the Alpha 9 Property. He relied heavily on his notes when testifying. His 10 declaration revealed that he had reviewed the Palmer appraisal 11 and noted that Palmer adjusted his refurbishment estimate upward 12 after Palmer inspected the interior of the Alpha Property. 13 Toomey also appeared unsure of the condition of some of the 14 important aspects of the Alpha Property, including the condition 15 of the fireplace, shower pan, roof, and other conditions. 16 17 Biehle Testimony 18 Biehle has been involved in the appraisal business for 19 approximately five years and acknowledged that she prepared most 20 of the components of the Toomey appraisal. Biehle and her 21 husband — a retired contractor — buy homes, repair and remodel, 22 and resell approximately 1-2 times a year. So, she appears to 23 have a grasp of the extended repairs necessary to refurbish the 24 Alpha Property. She noted a few conditions of the Alpha Property 25 which were not present in the Milner Property after consultation 26 with the Milner Property’s former owner. Those included: a 27 crumbling fireplace, dry rot, and a leaning fence. Biehle 28 confirmed that though the comparable sales in the Toomey 1 appraisal (other than the Milner Property) range from 2 $192,000.00 to $201,000.00, all of those properties were in 3 superior condition to the Alpha Property. 4 Biehle’s demeanor as a witness was candid and responsive. 5 She demonstrated a more working knowledge of the condition of 6 the Alpha Property which could be due to her more “hands-on” 7 inspection compared to Toomey. Her experience with her husband 8 in purchasing and reselling homes was not challenged by the 9 respondents and her methodology for determining refurbishment 10 costs seemed reasonable. 11 12 Palmer Testimony 13 Palmer conducted two appraisals of the Alpha Property. The 14 first was an exterior only inspection in July 2019. The second 15 was in early September 2019. He, too, used some of the same 16 comparable sales. He reviewed more comparable sales than the 17 Toomey appraisal. The comparable sales included properties 18 located less than a tenth of a mile from the Alpha Property to 19 slightly over one mile from the property. The comparable sales 20 ranged from $190,000.00 to $205,000.00. One of the $205,000.00 21 comparable sales is the Milner Property after refurbishment. 22 Palmer noted the properties at the higher end of the comparable 23 sales were recently refurbished. 24 Palmer’s July 2019 exterior only appraisal of the Alpha 25 Property was for $180,000.00. Palmer’s interior inspection 26 showed some of the conditions relating to the damage in the 27 bathroom, damaged exterior siding, range and oven repair, and 28 ceiling repair in the laundry room and garage. Based on his 1 interior inspection, Palmer revised downward his earlier 2 appraisal to $170,000.00. Palmer initially questioned the 3 validity of using the Milner Property sale as a comparable 4 because Palmer concluded the sale to the previous owner was an 5 “REO sale.”2 Palmer estimated that it would cost $12,500.00 to 6 repair the Alpha Property including roof, bathroom, siding, 7 kitchen, and ceiling repair. That is far less than the 8 Toomey/Biehle opinion that over $50,000.00 of repair was 9 necessary. Palmer did submit a supplemental declaration in which 10 he corrected a statement made in his earlier declaration that 11 REO sales are made without an opportunity to conduct an interior 12 inspection. His correction was that the Milner Property was 13 listed on the multiple listing service before the REO sale and 14 potential buyers had the opportunity to inspect the property. 15 But he reaffirmed his opinion that the $130,000.00 purchase of 16 the Milner Property by the former owner is not an appropriate 17 comparable sale for valuation of the Alpha Property. 18 Palmer has over 20 years’ experience in residential 19 appraisals. He appeared knowledgeable, but his testimony at 20 times was confusing and disengaged. For example, he seemed to 21 rely on his value conclusion for the Alpha Property based on the 22 exterior only appraisal — $180,000.00. But his later appraisal 23 after an interior inspection concluded the value of the Alpha 24 Property was $170,000.00. He also testified that the $180,000.00 25 value estimate was after sufficient repairs were made so a buyer 26 could obtain a loan to purchase the Alpha Property. He testified 27 that he had no opinion on the value of the Alpha Property “as it 28

2 “REO” means real estate owned. 1 sits.” This meant that most of his testimony was irrelevant. He 2 also had difficulty recalling the basis of his estimates for 3 repair. After reviewing his notes, he repeated his estimate for 4 refurbishing the Alpha Property which was substantially less 5 than estimated by Toomey/Biehle. He did not offer testimony 6 explaining the difference. During his live testimony, Palmer 7 testified the purchase of the Milner Property by the former 8 owner for $130,000.00 was a “pre-foreclosure not REO” purchase. 9 He reiterated that because a “pre-foreclosure” sale was a 10 distressed sale and not at arm’s length. On the other hand, he 11 did not significantly discount the $205,000.00 resale price for 12 the Milner Property after refurbishment. Palmer confirmed that 13 none of the properties in his comparable sale analysis were in 14 the same condition as the Alpha Property. He also testified that 15 his estimates of repair largely came from the “recognized 16 handbook” Marshall & Swift. He consulted the handbook for roof 17 repair estimate. He also discussed potential repair costs with 18 an acquaintance who is a contractor. But Palmer admitted he did 19 not discuss shower pan repair or much of the additional work 20 necessary to refurbish the Alpha Property with the contractor. 21 At the conclusion of his testimony, it was unclear whether 22 Palmer would discount his $180,000.00 appraised value by 23 $15,000.00 or not. 24 25 ANALYSIS 26 1. Legal basis to determine value. 27 The value of the bankruptcy estate’s interest in the Alpha 28 Property is critical to the treatment of Respondents’ claim 1 under the Chapter 13 Plan and Debtors’ success in performing the 2 Plan. In this circuit, wholly unsecured second liens on a 3 principal residence may be avoided because the “secured” claim 4 is not really a “secured” claim under 11 U.S.C. § 506(a). Zimmer 5 v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 6 2002). So, if the court finds that the Alpha Property is worth 7 less than or equal to the balance owed on the claim secured by 8 the first deed of trust — approximately $148,000.00 — 9 Respondents’ claim is wholly unsecured and the Debtors can 10 modify or avoid the secured claim. On the other hand, if the 11 court finds that the value of the Alpha Property is greater than 12 what is owed the beneficiary of the first deed of trust, the 13 Debtors cannot modify Respondents’ claim. 11 U.S.C. § 1322(c). 14 A bankruptcy court’s valuation of a debtor’s property is a 15 finding of fact that is reviewed for clear error. Pletz v. 16 United States (In re Pletz), 221 F.3d 1114, 1116 (9th Cir. 17 2000). The same is true of credibility determinations. In re 18 Ashley, 903 F.2d 599, 606 (9th Cir. 1990) (quoting United States 19 v. Lummi Indian Tribe, 841 F.2d 317, 319 (9th Cir. 1988)). The 20 Debtors initially bear the burden here in overcoming the 21 presumption that the value of the property stated in the 22 creditor’s claim is the correct value. After the Debtors meet 23 that burden it shifts to the creditor to show the value of the 24 property by a preponderance of the evidence. In re Tapang, No. 25 11-59479-ASW, 2015 Bankr. LEXIS 1349, at *33 (Bankr. N.D. Cal. 26 Apr. 17, 2015) (citing In re Southmark Storage Associates Ltd. 27 P’ship, 130 B.R. 9, 10 (Bankr. D. Conn. 1991). 28 1 The court must make the factual finding of value based upon 2 the testimony before it. The initial burden of proof is on the 3 Debtors to establish that the value of the Alpha Property in 4 Respondents’ proof of claim — $185,000.00 — is not a correct 5 value. 6 7 2. The Debtors have met the burden of proof. 8 The court has reviewed the testimony, the declarations, and 9 the exhibits. The Debtors have met their burden, overcoming a 10 presumption in favor of Respondents that the value of the 11 property as stated in their proof of claim is correct. Even the 12 Palmer appraisal — either $5,000.00 or $15,000.00 less than set 13 forth in the proof of claim — establishes that. 14 The more difficult question is whether the Respondents here 15 have shown by a preponderance of the evidence the value of the 16 property exceeds what is owed the first deed of trust. 17 Respondents here have not met that burden. 18 Palmer was uncertain as to the value of the property. 19 Palmer’s “exterior only” appraisal concluded the value of the 20 Alpha Property was $180,000.00. After inspecting the interior, 21 Palmer reduced his estimate to $170,000.00. At trial, Palmer 22 seemed to rest on the $180,000.00 value. But that contradicted 23 his second appraisal where he had access to the interior of the 24 Alpha Property. What’s more, Palmer admitted that he did not 25 have an opinion of the value of the Alpha Property “as it sits.” 26 At most, Palmer’s testimony was inconclusive, at worst it was 27 irrelevant. 28 1 Palmer’s estimates to refurbish the Alpha Property were not 2 credible. Toomey/Biehle consulted a recent home inspection 3 report, as well as the former owner of the Milner Property, 4 which all parties agreed was most similar to the Alpha Property. 5 The inspection report confirmed the many deficiencies in the 6 condition of the Alpha Property that were mentioned by 7 Toomey/Biehle and Palmer in their respective reports. Palmer 8 relied on a manual for an estimate of roof repair and 9 conversations with a contractor acquaintance. Palmer admitted 10 that he did not discuss all the conditions observed at the Alpha 11 Property with the contractor. 12 Palmer’s conclusions on value proved speculative since he 13 admitted that some repairs would need to be done to bring the 14 Alpha Property to a condition where it could be sold for 15 $180,000.00. Palmer did not testify as to that assumption being 16 a normal and reasonable assumption used by residential 17 appraisers in the area to determine current fair market value of 18 residential property. 19 All the appraisers agreed that none of the comparable sales 20 used by any of them (with the possible exception of the Milner 21 Property’s former owner’s purchase for $130,000.00) had similar 22 conditions to those at the Alpha Property. That fact casts 23 serious doubt on the relevance of Palmer’s testimony that the 24 median sale price for properties in the area of the Alpha 25 Property sold in the prior 7-12 months was $195,000.00. 26 The largest discrepancy between the appraisers was the 27 estimate necessary to refurbish the Alpha Property. The 28 methodology used by Toomey/Biehle in this case was more credible 1 ||[since it involved direct communication with the owner of the 2 ||comparable Milner Property. This method, along with Biehle’s 3 ||personal experience in purchasing residences, refurbishing them 4 selling them was unchallenged by Respondents. 5 Finally, there was no dispute that the use of the Alpha 6 |}Property by Debtors would continue to be as a residence. So, it 7 ||/is speculative to add value to the Alpha Property as one would 8 |lexpect if it was purchased as an investment. The Alpha Property 9 not being held by the Debtors as an investment. So, the “as 10 |iis” or “where it sits” valuation is most relevant for purposes 11 confirmation of Debtors’ proposed Plan. 12 13 CONCLUSION 14 Though both experienced appraisers Toomey and Palmer were 15 |iproblematic witnesses, after reviewing all the evidence and 16 ||considering the basis for all of the opinions, and for the 17 |jreasons set forth in this ruling, the court finds the relevant 18 |lvalue of the Alpha Property is $130,000.00. The Debtors’ motion 19 GRANTED. Debtors’ counsel shall prepare an order in 20 |}conformance with this ruling. 21 22 23 Dated: Nov 22, 2019 By the Court 24 a“ 25 hifi pe ené Lastreto II, Judge 26 United States Bankruptcy Court 27 28

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1 Instructions to Clerk of Court 2 Service List - Not Part of Order/Judgment

3 The Clerk of Court is instructed to send the Order/Judgment 4 or other court generated document transmitted herewith to the 5 parties below. The Clerk of Court will send the Order via the BNC or, if checked X , via the U.S. mail. 6

7 Christopher A Milauckas 8 762 Alpha Street Tulare CA 93274 9 Laurie Milauckas 10 762 Alpha Street 11 Tulare CA 93274

12 Michael H. Meyer PO Box 28950 13 Fresno CA 93729-8950 14 David R. Jenkins 15 8050 N Palm Ave, Ste 300 16 Fresno CA 93711

17 Mark D. Johnson 12232 E Kings Canyon 18 Sanger CA 93657 19 Martin W. Phillips 20 8180 E Kaiser Blvd #100 21 Anaheim Hills CA 92808

22 Office of the U.S. Trustee United States Courthouse 23 2500 Tulare Street, Room 1401 24 Fresno CA 93721

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