Superadequacy of a property in valuation for a bankruptcy proceeding.

Author:Blair, Benjamin A.
Position:Recent Court Decisions on Real Estate and Valuation

In 1996, Ainsworth (Debtor), the owner of a trucking company, leased, and later purchased, a property in Nueces County, Texas, for use as an office space and truck yard. The purchase was facilitated by a loan eventually held by NewFirst National Bank (Lender).

In 2010, there was a significant growth in the oil and gas industry in south Texas because of the discovery of oil and gas reserves in the Eagle Ford Shale area, which prompted Debtor to expand his business. He added to his property, eventually owning a 51.8-acre property that was purchased with loans. The property consisted of an improved 20-acre tract and a 30-acre tract of excess land.

As part of the growth, Debtor added multiple metal buildings and a large stabilized yard of approximately 15 acres to the improved tract. The yard was built to a standard that far exceeded its functional requirements. It was built to highway standards, when a stabilized yard can function well when built at a far lower cost. The buildings were built to withstand a Category 5 hurricane.

Unfortunately for the Debtor, the price of oil and gas dropped significantly in 2015, making much of the drilling in the area unprofitable. Debtor's businesses ceased operating at a profit, and Debtor placed the entire 51.8 acres on the market with a listing price of $9.8 million for the 20-acre improved tract. No offers were received for the property. Eventually, Debtor filed for Chapter 11 bankruptcy relief.

Lender filed a motion for relief from the automatic stay, alleging that Debtor did not have an equity cushion in its collateral, because Lender's secured claim totaled $8.1 million. Debtor sought to transfer the 20-acre improved tract to Lender in full satisfaction of the claim. The parties' valuations of the property differed considerably.

Debtor and Lender each obtained appraisals of the entire property. Lender also hired a review appraiser to assess both appraisals. Both appraisers used the cost and sales comparison approaches, but the key difference in the parties' approaches focused on the value of the stabilized yard.

Lender's review appraiser concluded that both reports appeared to be "reasonable, complete, accurate and relevant," however both reports failed to consider functional obsolescence. The yard was built to...

To continue reading