Appeal by mortgagee from order approving trustee's sale of real estate in Chapter X proceeding of United States District Court for the Southern District of New York, Dudley B. Bonsal, Judge . Order held not to be abuse of discretion where debtor had equity even though sale is contingent on municipal approval of rezoning where buyer has made substantial financial commitments and has obligated itself to prepare and submit the necessary rezoning application.
Before Oakes and Van Graafeiland, Circuit Judges, and Mishler, District Judge.*fn*
This case arises from a Chapter X reorganization proceeding in the United States District Court for the Southern District of New York, Dudley B. Bonsal, Judge. It involves Investors Funding Corporation of New York ("IFC") and thirty-three other debtor corporations, including IFC Collateral Corporation ("Collateral") and IFC Serramonte Estates Corporation ("Serramonte"). Union Bank appeals from an order of Judge Bonsal which authorizes appellee James Bloor, the Reorganization Trustee of all the debtors including Serramonte, to perform a contract of sale for a parcel of Serramonte's real property free of encumbrances (including Union Bank's mortgage lien and an $880,000 deed of trust held by Collateral), such encumbrances to attach to the proceeds of the sale. The other party to the contract is appellee Damavandi Enterprises, Inc. The bank argues that the order deprived the bank of its right, in the absence of a reorganization plan, to foreclose on its collateral within a reasonable period of time.
The bank contends that the contract authorized by the order is not a sale of the property, which is located adjacent to a freeway on the San Francisco Bay Peninsula, but in reality a one-year option to purchase it, since the purchase authorization is contingent upon approval of a subdivision or rezoning plan by the Daly City, California city council. Because three years had already elapsed between the filing of Chapter X proceedings and the issuance of the sale authorization order, and because there is no assurance that the sale will be consummated, the bank argues that it should be allowed to foreclose without any further delay.
The court in a Chapter X proceeding may approve the sale of property in its discretion, 11 U.S.C. § 516(3); See Frank v. Drinc-O-Matic, 136 F.2d 906 (2d Cir. 1943) (per curiam). Generally, a sale free of encumbrances is disfavored if the aggregate of the encumbrances is greater than the proceeds of the sale but favored if the estate has an equity in the property and the sale is in the best interests of the estate. In re Miller, 95 F.2d 441, 442-43 (7th Cir. 1938); 4B Collier on Bankruptcy P 70.97, at 1139-41 (14th ed. 1978). Although no findings appear in the order, it is evident from comments by Judge Bonsal recorded in the transcript of the hearing on the merits of the sale*fn1 that Judge Bonsal found that the estate did have an equity in the property and that the sale was in the best interests of all concerned. The bank challenges both findings.
We note at this point that detailed, written findings of fact supporting the court's use of discretion in allowing a sale of property of the debtor greatly facilitate appellate review. We urge district judges, and the bankruptcy judges who will be adjudicating such issues under the new Bankruptcy Reform Act, to make such findings. In this case, in the absence of such findings, we must search the record to see if there exists sufficient evidence to support the general factual conclusions that the district court must have reached in order not to have abused its discretion in approving the sale contract.
A preliminary question is whether, for the purpose of evaluating the estate's equity, the land should be valued only at its fair market value without subdivision plan approval, stipulated by the parties as $1,000,000 as of July 5, 1977, or at its expected sale price of $1,440,000, or at an intermediate figure. We do not accept the proposition that the land must be valued at the lower amount. Although there is a paucity of case law dealing with valuation of land in bankruptcy proceedings, we find support for our conclusion in related areas of the law.
We first look for guidance in the field of valuation in condemnation proceedings. In this circuit, the applicable law was stated in United States v. Meadow Brook Club, 259 F.2d 41, 44-45 (2d Cir.), Cert. denied, 358 U.S. 921, 79 S. Ct. 290, 3 L. Ed. 2d 239 (1958):
Just compensation compatible with the requirements of the Fifth Amendment is the fair market value of the condemned property just prior to the taking. . . . This evaluation should reflect not only the purpose for which the property has theretofore been used, but other uses which might render it more profitable. . . . It would be improper to value the property as if it were actually being used for the more valuable purpose. . . . Obviously the more profitable operation must be one allowed by law to be carried out on the premises. Thus if existing zoning restrictions preclude a more profitable use, ordinarily such use should not be considered in the evaluation.
(Emphasis added; citations omitted.)
Several other circuits have expressly endorsed this reasoning. For example, in Wolff v. Puerto Rico, 341 F.2d 945 (1st Cir. 1965), the court stated:
The highest and best possible use of property is not confined to the use at the time of taking. Neither is it confined by the zoning at the time of the taking, if there is a reasonable possibility that there may be a re-zoning. . . . "When "there is a possibility or probability that the zoning restriction may in the near future be repealed or amended so as to permit the use in question, Such likelihood may be considered if the prospect of such repeal or amendment is sufficiently likely as to have an appreciable influence upon present market value. It follows from the foregoing that such possible change in the zoning regulations must not be remote or speculative.' Nichols on Eminent Domain, 3rd ed., Vol. 4, sect. 12.322, pages 238-243."
341 F.2d at 946-47 (footnote omitted) (emphasis added) (quoting with approval from state's brief). In Wolff the court reversed the district court's finding on the valuation of a plot of condemned land on the ground that certain items of evidence relating to a possible zoning change and its effect on the property's value had been held inadmissible. Among these items was evidence showing "that prior to the condemnation the (land) had been contracted to be sold at a high price, conditioned upon obtaining a new classification." 341 F.2d at 947. See also Reservation Eleven Associates v. District of Columbia, 136 U.S.App.D.C. 311, 420 F.2d 153 (1969); United States v. 1,291.83 Acres of Land, 411 F.2d 1081 (6th Cir. 1969); United States v. Benning, 330 F.2d 527 (9th Cir. 1964).
These cases make clear that the possibility of a zoning change and the probable value of property after the zoning change must be "considered" when appraising the value of the property prior to the change. Critically, however, "the property must not be evaluated as though the rezoning were already an accomplished fact. It must be evaluated under the restrictions of the existing zoning (with) consideration given to the impact upon market ...