Condo Fever First Essay

Now that the condo bubble has burst, and many American cities are overbuilt with these pleasant one-two bedroom units, American courts increasingly will be left to pick up the pieces or fallout from our "condo craze." My theory, argued in other essays, is that two forces in American society were operative in generating this craze, which began about 5 -6 years ago. First, a younger generation of Americans was becoming more comfortable with the concept of urban living as a way of "saving the earth"--i.e., they wouldn't have to commute so far and they could have the conveniences of food, entertainment, living and learning all within walking distance. Second, an older generation of Americans (who also wanted a condo) was finally convinced that you didn't have to have a lawn in order to prove to your neighbors and world around you that you were a "moral" person or "good citizen." The "white-picket fence" approach to housing, denoting security as well as responsibility, simply has lost its appeal for many people.

When you had the confluence of these two factors, people began to seek other forms of living that would reflect these values. Developers got into the craze, then, and quickly did two things: (1) bought property and built units from the ground up; or (2) converted existing apartment buildings. When "condo-fever" was at its peak from about 2003-2007, then, all builders had to do was to secure financing, put the condos together and then sell them at an ever-increasing price. Then, as we know, the bottom "fell out." The national "credit crunch" began, bank stocks plummeted, people couldn't get loans, homes didn't sell. Or, that was the "buzz" out there.

In order to get beyond the "buzz," however, it might be helpful to look at one developer's experience who got caught up in the frenzy but got into it a little too late. Specifically, I will be looking at the case entitled In Re Northstar Development Associates, LLC. The case is in King County Superior Court in Seattle, numbered 08-2-20218-6, and only commenced on June 13, 2008. You can read documents online, though there is a $.10 per page charge for that service. Just go to the King County Superior Court website, and you will easily find where you want to go.

The principal/seller in this case is a Bellevue, WA developer named Jon Eric deGooyer, who is in the process of developing three properties, consisting of 78 living units, in the Seattle area. When the crunch began, he was still finishing up his units. He is still trying to finish all the units, and people aren't buying. When people didn't buy, the construction folk and material suppliers began to sue. When they sued, the seller/developer of apartments into condos, fled to the arms of a new statute, passed in the state of Washington, to help him out. The purpose of these three essays is to tell you about that law, and then bring you into some of the details of an actual legal case, which has really just begun, so that you can see some of the smoothness and bumps of this process.

The Washington State Receivership Statute

The legal process that allows for a developer to stop lawsuits filed by material suppliers against him until he finishes and sells the units is called receivership. Though creditors can pursue a bankruptcy route in federal court, the state law receivership process is supposed to be cheaper and more streamlined, with the creditors still having the same control over the property and seller that they would in a bankruptcy proceeding. The goal of the receivership proceeding, then, is to "Stop the lawsuits" long enough for the buyer to finish his work, sell his properties and then pay off the creditors. Though this can be explained easily enough, there are many pitfalls or unclear things in the application of the law that still need to be worked out.

Why do I say this? Because WA passed its "modern" receivership law only four years ago. Before that time, their receivership law was one that had been in place since Territorial times and consisted of five relatively short paragraphs. The new law, signed by then-Governor Locke in 2004, consists of about 30 paragraphs of differing length. Codified now at RCW 7.60.005 et seq., the law provides many features of federal bankruptcy law but differs from it in at least three ways: (1) it may impose fewer costs on the lender (the bank), while providing the lender with the same formal control that bankruptcy would provide; (2) it replaces the borrower with a court-appointed receiver, so that the debtor/developer doesn't control his assets and operations; and (3) it does not provide for a formal creditors committee, which might be hostile to the secured lender's position. Thus, this new piece of legislation is a "pro-bank" law, which should probably come as no surprise to those who understand the growing importance of banks in our economy. In the particular case under consideration, this point is important, since there are more than 120 creditors in the action, and the banks are only a few of them.

One Feature of the Law

In order to invoke the protections of the law, the debtor/builder/developer/seller must first assign all his assets to the person who the court then appoints as receiver. This was done in the aforementioned case on June 13, 2008. The duties of the receiver depend on what kind of receiver is appointed. Will it be a custodial or a general receiver? RCW 7.60.015 tells us the difference:

"A receiver must be a general receiver if the receiver is appointed to take possession and control of all or substantially all of a person's property with authority to liquidate that property and, in the case of a business over which the receiver is appointed, wind up affairs. A receiver must be a custodial receiver if the receiver is appointed to take charge of limited or specific property of a person or is not given authority to liquidate property."

Though at first I thought that the receiver appointed in this case would be a custodial one (because I only thought that one or two properties were at issue), I have since learned that 72 of the 78 units in three properties are at issue in this case, and the court (Judge Erlick) appointed Seattle attorney Stuart Kastner to be the general receiver on June 13.

One howl of protest immediately arose from some of the creditors. They claimed that a fourth property which Mr. deGooyer had purchased and was to convert to condominiums, the "Belmont property," should also be put into the properties under control of the receiver. deGooyer had transferred the Belmont property to its own LLC late in April 2008 (probably with the future receivership proceeding in mind), but the Belmont property consists only of apartment buildings that he hadn't yet begun to convert to condominiums. But, from the language of the statute, should that property have been included also under the control of the general receiver? It seems so, though I don't think the court will so include it.

Thus we see that a new law, like a new house itself, may have certain "bugs" to be worked out before it begins to work smoothly. The next essay tells more about the law and about how the case began to unfold.

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