Condo Fever II--The Evolution of a Case

In the Northstar case mentioned in the previous essay, Mr. Stuart P. Kastner was appointed as the general receiver on June 13, 2008. He is an experienced debtor-creditor attorney in Washington. Objections came within a week or so, mentioning that Kastner had posted no bond, and the statute (7.60.045) required the posting of bond upon the naming of a receiver. Shortly thereafter he posted a $25,000 bond, which some of the creditors objected to as not being sufficient to cover the risks of the case (the numbers below show that we are dealing with sums of about $20 million). I suppose, however, that this went through without really a hiccup. One other thing that was requested by the receiver shortly after his appointment was an extension of the time for the receivership. The new WA law says that a receivership will last 60 days unless that period is extended. Kastner asked for the receivership to last until May 15, 2009, which would have been nearly 11 months from the time it was set up.

The reason? It will take about 4-6 months to finish the remaining 21 unfinished units (out of 52 for sale) in the Vermont condominiums, and then it is projected that sales will take another year after that. So, I think that the receiver is asking for a "realistic" timeline, even though the creditors want to get paid long before that time.

But the length of the receivership may have nothing to do, ultimately, with when creditors are paid. Why? Because on July 16 the court established procedures for the sale of the units as well as the disbursement of proceeds to the lienholders or creditors. Crucial in that procedural decision was the notion that monies were to be paid out as they come in, first to the banks which loaned the money to the developer. The principle is fairly simple--first loan, first with the money. But here is my uncertainty--and I guess I can explore it with you by looking at some of the numbers below. Was the bank money supposed to be used primarily to pay for the purchase of the apartment units that were then converted into condominiums? Or was the bank money also supposed to be enough to pay also for the subcontractors and general contractor? I guess there would probably be two kinds of loans--purchase and contractor's loans, but I don't know enough details of the case at this point to tell you the specifics.

The Money Involved

Now is the time, however, to move to the amounts of the money involved, so you can see how trouble emerged. Loans from the banks were made to Mr. deGooyer beginning in mid-2007; construction began on each of the three sites later in 2007. They were ready to be sold, in most instances, early in 2008. The WA law requires the debtor, in a receivership proceeding, to submit a statement of his assets and liabilities to the receiver, who submits them to the court. Here is what was submitted, first with respect to the creditor list.

More than 120 creditors appear in his exhibit, from "A" (Advanced Innovative Systems, with a claim of $13,712.37) to "Z" (Woodpecker Flooring, with a claim of $148,188.02). These claims were for work on the Vermont Condos (54 units), the Marc-Anna (6 units) and the First Galer (18 units). The largest of the claims was from City Bank in Lynnwood, WA, to the tune of $8,537,000 and change. By the time of the latest filings, I think the indebtedness to City Bank was over $9 million. Washington First International Bank loaned an amount of $4.7 million But you also have some private venture capitalists who were engaged in this venture. For example, Velocity Capital Partners, LLC had a certain T.R. Hazelrigg at Centurion Financial Group investing $1,200,000 in the project and a Jeffrey Sakamoto from Lake Oswego, OR with $2,000,000 at stake. The total indebtedness, including taxes, stands at about $19.1 million. Of this $19.1 million, about $17.8 is in secured claims; .1 million in taxes and $1.2 million in unsecured claimes. There were also some submissions to the court giving the impression that another $800,000 or so is necessary to finish the Vermont project; thus this amount may rise to nearly $20 million. The interest on the City Bank loan alone, their filing claims, is more than $2,000 per day.

To offset that amount is the anticipated income through the sales of the units. By the time the receivership was established on June 13, six of the 78 units had been sold (two at Vermont, three at Mark-Anna and one at First Galer); thus 72 units remained to be sold to pay off creditors. Here is how deGooyer plans to recoup his money. The 52 remaining units at the Vermont Condominiums should bring in $12,764,600; the three remaining Marc-Anna Codos should yield $987,000 and the 17 left at First Galer should net $6,800,000. This, of course, is a guestimate and it is reasonable to believe that many of these numbers will fall over the next several months as "fire sales" happen to sell the units so that the bank doesn't have to foreclose and liquidate. The total "liquidation value" on the date of appointment of receiver, then, is about $20.5 million. When you consider that the receiver is to get a fee of $1,000 per sold condo, and that the receiver's professional help--i.e., his attorney, will also be paid, then the margin of profit is narrow indeed. Finally, when you further realize that prices may have to drop, sometimes precipitously, to sell some of these units in the next several months, you have the clear prospect that not everyone will get paid in full. In fact, the full effect of the housing slowdown probably won't "hit" for another year on this particular project. And, if other such projects are in the "works," as I believe them to be, we might not start to climb out of the condo-glut until 2010--at the earliest.

Conclusion

I think I need one more essay to review some of these things and to raise additional questions.

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