Ardmor Vending Co. v. Kim (In re Kim) , 97 Daily Journal DAR 8526 ( 1997 )

OPINION

MEYERS, Bankruptcy Judge:

I

The debtors filed a Chapter 13 plan proposing to treat one creditor as only partially secured and another as wholly unsecured. The creditors objected to the plan contending that the debtors had undervalued the collateral securing their claims. The debtors responded by filing objections to the creditors’ claims. The bankruptcy court sustained the claims objections and confirmed the plan.

We AFFIRM.

II

FACTS

Peter and Esther Kim (“Kims”) operated a dry cleaning business. Ardmor Vending Co., dba Great Northern (“Great Northern”), and Ardmor Co. Profit Sharing Plan (“Ardmor”) (collectively referred to herein as the “Appellants”) were creditors secured by the business’s equipment. Great Northern also took an assignment of the business lease as collateral. The Kims have not contested the validity of the security interests asserted by the Appellants.

On June 30, 1995, the Kims filed for relief under Chapter 13 of the Bankruptcy Code. As of the petition date Great Northern was owed $99,595 and Ardmor was owed $10,000. In their bankruptcy schedules the Kims listed the fair market value of the equipment as $34,000.

The Kims filed several Chapter 13 plans with the first being filed on July 14,1995. In the original plan Great Northern was treated as secured in the amount of $34,000 and otherwise unsecured, while Ardmor was treated as completely unsecured. On August 2, 1995, the Appellants objected to this plan on the basis that their claims were improperly treated as unsecured claims. A hearing on confirmation was set for September 11, 1995.

On August 18, 1995, the Appellants filed a supplemental objection in the form of the declaration of Irving D. Weiner (“Weiner”), the chief executive officer of Great Northern. Weiner declared that in his view the collateral, both the equipment and lease together, was worth approximately $100,000.

On August 18, 1995, the Appellants also filed proofs of claim: Great Northern in the amount of $98,758.97, plus interest from the petition date, and Ardmor in the amount of $10,437.49.

On August 30,1995, the Kims filed a reply to the plan objection. They objected to the introduction of Weiner’s valuation on the basis that he was not a qualified ‘Valuation expert i.e. an appraiser,” and he had not explained his methodology in reaching his valuation. The Kims also contended that the lease had no value because the rent exceeded the market value. In support of this argument, the Kims filed the declaration of Todd Basmajian (“Basmajian”), a Member of the Appraisal Institute (“MAI”) and certified real estate appraiser. .He concluded that the terms of the lease provided for rent in the amount of $3.97 per square foot, while the market rate, in his opinion, was $1.50.

In the Kims’ final modified Chapter 13 plan, which is the subject of this appeal, the Appellants’ claims essentially were treated as they had been in the first plan. The Kims then filed objections to the Appellants’ claims, which basically repeated the' arguments they had raised in response to the Appellants’ objection to the plan.

On November 1, 1995, the Appellants filed additional pleadings in response to the claims objections. The Appellants contended that the best valuation method would be to take the business as a whole rather than attempt to separately value the lease and equipment and that the Kims had failed to provide any evidence as to the value of the business. They also contended that Basmajian failed to take into account that the Kims had been able to modify their lease and reduce the rent from nearly $7,500 per month to $4,760 per month, as reflected in their Schedule J. Additionally, the Appellants filed the declaration of Robin D. Rix (“Rix”), a real estate agent who had previously listed the Kims’ business for sale. He maintained that were he to sell the business he would list it for $175,000 and expect to get $165,000.

A hearing on the claims objections was conducted on November 13, 1995.³ The Appellants argued that they were secured by the equipment and the lease and that when the two were taken together as a package there was value in excess of their claims. However, the court viewed the Appellants’ argument as an improper attempt to be treated as being secured by the value of the entire business. The trial court stated that the Appellants’ security interest in the lease and the equipment was “something substantially short of a security interest in the business, though.” The court continued the hearing to December 4, 1995, to allow the parties an opportunity to file further pleadings.

The Kims filed supplemental claims objections on November 22, 1995, along with another declaration from Basmajian. The Kims argued that the only remaining issue was the value of the lease. The Kims then contended that the Rix declaration was flawed because he had premised his opinion on the value of the entire business. Basmaji-an reiterated that if the contract rent exceeded the market rent, the lease would have no value.

The Appellants responded on November 30, 1995 and filed an additional declaration from Weiner. He again gave a very general overview of his business background and then declared that a sale of the equipment “off-location” would not bring in more than $45,200. He did not explain how he arrived at that figure. Additionally, he declared that Great Northern had never conducted an “off-location” sale of equipment. The declaration included a review of allegedly comparable sales Weiner’s company had conducted over the prior three years.

The final hearing was conducted on December 4, 1995. The court ruled that Weiner’s declaration lacked a “sufficient foundation” for the valuation of the equipment and that Weiner had failed to demonstrate that he was competent to testify as to the value of the equipment. The court also ruled that the Appellants’ evidence of Great Northern’s other sales of equipment and leases was not admissible because it did not include the exact location of those businesses, the dates of the sales and the names of the parties involved. The Appellants sought a continuance so that they could supply the court with that information. The court rejected the request.

The court concluded that the lease had no net value because the payments under the lease were at least equal to the market rate. As for the equipment, the court found that the only admissible evidence was the Kims’ statement that the equipment was worth $34,000, and that the other evidence did not “relate to what the value of the equipment is apart from the value of the business, in which the secured creditor — in which the creditor does not have a security interest....” The court sustained the claims objections. The court then confirmed the Kims’ Chapter 13 plan.

Ill

STANDARD OF REVIEW

The court’s findings of fact concerning value are reviewed under a clearly erroneous standard. In re Tuma, 916 F.2d 488, 490 (9th Cir.1990). The Panel must be left with the definite and firm conviction that a mistake has been committed before a factual finding can be determined to be clearly erroneous. Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985).

We review under an abuse of discretion standard the trial court’s evidentiary rulings. In re Karelin, 109 B.R. 943, 947 (9th Cir. BAP 1990). Additionally, we apply that same standard to our review of the court’s denial of a continuance to allow the Appellants to supplement the record. U.S. v. Mejia, 69 F.3d 309, 314 (9th Cir.1995).

IV

DISCUSSION

A, Examination of the Court’s Methodology

The Appellants contend that the Panel should apply a de novo standard in its review of the court’s valuation on the grounds that the court used an improper methodology. Specifically, they maintain that the court erred as a matter of law by applying a liquidation analysis in contravention of In re Taffy 68 F.3d 306 (9th Cir.1995), affirmed as modified en banc, 96 F.3d 1190 (9th Cir.1996).⁴

We recognize that Taffi is the controlling authority in this circuit for valuations under Bankruptcy Code Section 506. Tajfi holds that a bankruptcy court must determine the fair market value of the collateral and not its liquidation value if the collateral is to be retained by the debtors under their plan. However, the Appellants have failed to show that the bankruptcy court acted contrary to this proposition. Instead, a review of the record demonstrates that the court’s valuation was dependent on the evidence presented and not on the application of an allegedly incorrect standard. In fact, the parties provided the court with very limited evidence as to the value of the collateral, with the Appellants putting forth only the declarations of Weiner and Rix to support their assertions as to the value of the collateral. The court made certain evidentiary rulings, discussed below, and then simply resolved the matter based on the remaining relevant evidence.

B. Valuation of the Lease and Equipment

The Appellants argue that the court improperly valued the equipment and lease separately; rather, they contend that the value of the entire business essentially consisted of the equipment and lease. However, the court properly recognized that the security interest was limited to the equipment and the lease and did not include all value of the business. Indeed, there can be no dispute concerning the actual scope of the Appellants’ security interest.

1. Valuation of the Lease as a Starting Point

The court began its analysis with an examination of the value of the lease. This was as reasonable a place to start as any. The only direct evidence of the value of the lease in question was brought in by the Debtors through the declaration of Basmajian. The Appellants did not make any objections regarding his qualifications.

Basmajian asserted that the rent in the lease was far above market rate and, therefore, had no value. He fully explained the method utilized and provided information on comparable rates. Although the Appellants pointed out that Basmajian did not take into account any reduction in rent, they failed to demonstrate that his declaration was flawed as it related to the current market rental rate. At that point, the numbers spoke for themselves. The current market rate was $1.50 per square foot and, even under the modified rate, the Kims were paying approximately $2.53 per square foot.⁵ Clearly, the lease provided for rent far above the market rate. We do not see any reversible error in the court finding that the lease had no fair market value.

The Appellants presented a declaration from Weiner concerning past sales conducted by the Appellants of leasehold interests and equipment. The court ruled that evidence of the previous sales conducted by the Appellants was not admissible because they had not disclosed the buyer, seller and exact location. We agree that such information would be necessary before the court could give much weight to the evidence. We note also that the declaration did not contain any information which would indicate whether the leases involved in those sales were above, below or at fair market value. Therefore, it added nothing to determining the value of the Debtors’ lease.

2. The Equipment was the Remaining Collateral

The court then directed the parties to focus their attention on the value of the equipment. The Appellants presented the declarations of Rix and Weiner, while the Debtors relied on their uncontested valuation set forth in their schedules.

i. Declaration of Robin Rix

The Rix declaration is barely two pages long and lacks any detail. As the trial court pointed out, Rix’s declaration only gave a value for the entire business, although that exceeded the scope of the Appellants’ security interest. This was also a point raised by the Debtors in an objection to the Rix declaration. Rix did not explain how the equipment and leasehold interest were valued within that overall valuation. We agree with the court that this was a sufficient basis for not giving the Rix declaration any weight.

ii. Declarations of Weiner

All that remained to support the Appellants’ position were the declarations from Weiner. These also proved to be of limited use. On August 18, 1995, Weiner declared that the collateral, equipment and lease together, was worth $100,000.⁶ He did not present a breakdown of the value of equipment. The Kims objected on the basis that Weiner was not a qualified expert and had not explained his methodology for reaching his determination.

Weiner’s subsequent declaration still failed to explain how he had determined the value of the Kims’ equipment. The trial court gave the Appellants an opportunity to explain if Weiner’s valuation was based on comparable sales. In response the Appellants provided data concerning sales of equipment and leases they had conducted, as well as estimates by Weiner as to what he believed the equipment would have sold for had it been sold separately.

The trial court examined the declaration and questioned counsel as to how Weiner arrived at his estimates for the equipment values. Counsel acknowledged that the amounts were not based on actual sales. Instead, he explained that the estimates were “based upon his [Weiner’s] understanding of what they would draw if there were to be public sales of the equipment. But he would never sell it that way.” Indeed, in his declaration, Weiner admitted that his estimates were not based on personal knowledge, in so much as the Appellants had never in the history of their business conducted separate sales of equipment. Consequently, the trial court ruled that Weiner was not competent to speculate as to the value of the Debtors’ equipment.

Lay opinion is only admissible if it is rationally based on the perception of the witness. Federal Rule of Evidence 701; Joy Mfg. Co. v. Sola Basic Industries, Inc., 697 F.2d 104, 111 (9th Cir.1982). This requirement “reflects the general limitation embodied in Federal Rule of Evidence 602 that in order to testify on a subject a witness must have ‘personal knowledge of the matter.’” Id. (quoting Teen-Ed, Inc. v. Kimball International, Inc., 620 F.2d 399, 403 (3d Cir.1980)). Weiner’s valuation of the equipment was admittedly speculative, and was not based on personal knowledge. We do not see any abuse of discretion in the court’s decision to exclude Weiner’s declarations on the value of the equipment.

The Appellants have asserted that Weiner was testifying as an expert under Federal Rule of Evidence 702. The qualification of an expert is a question which lies within the sound discretion of a trial judge whose ruling will not be overturned in the absence of clear abuse, a standard which will be rarely met. 3 Weinstein’s Evidence ¶ 702[04], p. 702-53. See United States v. Booth, 669 F.2d 1231, 1240 (9th Cir.1981) (abuse of discretion standard applied to review of court’s refusal to admit expert testimony on grounds of relevance).

The record does not indicate that the Appellants ever asked the court to treat Weiner as an expert witness. Rather, his declarations stated each time that his testimony was purportedly based on personal knowledge. The declarations did not assert that Weiner was presenting opinion testimony as a qualified expert witness. Allowing Weiner to testify as an expert would have required a factual finding regarding his qualifications. The Appellants have failed to demonstrate that they presented this argument to the trial court, and therefore, we consider it waived. In re Lund, 202 B.R. 127, 131 (9th Cir. BAP 1996).

Additionally, the deficiency with Weiner’s declaration could not be overcome by merely asserting that he was an expert. Even an expert would have to provide an adequate explanation as to how he had reached his conclusions if his testimony were to have any value. Consequently, to the extent that the court chose to disregard Weiner’s declaration because he did not qualify as an expert, we cannot say that this was an abuse of discretion.

iii. Valuation of Equipment by the Debtors

All that remained before the court for consideration was the Kims’ own assertion that the value of the property was $34,000. As owners of the business, the Debtors were competent to give their opinion as to the value of their property. Robinson v. Watts Detective Agency, 685 F.2d 729, 739 (1st Cir.1982).

The dissent states that it is “surprising” that the trial court accepted the Debtors’ valuations since, in the dissent’s opinion, that valuation was no less speculative than Weiner’s. Additionally, the dissent states that “[n]ot a single question was asked of the Debtors as to how they eame up with that amount. No examination of the Debtors’ factual basis and no probing of the Debtors’ methodology appears anywhere in the record.” In other words, the Appellants did not raise any objections to the introduction of the Debtors’ valuation, nor did they seek to question the Debtors regarding this figure. Accordingly, we cannot agree with the dissent’s characterization of the trial court’s decision because we believe it was incumbent on the Appellants to object to the Debtors’ valuation if they believed it was inadmissible.

The Appellants’ inaction stands in stark contrast to the Debtors’ response to the introduction of the Appellants’ evidence. The Debtors did object to the declarations of Rix and Weiner. In fact, they specifically objected to Weiner’s declaration because he failed to explain the methodology utilized in reaching the valuations he did. Weiner’s declaration became inadmissible because the Debtors raised an objection and the trial court upheld the objection. On the other hand, no objection was raised as to the Debtors’ valuation. If the Appellants believed that the Debtors’ valuation was lacking and that the court should not have relied on it, they should have raised this before the court. Instead, they failed to present any reason for the court to disregard what was otherwise admissible evidence.

Only now do the Appellants assert that this valuation was a liquidation value. However, as the Kims point out, the bankruptcy schedules required them to state their opinion of the current market value of the equipment, not a liquidation value. We see no error in the court choosing to rely on the valuation provided by the Kims.

3. Value of the Entire Business

We have discussed the limited scope of the Appellants’ security interests. The bankruptcy court’s factual findings set forth the fair market value of the pertinent collateral. Still, the dissent argues that the Appellants’ security interests should be viewed as equal in value to the value of the entire business. We now address this point in more detail.

We see no error in the trial court’s finding that the lease exceeds market rate. If an essential component of the collateral is a lease which exceeds market rate, this component, realistically, cannot excite interest on the part of a buyer who does not have to buy, and therefore, such a lease has little, if any, intrinsic value. It might be that the secured creditor or a purchaser could independently negotiate a lease which would make continued occupation and operation worth while, but that is problematic if not speculative. There is nothing in the record which would warrant, let alone require, such a finding.

Implicit in the Appellants’ argument is the notion that somewhere, somehow, a purchaser would want to accept an uneconomical lease because the dry-cleaning equipment was there. This might have been done before or in a number of cases, but what the persuasions and representations were have not been made known. But we cannot agree that an uneconomical lease can per se become valuable simply because the tenant is permitted to occupy the premises.

The dissent presents a very thoughtful discussion of what may or may not be valuable in a dry cleaning business. While the dissent does a masterful job in analyzing the evidence in great detail, we view our role as an appellate court as more narrowly defined. When the bankruptcy court’s findings are plausible in light of the entire record, the Panel may not reverse even if it is convinced that it would have weighed the evidence differently had it been sitting as the trier of fact. Anderson v. Bessemer City, supra, 470 U.S. at 573-74, 105 S.Ct. at 1511-12. ‘Where there are two permissible views of the evidence, the factfin-der’s choice between them cannot be clearly erroneous.” Id. Further, the Appellants simply did not present any evidence which supports the dissent’s breakdown of the value of a dry cleaning business. While we might not disagree that the dissent’s viewpoint could be supported by the proper presentation of evidence, we believe it was incumbent on the Appellants to present such, evidence. Despite being given numerous opportunities to supplement the record, the Appellants consistently failed to demonstrate that the bankruptcy court must accept their valuations of the whole business as being the equivalent of the property in which they actually had an interest.

C. Court Did Not Abuse Discretion in Denying Continuance

Finally, the Appellants assert that the court should have granted them a continuance so they could have presented the court with the names of the buyers and sellers and the exact locations of the business involved in the prior transactions. Granting or denying a continuance was within the discretion of the court. U.S. v. Mejia, supra, 69 F.3d at 314. The matter had been pending for several months and the Appellants had several opportunities to present evidence to the court. In fact, prior to the last hearing the court invited the parties to file “[w]hatever is appropriate to determine the value of the collateral.” Additionally, before we could reverse, the Appellants would need to show that they have suffered prejudice due to the denial of the request. Id. at 314-15. The information the Appellants sought to present still would not have demonstrated Weiner’s personal knowledge concerning the equipment owned by the Kims. Also, as we explained, the data on previous sales had little value because it did not indicate if the leases involved were above or below market rates and Weiner would not have been qualified to present such evidence. Consequently, the Appellants have failed to demonstrate prejudice. The court did not abuse its discretion when it denied the request for a continuance.

Y

CONCLUSION

The Appellants have failed to demonstrate that the bankruptcy court abused its discretion in making the evidentiary rulings that it did. Effectively, what was left for the court to consider was the statement of fair market value presented by the Debtors in their schedules. Based on this, the court made its factual finding concerning the value of the collateral. Pursuant to these dictates, we cannot say that the bankruptcy court’s finding as to the value of the collateral was clearly erroneous.

AFFIRMED.

3 . A brief hearing also had been conducted on September 11, 1995, but the matter was continued to allow the court an opportunity to review the pertinent pleadings.

4 . The Court of Appeals' en banc opinion was decided on September 17, 1996, during the pen-dency of this appeal.

5 . This is based on rent of $4,760 for 1880 square feet.

6 . We note that in his November 30, 1995 declaration, Weiner asserted that the collateral was worth between $125,000 and $165,000. However, he failed to explain why the value had increased from his earlier assertion that the collateral was worth $100,000.