Property rights litigation: Challenges, risks and financial settlement in the case of the Thompson Valley Towne Center

Journal of Real Estate Practice and Education, 2002 by Holsapple, Eric, James, Bruce A, Worzala, Elaine M

Under the bankruptcy code, the bankruptcy court can order the sale of property owned only partially by the bankrupt debtor when certain conditions are met. These conditions primarily focus on whether the bankrupt estate will receive more proceeds from the sale of the entire property versus a partitioning, or split, of the property. If the court approves the sale, however, the other co-owners are granted a right of first refusal to purchase the property on the same terms and conditions as the court approved sale. Therefore, the existing owners of the property were given a right of first refusal. In this case, the right of first refusal was complicated by an extended contract that allowed for approval of the plans prior to a contemplated closing date.

The Sale Appeal

When the developers of the proposed shopping center retained legal counsel, the principal concern was the defense of an appeal (the "Sale Appeal") filed by Hahn and Wright contesting the bankruptcy court approved sale price of the Thompson Valley Towne Center property in federal court. When the Sale Appeal was filed, Hahn and Wright sought to halt the sale. Because the two could not secure the funds necessary to post a bond for the property, the sale of the Thompson Valley Towne Center property to the developers was permitted to proceed even though the appeal was still pending. Although the developers would take title to the property, if the case were to be reversed on appeal, they could be required to return the title to the property to the original co-owners (although the developers would be entitled to a return of their $1,000,000 purchase price). Any money spent to secure development and entitlement rights would be lost, as would any value added to the property from the entitlement and marketing process.

The Early Closing Appeal

Closing on the Thompson Valley Towne Center property was contingent on the successful annexation and zoning of the property and was scheduled to occur shortly following the completion of the city zoning process and the vesting of development rights. The economic basis of such contracts is that the developer may pay a higher price if he/she is allowed to close when the property is annexed and zoned as the property is far more valuable at this point because all or most of the entitlement risk is mitigated. The developer front-ends the development costs and devotes the time and expertise required to get the entitlement process complete and is compensated with less development risk. Ironically, in this case the rezoning and annexation increased the likelihood that the co-owners might attempt to exercise their statutory right of first refusal to the detriment of the developers.

Throughout the zoning process, Hahn appeared at every public hearing in opposition and argued that the zoning was improper while the Sale Appeal was pending. In his opinion, the original owners would prevail and two of them (Hahn and Wright) did not support or approve of the rezoning efforts. The City Attorney advised the planning commission and city staff that Hahn's position was incorrect. However, Hahn continued his vocal opposition. From the developers' perspective, this opposition increased the chances that the project might not get City Council approval. In light of Hahn's continued opposition, a decision was made by the developers to go ahead and close on the property prior to final zoning and annexation approval in June of 1998. This allowed the developers to clearly demonstrate ownership to the Loveland City Council and cleared the way for City approval of the development's zoning in July of 1998.