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2008-11-08

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stories: sacbee.com

We are initiating coverage on SunCal Companies, a self-described "development company in the western United States," as seven SunCal entities have recently filed for Chapter 11 bankruptcy. One astute forum member has reported:

Both the L.A. Times and Sacramento Bee are carrying stories today, November 7th, cited below, indicating that separate SunCal entities filed Chapter 11 bankruptcies today in the U.S. Bankruptcy Court for the Central District of California, Santa Ana branch.

In fact SEVEN (7) SunCal entities filed voluntary Chapter 11 petitions on 11/7/08 in that court:

SunCal Beaumont Heights LLC - Case 8:08-bk-17209-ES

SunCal Bickford Ranch LLC - Case 8:08-bk-17231-ES

SunCal Communities I, LLC - 8:08-bk-17248-ES

SunCal Communities III, LLC - 8:08-bk-17249-ES

SunCal Emerald Meadows Ranch, LLC - 8:08-bk-17230-ES

SunCal Johannson Ranch, LLC - 8:08-bk-17225-ES

SunCal Summit Valley, LLC - 8:08-bk-17227-ES

All seven of the new cases were assigned to Bankruptcy Judge Erithe Smith, who is already the judge assigned to the 4 involuntary cases filed against Lehman Brothers Real Estate Partners, LP owned and dominated entities (to the extent of 85%). Those involuntary cases were filed by junior mortgagees and mechanics lien claimants. Just last week, Judge Smith appointed Alfred Siegel of Sherman Oaks, California as Chapter 11 Trustee in the four involuntary cases.

You can find the full write-up by "Aristotle" below in the comments to this post, which are pulled from the original forum posting. It appears that these filings are related to the implosion of investmeent banker Lehman Brothers, the sole funder of the Bickford Ranch project (See this article on Bickford Ranch's bankruptcy filing).

Further to SunCal's "about" page:

Today, SunCal Companies has more than 250,000 residential lots and 10 million square feet of commercial space in various stages of development throughout more than 50 projects. You may be familiar with some of our master-planned communities. You might even live in or visited one and not even know it. Some of SunCal's successful developments include Amerige Heights in Fullerton, Lincoln Crossing near Sacramento and Terra Lago and Fairway Canyon near Palm Springs.

Follow this link for a list of SunCal communities.

SunCal has operations in California, Arizona, New Mexico, Texas, Florida and Washington, D.C.

permalink to this record | forum thread


Comments:

Aristotle at 01:59 2008-11-08 said:
We've now learned that it's 14 new Chapter 11 bankruptcies, not just 7. Seven (7) of the new debtors have "SunCal" in their names, and 7 don't.

Both the L.A. Times and Sacramento Bee are carrying stories today, November 7th, cited below, indicating that separate SunCal entities filed Chapter 11 bankruptcies today (and apparently yesterday) in the U.S. Bankruptcy Court for the Central District of California, Santa Ana branch.

In fact SEVEN (7) SunCal entities filed voluntary Chapter 11 petitions on 11/6-7/08 in that court:

SunCal Beaumont Heights LLC - Case 8:08-bk-17209-ES

SunCal Bickford Ranch LLC - Case 8:08-bk-17231-ES

SunCal Communities I, LLC - 8:08-bk-17248-ES

SunCal Communities III, LLC - 8:08-bk-17249-ES

SunCal Emerald Meadows Ranch, LLC - 8:08-bk-17230-ES

SunCal Johannson Ranch, LLC - 8:08-bk-17225-ES

SunCal Summit Valley, LLC - 8:08-bk-17227-ES

All seven of the new cases were assigned to Bankruptcy Judge Erithe Smith, who is already the judge assigned to the 4 involuntary cases filed against SunCal managed, Lehman Brothers Real Estate Partners, LP owned and dominated entities (to the extent of 85%). Those involuntary cases were filed by junior mortgagees and mechanics lien claimants. Just last week, Judge Smith appointed Alfred Siegel of Sherman Oaks, California as Chapter 11 Trustee in the four involuntary cases.

In addition, 7 other SunCal controlled entities, which don't have the word "SunCal" in their names, filed Chapter 11 bankruptcies in the same court, also on 11/6-7/08. For detail see the Implode-O-Meter Forum post "SunCal Reluctantly Declares War on Lehman". That means there are a total of 14 SunCal related cases where a Lehman entity is the mortgage lender, but not a controlling owner.

Prior to her appointment to the Bankruptcy Court bench in 1994, Judge Smith was a well known Chapter 11 debtors' lawyer practicing in Orange County.

What is different with these 14 new cases is that they were filed by the debtors. Particularly humiliating was the need for SunCal's owner, Bruce Elieff, to personally sign the limited liability company resolutions required by the Bankruptcy Court, in his capacity as Manager of the new debtor LLCs, documenting that proper internal procedures had been followed authorizing the filing of the LLCs' bankruptcy cases.

In each of these 14 new SunCal bankruptcy cases, the court files disclose that the debtors are represented by Paul J Couchot, Esq., Winthrop Couchot PC, 660 Newport Ctr Dri Ste 400, Newport Beach, CA 92660 949-720-4100, Fax : 949-720-4111, Email: pcouchot @ winthropcouchot.com. Winthrop Couchot is a small bankruptcy law firm, solely composed of experienced debtors' lawyers, and known for offering Chapter 11 debtors counsel legal services at reasonable hourly rates.

Apparently, SunCal has a new spokesman concerning these bankruptcies. See today's Los Angeles Times Article at:

http://www.latimes.com/business/la-fi-suncal8-2008nov08,1,2614508.story

In that article, dealing with the now defunct Bickford Ranch project in Placer County, California, the Times said: "The failure of Lehman Bros. "has created a situation that stands in the way of any new capital coming into the project," said David Soyka, a SunCal spokesman. "Without additional funds, we cannot complete infrastructure elements, implement storm water control measures, care for seedlings and generally maintain the property."

The Sacramento Bee highlighted another feature of the Bickford Ranch project, reporting that it had been a profoundly politically unpopular project. See:

http://www.sacbee.com/static/weblogs/real_estate/archives/016838.html

Swallowing SunCal's public relations spin hook, line and sinker, The Sacramento Bee also that: "SunCal said the bankruptcy filing, which seeks protection from creditors, is only for its Bickford Ranch limited liabiilty firm. It does not apply to SunCal itself." Obviously, that statement is patently untrue in light of the simultaneous filing of 14 SunCal entity bankruptcies in the same court.

See: http://www.sacbee.com/749/story/1380119.html

http://www.sacbee.com/142/story/1380689.html

Swallowing that same line that the bankruptcy filing only relates to Bickford Ranch, the Sacramento Business Journal also reports:

"The company said the action follows the bankruptcy of Lehman Brothers, which has been the sole source of funding for the Bickford Ranch project. SunCal said in a news release that despite repeated efforts, “Lehman has provided no meaningful response to funding requests and appears to be either unwilling or unable to fulfill its obligations ... Lehman’s lack of action has effectively starved the development of the capital it needs to pay consultants and contractors, be a good neighbor to nearby residents, perform on-site maintenance and adhere to applicable health and safety regulations.”

See: http://www.bizjournals.com/losangeles/stories/2008/11/03/daily32.html?ana=from_rss

In fact, California is full of SunCal projects where construction has stopped and mechanics lien claimants are screaming for payment, including one in San Clemente and one in Castaic, which at first blush do not appear to be included in these new SunCal bankruptcies. However, review of the 14 new bankruptcy files, and an important declaration filed by the debtor's lawyer Paul Couchot, makes it fairly apparent that the projects where there are "big" mechanics lien problems are projects where a Lehman controlled entity is part of the ownership structure, and apparently is unwilling to voluntarily file Chapter 11 cases.

It is also unclear whether it is both bankrupt and not-bankruptcy Lehman entities which have failed to complete funding of SunCal development projects. An investigation by the Orange County Register disclosed that a non-bankrupt entity, Lehman ALI, was the lender on the San Clemente project. In addition, Lehman Brothers Real Estate Partners, L.P., the indirect owner of the Lehman interests in some of the SunCal projects, is not a Chapter 11 debtor in Lehman Brothers Holdings, Inc.'s consolidated Chapter 11 bankruptcy in the Southern District of New York.

Careful reading of the documents filed yesterday and today, and those filed later in each case, may disclose more precise details about which Lehman entities were involved in each bankrupt project, and whether or not those Lehman lenders and equity investor entities are bankrupt themselves. Permalink

Justin at 08:34 2008-11-08 said:
Great sleuthing Aristotle -- just threw up SunCal on our ailing/watch list. Permalink
Aristotle at 12:52 2008-11-08 said:
There may be more than the 7 bankruptcies I found. They were the ones which popped up on a quick PACER search using the word "SunCal".

It was interesting that SunCal suddenly has a new P.R. guy, the bankruptcies were filed on Friday (at the end of the news cycle as they would say on West Wing) and that they actually sent press releases to some print press outlets in California. Permalink

Aristotle at 14:58 2008-11-08 said:
In addition to the 7 voluntary Chapter 11 bankruptcies, with the name "SunCal" in them, there are 7 more SunCal managed, Lehman financed entities which filed bankruptcy in the Santa Ana branch court. The lead case was filed on 11/6/08. The debtors have filed a motion, detailed in a separate post, requesting that all 14 of the Chapter 11 cases be administered as related cases under the following case number and caption:

In re: Palmdale Hills Property, LLC - Case 8:08-bk-17206-ES

The other Chapter 11 cases concurrently filed, without "SunCal" in their name are:

SCC/Palmdale, LLC - 8:08-bk-17204-ES Acton Estates, LLC - 8:08-bk-17236-ES Seven Brothers, LLC - 8:08-bk-17240-ES SJD Partners, LTD - 8:08-bk-17242-ES SJD Development Corp. - 8:08-bk-17249-ES Kirby Estates, LLC - 8:08-bk-17246-ES

The lead case, and the most interesting one with the "different name" debtor is Palmdale Hills Property, LLC, owner of the previously bankrupt Ritter Ranch in the City of Palmdale, California. The Antelope Valley Press has an interesting story about the sad history of that project, and the effects of this new Chapter 11. See: http://www.avpress.com/n/08/1108_s1.hts

Palmdale Hills Property, LLC bought the Ritter Ranch, and its rights under an important water supply agreement, from the Chapter 11 Trustee in the U.S. Bankruptcy Court for the Central District of California, Woodland Hills Branch, the Hon. Geraldine Mund presiding, in Case No. 1:98-bk-25043-GM, In re: Ritter Ranch Development, LLC.

In addition to buying the Ritter Ranch and its water service agreements from the Chapter 11 Trustee, Palmdale Hills Property, LLC and its affiliate privately bought all of the first lien public improvements bonds for the project, called "Senior Bonds Issued by the City of Palmdale Community Facilities District 93-1". As a result of Ritter Ranch LLC's default on those Senior Bonds, as well as Subordinate Bonds held by third parties, the City of Palmdale, Palmdale Hills Property, LLC and SCC Acquisitions, LLC (another SunCal entity) became enmeshed in litigation against the bond issuer, Community Facilities District 93-1, filed by the holders of the Subordinate Bonds aka junior lien public improvement bonds.

At the end of the Ritter Ranch LLC bankruptcy case, after it already owned Ritter Ranch, Palmdale Hills Property, LLC filed a pleading in the Ritter Ranch LLC bankruptcy case, Document 749, saying "Palmdale [Hills Property, LLC] is the current holder of the Senior Bonds in connection with debtor's Mello Roos financing...the Subordinate Bondholders are not entitled to be paid by the City...the City is only obligated to remit its collection of Special Taxes to the fiscal agent for the Subordinate Bonds...the Fiscal Agent Agreement requires that the Senior Bonds held by Palmdale [Hills Property LLC] be paid before the Subordinate Bonds."

Neither the Ritter Ranch, LLC bankruptcy file nor the Palmdale Hills Property, LLC bankruptcy file disclose whether the Senior Bonds (owned by some SunCal affiliate) or the Subordinate Bonds (owned by the unhappy third party bondholders) are still unpaid.

So now, if those Mello Bonds are still unpaid, as property owner Chapter 11 Debtor Palmdale Hills Property, LLC is the party who is supposed to be paying the Special Taxes to the City of Palmdale, so that they can be forwarded to that fiscal agent for the Senior Bond holders and Subordinate Bond holders.

I am posting a separate topic, tentatively called "SunCal Reluctantly Declares War on Lehman", which details the current state of the relationship between SunCal and Lehman, by quoting from an Emergency Motion filed in this new "lead case", the Palmdale Hills Property, LLC case. Permalink

Aristotle at 17:47 2008-11-08 said:
Beginning on 11/6/08 fourteen (14) voluntary Chapter 11 bankruptcies were filed in the U.S. Bankruptcy Court for the Central District of California, Santa Ana Branch, and assigned to Bankruptcy Judge the Hon. Erithe Smith.

The lead case is:

In re: Palmdale Hills Property, LLC - Case 8:08-bk-17206-ES

The other voluntary Chapter 11 cases concurrently filed, with and without "SunCal" in their name are:

SCC/Palmdale, LLC - 8:08-bk-17204-ES Acton Estates, LLC - 8:08-bk-17236-ES Seven Brothers, LLC - 8:08-bk-17240-ES SJD Partners, LTD - 8:08-bk-17242-ES SJD Development Corp. - 8:08-bk-17249-ES Kirby Estates, LLC - 8:08-bk-17246-ES SunCal Beaumont Heights LLC - Case 8:08-bk-17209-ES SunCal Bickford Ranch LLC - Case 8:08-bk-17231-ES SunCal Communities I, LLC - 8:08-bk-17248-ES SunCal Communities III, LLC - 8:08-bk-17249-ES SunCal Emerald Meadows Ranch, LLC - 8:08-bk-17230-ES SunCal Johannson Ranch, LLC - 8:08-bk-17225-ES SunCal Summit Valley, LLC - 8:08-bk-17227-ES

These Chapter 11 Debtors in Possession did not file any of the key schedules to their bankruptcy petitions. The Court has set a deadline of 11/24/08 for the filing of those schedules, which will include descriptions of the real estate development projects owned by those entities. The debtors apparently made press releases describing certain of the affected projects, including Bickford Ranch in the Sierra Foothills of California, and Ritter Ranch in Palmdale, California which sits atop part of the San Andreas Fault in the mountains north of Los Angeles.

In the lead case, In re: Palmdale Hills Property, LLC, the debtor has also filed with the court, as Document 4 in the PACER Docket, an "Emergency Motion for Joint Administration of Related Cases". The filing of that motion is nothing unusual. However, in the Memorandum of Points and Authorities supporting the motion, signed by the debtors' lawyer Paul Couchot, and supported by a declaration signed by The SunCal Companies General Counsel, finally admits the status of the relationship between The SunCal Companies' real estate development subsidiaries, Chapter 11 Debtors Lehman Brothers Holding, Inc. and Lehman Commercial Paper, Inc. and non-debtor Lehman ALI, Inc.:

"The related debtors were formed to develop various residential real estate projects located throughout the Western United States (the "Projects"). PUrsuant to various agreements with Lehman Brothers Holdings, Inc., a Delaware corproration ("Lehman Holdings") and Lehman Ali, Inc. a Delaware corporation ("Lehman Ali") dated May 23, 2008 (the "Agreements"), Lehman Holdings and Lehman Ali committed, among other things, to fund the continuing costs necessary to preserve the value of the Projects, which had already received loans from Lehman Ali and/or Lehman Commercial Paper, Inc. totalling approximately $2.3 Billion. The amounts previously loaned by Lehman and to be advanced by Lehman pursuant to the Agreements are all secured by, among other things, first priority deeds of trust on the Projects.

Since the bankruptcy filing of Lehman Brothers Holding, Inc., Lehman has breached its obligations under the Agreements by failing to fund the ongoing, critical expenses of the Projects. As a result, the Projects have suffered and continue to suffer catastrophic losses, and the public safety and health has been endangered.

Representatives of Debtors have tried for weeks to determine the status of Lehman's commitment by notifying Lehman of the Projects' condition and requesting that Lehman resume funding the Projects. During these weeks the related Debtors' requests have been essentially met with inaction from Lehman. Recently, Lehman representatives have confirmed that the required funding is not forthcoming.

In order to address the multitude of issues caused by Lehman's failure to honor its obligations under the Agreements, the Related Debtors believe that relief under Chapter 11 of the Bankruptcy Code was necessary. [Footnotes omitted]"

The Footnotes to that statement by debtors' bankruptcy counsel recite two critical pieces of information:

(1) According to the debtors' counsel, use of the word "Lehman" in the statement quoted above means Lehman Brothers Holdings, Inc., Lehman Commercial Paper, Inc. and Lehman Ali, Inc. Lehman Ali, Inc. does not appear to be a Chapter 11 debtor, whereas the other two entities are Chapter 11 Debtors in the Southern District of New York consolidated Lehman Brothers Holdings, Inc. Case #08-13555.

(2) The debtors' counsel states: "This amount [the $2.3 Billion] includes loans on approximately 9 other projects that are not currently related debtors because Lehman controlled entities are equity holders and have not given the required consent to the Chapter 11 petitions".

The May 23, 2008 "Agreement" referred to by these new Chapter 11 debtors' counsel is probably the work out agreement referred to by Sun Cal officials when they were interviewed by The Orange County Register several months ago. The actual Credit Agreements, Construction Loan Agreements and Deeds of Trust/Mortgages between "Lehman" as lender and the new Chapter 11 debtors as borrowers predate the May 23, 2008 "Agreement" by time periods up to 4 years.

I've read the Chapter 11 Bankruptcy Petitions for all 14 of the new Chapter 11 debtors, and one point is very clear. None of the projects are "over encumbered" in terms of mechanics lien claims and other trade debt. These cases are vastly different, economically, from the 4 involuntary cases filed against the Lehman Brothers Real Estate Partners LP dominated debtors, where Judge Smith described those debtors' projects as "dead on arrival"".

Most of the 14 new debtors' cases look like there is enough equity in the debtor's assets to pay the unsecured claims. The only question, then, for each of the new Chapter 11 debtors is whether they can successfully reorganize the terms of their Lehman related mortgage loan, in order to allow the project to be sold to a third party or refinanced, and the mechanics lien creditors and trade creditors to be paid after such a sale or refinancing.

As a result, for those keeping score there are:

14 SunCal entities, named above, not controlled by Lehman which have filed voluntary Chapter 11 cases.

9 unnamed Lehman/SunCal entities controlled by Lehman affiliates who are majority owners of the entities and who, allegedly, have refused to consent to SunCal filing voluntary Chapter 11 petitions on behalf of those entities.

5 Lehman/SunCal entities, formerly controlled by 85% owner Lehman Brothers Real Estate Partners, L.P., which are Chapter 11 debtors with a Chapter 11 Trustee, because unpaid junior lienholders and mechanics lien claimants forced those 5 entities into bankruptcy through the filing of involuntary bankruptcy petitions. [LBREP/L-SunCal Master I LLC - Case No. 08-bk-15588-ES, LBREP/L-SunCal McAllister Ranch LLC - Case No. 08-bk-15637-ES, LBREP/L-SunCal McSweeney Farms LLC - Case No. 08-bk-15639-ES, LBREP/L-SunCal Summerwind Ranch LLC - Case No. 08-bk-15640-ES]

In a declaration signed and filed on 1/17/06 by Frank Faye, who said he was a Southern California based officer of "The SunCal Companies" Mr. Faye said "The SunCal Companies" is a fictitious business name used by a multitude of separate affiliated entities. See Document 749 in U.S. Bankruptcy Court for the Central District of California case 98-bk-25043, In re: Ritter Ranch LLC, in which one of the SunCal Companies, Palmdale Hills Property, LLC was the buyer of that unrelated debtor's real estate. As a result, there is no telling how many LLC, LPs and corporations form "The SunCal Companies". Clearly, all of those companies are not yet Chapter 11 debtors, and may never be.

Fortunately for The SunCal Companies, some of its projects are financed by lenders NOT directly controlled by Chapter 11 Debtor in Possession Lehman Brothers Holdings, Inc., such as The SunCal Companies' projects in Alameda and Albuquerque. In terms of credibility with public agencies throughout the west, the wisest course for The SunCal Companies' owner might be to publicly issue a comprehensive list of its projects which are financed by entities OTHER THAN the Lehman entities.

With respect to the Declaration by The SunCal Companies General Counsel, and the SunCal related voluntary Chapter 11 debtors' comments through their bankruptcy lawyer, above, SunCal's owners could easily be described as the biggest dollar-volume victim of a "construction lender failure" in the history of California.

The potential for the massive scale collapse of a major project financier/lender, such as the Lehman Brothers Holding, Inc. related entities, was clearly beyond the comprehension of even the most sophisticated developer, builder or real estate lawyer.

I've been writing, for weeks, that The SunCal Companies seemed to be victims of the Lehman bankruptcies, and now, case by case, the reality of that victimization is being revealed by SunCal. Permalink

Aristotle at 19:34 2008-11-08 said:
Interesting Story relating to SunCal's purchase of land in Albuquerque from the Altrisco family heirs, who apparently still own Altrisco Oil & Gas:

http://www.tradingmarkets.com/.site/news/Stock%20News/2007197/ Permalink

Justin at 10:50 2008-11-09 said:
No word on how much of SunCal's Marblehead Coastal work is funded http://www.ocregister.com/articles/city-suncal-placek-2159990-say-council

Developers of the 248-acre Marblehead Coastal development say they intend to continue building roads, storm drains and other infrastructure, but they can't say if or when the money might run out.

That was the scenario Tuesday night as Dave Placek, a representative of SunCal Cos., gave the latest in a series of progress reports at City Council meetings. The difference this time was that Lehman Bros., the New York lending company with whom SunCal has been working, filed Monday for Chapter 11 bankruptcy protection from creditors.

Asked how much of the current Marblehead Coastal work is funded, Placek said "we just don't know," because the bankruptcy proceeding just started. "Judges will render opinions and we hope to get more information by the end of this week and in the next week," Placek said. "We certainly don't know that there will be any impact, but at this point we don't know that there won't be."

City officials have suggested that if SunCal is unable to complete roads and other infrastructure required by a development agreement, the city can call in bonds posted to guarantee completion.

Permalink
Aristotle at 05:39 2008-11-10 said:
Funny thing about Marblehead.

The City of San Clemente is going to sue the Lehman/SunCal Marblehead entity for breach of contract in not completing offsite improvements.

Lehman/SunCal Marblehead is not one of the 14 entites controlled by SunCal, where SunCal has filed bankruptcy to try to force the Lehman lender on each of those projects to start funding construction, or at least preservation, again.

Deductive reasoning would then indicate that Marblehead is one of the 9 Lehman/SunCal projects where the Lehman entity which is an LLC member has veto power over bankruptcy filing. See quotes from SunCal's lawyer above. It's probably Lehman Brothers Real Estate Partners LP which is that owner. LBREP is NOT a Chapter 11 debtor in the New York Lehman bankruptcies.

Similarly, two California sources confirmed that the construction lender on the Marblehead project is Lehman ALI, Inc. They, too, are not bankrupt.

Which means, as a practical matter, that there's no excuse for Lehman ALI, Inc. to refuse to fund completion of the public improvements for the project NOW, before massive legal fees are incurred in defending against the City of San Clemente lawsuit....unless the excuse is that Lehman ALI, Inc's considerable monthly mortgage revenue is being used for other purposes, like meeting payroll for the remaining Lehman employees.'

It makes no economic sense for Lehman Ali, Inc. and LBREP to mothball the Marblehead project and incur huge attorneys fees costs in defending against the city. Permalink

Aristotle at 04:10 2008-11-12 said:
The Bakersfield Californian has taken the trouble to figure out the marketing names and sizes of the projects being developed by the 14 newly bankrupt SunCal entities.

See: http://www.bakersfield.com/102/story/606916.html Permalink

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Important: Ailing Builders haven't shut down, but they've suffered significant valuation declines, temporarily halted redemptions, or faced other major business hurdles. Builders on watch may not even have unusual declines relative to peers, but may be posted if it is felt there may be risk of developing a more serious condition in the near future.