Stephen A. McCartin (TX 13374700) Virgil Ochoa (TX ...emergency motion for order authorizing debtors...

EMERGENCY MOTION FOR ORDER AUTHORIZING DEBTORS TO CONSUMMATE CONTRACT

OF SALE AND ESCROW AGREEMENT WITH FORESTAR (USA) REAL ESTATE GROUP - Page - 1 DA-3205151 v4 1279056-00201 DALLAS 2266618v.3

Stephen A. McCartin (TX 13374700)

Holland Neff O'Neil (TX 14864700)

Virgil Ochoa (TX 24070358)

GARDERE WYNNE SEWELL LLP

3000 Thanksgiving Tower

1601 Elm Street Dallas, TX 75201-4761

Telephone: (214) 999-3000

Facsimile: (214) 999-4667

[email protected]

[email protected]

[email protected]

and

Jeffrey C. Krause (CA 94053)

Gregory K. Jones (CA 181072)

STUTMAN, TREISTER & GLATT PROFESSIONAL

CORPORATION

1901 Avenue of the Stars, 12th Floor

Los Angeles, CA 90067

Telephone: (310) 228-5600

Facsimile: (310) 228-5788

[email protected]

[email protected]

PROPOSED COUNSEL FOR DEBTORS AND

DEBTORS IN POSSESSION

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

In re:

R.E. LOANS, LLC,

R.E. FUTURE, LLC and

CAPITAL SALVAGE, a California

corporation,

Debtors.

§

§

§

§

§

§

§

§

Chapter 11

Case No. 11-35865-BJH

Jointly Administered

EMERGENCY MOTION FOR ORDER AUTHORIZING DEBTORS TO

CONSUMMATE CONTRACT OF SALE AND ESCROW AGREEMENT WITH

FORESTAR (USA) REAL ESTATE GROUP1

1 Contemporaneously with the filing of this Motion, the Debtors have filed a motion to expedite the hearing on

this Motion given that there is cause to have this matter heard on the earliest available date.

Case 11-35865-bjh11 Doc 60 Filed 09/19/11 Entered 09/19/11 22:26:52 Desc Main Document of 12



R.E. Loans, LLC, a California limited liability company ("R.E. Loans"), Capital

Salvage, a California corporation ("Capital Salvage") and R.E. Future, LLC, a California

limited liability company ("R.E. Future"), the debtors and debtors-in-possession in the above-

captioned cases (collectively, the "Debtors"), hereby file the Emergency Motion for Order

Authorizing Debtors to Consummate Contract of Sale and Escrow Agreement With Forestar

(USA) Real Estate Group (this "Motion") and respectfully state as follows:

I.

JURISDICTION AND VENUE

1. This Court has jurisdiction over these chapter 11 cases and the Motion pursuant to

28 U.S.C. §§ 1334 and 157(b), and venue is proper in this District pursuant to 28 U.S.C. §§ 1408

and 1409.

II.

RELIEF REQUESTED

2. The Debtors hereby request the Court enter an order pursuant to section 363 of

Title 11 of the United States Code (as amended, the "Bankruptcy Code") and Rules 2002, 6004,

and 9014 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") authorizing

the Debtors to complete their required performance obligations under the "Contract of Sale and

Escrow Agreement with Forestar (USA) Real Estate Group," as amended (the "Forestar

Contract"). True and correct copies of the original contract and all amendments thereto are

attached hereto collectively as Exhibit "A" and made a part hereof.

3. This Motion is supported by the evidence contained in the Declaration Of W.

Farley Dakan In Support Of Emergency Motion for Order Authorizing Debtors to Consummate

Contract of Sale and Escrow Agreement with Forestar (USA) Real Estate Group (the "Dakan

Declaration") filed concurrently herewith, and the record in these cases.




III.

BACKGROUND

A. The Indebtedness

4. R.E. Loans, Capital Salvage, and R.E. Future each filed a voluntary chapter 11

petition on September 13, 2011 (the "Petition Date"). Pursuant to Bankruptcy Code

sections 1107(a) and 1108, the Debtors are continuing to operate their respective businesses and

managing their respective financial affairs as debtors in possession.

5. R.E. Loans is a California limited liability company that made loans to certain

borrowers secured by real property. The promissory notes from these borrowers and the deeds of

trust securing those notes have been pledged to secure both (a) R.E. Loans' prepetition

obligations to Wells Fargo Capital Finance, LLC ("Wells Fargo"), in the aggregate amount of

approximately $68 million, and (b) certain notes issued to the former members of R.E. Loans

(the "Noteholders") in the aggregate amount of approximately $776 million, including

prepetition interest (the "Exchange Notes"). The security interest granted to Wells Fargo in the

notes payable by Capital Salvage (and other borrowers of R.E. Loans) is senior in priority to any

security interest granted in favor of the Noteholders.

6. R.E. Loans is the sole shareholder of Capital Salvage. Capital Salvage's only

material debts are notes payable to R.E. Loans (most of which Capital Salvage has delivered to

R.E. Loans in exchange for real estate acquired by Capital Salvage) and ad valorem property

taxes that constitute senior liens against the real estate owned by Capital Salvage.




B. The Harris County Property

1. Loan to Bravo Marshall Communities, L.P.

7. On or around January 14, 2008, R.E. Loans made one or more loans in the

aggregate principal amount of $23,000,000 (the "BMC Debt") to Bravo Marshall Communities,

L.P., a Texas limited partnership ("BMC"). The BMC Debt was evidenced by a note payable by

BMC to R.E. Loans (the "BMC Note")2, secured by a first-lien deed of trust (the "Deed of

Trust"), security agreement, and assignment of leases and rents, executed by BMC in favor of

R.E. Loans. The repayment of the BMC Note was secured by certain real and personal property

located in Harris County, Texas (the "Property"). Capital Salvage acquired a second note

executed by BMC and secured by a second-lien deed of trust on the Property (the "Second Deed

of Trust").

8. In connection with the Deed of Trust, on January 14, 2008, BMC also executed a

Collateral Assignment of Utility Agreement Rights (the "Utility Assignment") in favor of R.E.

Loans. Pursuant to the Utility Assignment, BMC assigned to R.E. Loans certain tax increment

reinvestment zone rights (the "TIRZ Reimbursements") relating to the Property. A true and

correct copy of the Utility Assignment is attached hereto as Exhibit "B" and is incorporated

herein for all purposes.

2. BMC Bankruptcy

9. On September 19, 2008, BMC filed a voluntary petition for relief under chapter 7

of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of

2 In July 2007, Wells Fargo was granted a first-priority security interest in all, or substantially all, of the assets of

R.E. Loans, including after-acquired property, which would include the BMC Note and any and all collateral

securing payment thereof (including the Property and the TIRZ Reimbursements, as defined herein), together with

any and all proceeds of the foregoing.




Texas, Houston Division (the "Houston Bankruptcy Court"), Case No. 08-36044-H3-7 (the

"Chapter 7 Case").

10. Notwithstanding the fact that R.E. Loans had an assignment of the TIRZ

Reimbursements pursuant to the Utility Assignment, BMC stated in its bankruptcy Schedules of

assets and liabilities (the "Schedules") that it owned such TIRZ Reimbursements. R.E. Loans

and Capital Salvage disputed the assertions in BMC's Schedules, but no immediate action was

taken to amend BMC's Schedules.

11. On February 11, 2009, the Houston Bankruptcy Court entered an order

abandoning BMC's interests in the Property (the "Abandonment Order"). The TIRZ

Reimbursements were not included as part of Property abandoned within such Abandonment

Order.

12. After the Abandonment Order was entered, Capital Salvage foreclosed on the

Second Deed of Trust, and credit bid at the foreclosure sale. As a result, Capital Salvage

acquired title to the Property, subject to R.E. Loans' first-lien deed of trust, which had been

pledged to Wells Fargo. Based on the foregoing, Capital Salvage acquired title to the Property,

subject to the first-lien deed of trust in favor of R.E. Loans and securing the BMC Note payable

to R.E. Loans in the amount of approximately $23 million.




3. Agreement To Sell Property To Forestar

13. On or around July 11, 2011, Capital Salvage and Forestar (USA) Real Estate

Group, Inc. ("Forestar") entered into the Forestar Contract, whereby Capital Salvage agreed to

sell and transfer the Property and the TIRZ Reimbursements to Forestar. The Forestar Contract

was amended on August 29, 2011, August 31, 2011, and September 6, 2011.

14. Capital Salvage agreed to transfer the proceeds obtained from the sale of the

Property from Forestar (the "Proceeds") to R.E. Loans. Once received by R.E. Loans, the

Proceeds would constitute Wells Fargo's cash collateral. Pursuant to the terms and conditions of

the Forestar Contract, R.E. Loans agreed to sell and transfer the TIRZ Reimbursements to

Capital Salvage, which would then sell and transfer the TIRZ Reimbursements to Forestar.

4. Separation Of The TIRZ Reimbursements From The Sale Of The Property

15. Because BMC had asserted in its Schedules that it owned the TIRZ

Reimbursements relating to the Property, notwithstanding the prior transfer of such rights to R.E.

Loans, there was an issue regarding whether R.E. Loans or Capital Salvage could transfer clean

title to the TIRZ Reimbursements to Forestar.

16. R.E. Loans and Capital Salvage contacted BMC's chapter 7 trustee (the "Chapter

7 Trustee") to discuss BMC's assertion of rights to the TIRZ Reimbursements.

17. The Chapter 7 Trustee agreed with R.E. Loans and Capital Salvage that BMC had

improperly included the TIRZ Reimbursements in its Schedules, and he committed to file a

motion to abandon the estate's interests in the TIRZ Reimbursements (the "TIRZ Abandonment

Motion"). A hearing to consider the TIRZ Abandonment Motion is presently scheduled for

September 20, 2011.




18. However, R.E. Loans, Capital Salvage and Forestar wished to close the sale of the

Property when it was scheduled to close, which was before the hearing on the TIRZ

Abandonment Motion. Accordingly, to resolve issues relating to the TIRZ Reimbursements,

R.E. Loans, Capital Salvage, Forestar, and Stewart Title-Kingwood, as escrow agent ("Stewart

Title"), entered into an Escrow Agreement (the "Escrow Agreement"), which was consented to

by Wells Fargo. A true and correct copy of the Escrow Agreement is attached hereto as Exhibit

"C" and is incorporated herein for all purposes. The Escrow Agreement provided that (a)

Forestar would transfer $2,000,000 (the "Deposit") to an escrow account in the name of Stewart

Title, and (b) upon entry of an order (i) authorizing the abandonment of the TIRZ

Reimbursements, (ii) confirming Capital Salvage's right, title and interest in the TIRZ

Reimbursements or (iii) abandoning the TIRZ Reimbursements from the bankruptcy estate in

form and substance reasonably acceptable to Forestar (the "TIRZ Abandonment Order"),

Stewart Title would release the Deposit to Capital Salvage.

19. Pursuant to the terms and conditions of the Escrow Agreement, the parties agreed

to close the sale of the Property as scheduled and establish the $2,000,000 Deposit attributable to

the TIRZ Reimbursements, pending the entry of the TIRZ Abandonment Order.

5. Closing Of Sale Of Property (Not Including TIRZ Reimbursements)

20. On or around September 6, 2011, Capital Salvage conveyed the Property to

Forestar pursuant to the Forestar Contract. R.E. Loans (through Capital Salvage) received

approximately $4.9 million of the net proceeds generated by the sale (after payment of property

taxes, brokerage fees and other closing costs). These collateral proceeds were delivered to Wells

Fargo and applied against R.E. Loans' prepetition obligations to Wells Fargo.




21. Additionally, pursuant to the Escrow Agreement, Forestar delivered the

$2,000,000 Deposit to Stewart Title. As of the Petition Date, the $2,000,000 Deposit remained

with Stewart Title in an escrow account, pending the determination of the TIRZ Abandonment

Motion.

6. Relief Requested Through This Motion

22. Through this Motion, Capital Salvage seeks Court approval to consummate the

Forestar Contract and Escrow Agreement, obtain the Deposit following the Houston Bankruptcy

Court's entry of the TIRZ Abandonment Order, and apply the Deposit as collateral proceeds in

reduction of the prepetition indebtedness owed to Wells Fargo3 (the first-priority lienholder on

such property and the cash proceeds thereof). Further, by this Motion the Debtors seek the

waiver of the stay under Bankruptcy Rule 6004(h) for "cause," so that the order on this Motion

may be effective immediately without the fourteen (14) day stay otherwise applicable.

23. There is cause to waive such stay inasmuch as the closing of this transaction and

the receipt of the Deposit could occur immediately, and the attendant pay down of the Wells

Fargo, will reduce additional interest accrual.

IV.

ARGUMENT AND AUTHORITIES

A. The Debtors Have Articulated a Reasonable Justification to Consummate the

Forestar Contract and Escrow Agreement

24. Bankruptcy Code section 363 provides, in pertinent part:

(b)(1) The trustee, after notice and a hearing, may use, sell or lease,

other than in the ordinary course of business, property of the estate.

11 U.S.C. § 363(b).

3 Wells Fargo, the first-priority lienholder on such assets, consents to this transaction, provided it receives adequate

protection of its interests under 11 U.S.C. § 363(e), with the proceeds of such transaction to be applied in reduction

of its prepetition indebtedness.




25. Under applicable legal standards, a debtor may use or sell property of the estate if

the court finds that the transaction represents a reasonable business judgment by the debtor.

Institutional Creditors of Continental Air Lines, Inc. v. Continental Air Lines, Inc. (In re

Continental Air Lines, Inc.), 780 F.2d 1223, 1226 (5th

Cir. 1986) (citing In re Lionel Corp., 722

F.2d 1063, 1071 (2d Cir. 1983)); see also In re ASARCO LLC, 441 B.R. 813, 823 (S.D. Texas

2010), aff'd, 2011 U.S. App. LEXIS (5th Cir. 2011); GBL Holding Co. v. Blackburn/Travis/Cole,

Ltd. (In re State Park Building Group, Ltd.), 331 B.R. 251, 254 (N.D. Tex. 2005); In re Wilde

Horse Enters., 136 B.R. 830, 841 (Bankr. C.D. Cal. 1991); In re Ionosphere Clubs, Inc., 184 B.R.

648, 653 (S.D.N.Y. 1995).

26. Bankruptcy Code section 363 does not require that the court substitute its business

judgment for that of the debtor. See, e.g., In re Ionosphere Clubs, Inc., 100 B.R. 670, 676

(Bankr. S.D.N.Y. 1989) (court will not substitute a hostile witness's business judgment for

debtor's unless testimony "established that [the debtor] has failed to articulate a sound business

justification for its chosen course"). Rather, the court should ascertain whether the debtor has

articulated a valid business justification for the proposed transaction. See, e.g., Lewis v.

Anderson, 615 F.2d 778 (9th Cir. 1979), cert. denied, 449 U.S. 869, 101 S. Ct. 206 (1980). This

is consistent with "the broad authority to operate the business of the debtor . . . [which] indicates

Congressional intent to limit court involvement in business decisions by a trustee . . . [so that] a

court may not interfere with a reasonable business decision made in good faith by a trustee." In

re Airlift Int'l, Inc., 18 B.R. 787, 789 (Bankr. S.D. Fla. 1982).

27. In this case, adequate business justification exists to allow Capital Salvage and

R.E. Loans to consummate the Forestar Contract and Escrow Agreement. Prior to the Petition




Date, the Debtors (with the consent of Wells Fargo) determined that it was in their best interests

to sell the Property to Forestar pursuant to the Forestar Contract.

28. Capital Salvage received a significant portion of the proceeds of the sale of the

Property prepetition and transferred those proceeds to R.E. Loans to be applied against the note

secured by the first-lien deed of trust on the Property. In exchange, R.E. Loans agreed to release

its lien on the Property. When it received the initial proceeds from Capital Salvage, R.E. Loans

delivered those proceeds to Wells Fargo to reduce Wells Fargo's prepetition claims against R.E.

Loans.

29. However, as detailed above, $2,000,000 of the purchase price (subject to Wells

Fargo's liens) was held in the Deposit until entry of the TIRZ Abandonment Order.

30. It is in the best interests of the Debtors and their estates to take necessary action to

consummate the Forestar Contract and Escrow Agreement and obtain the Deposit. If the TIRZ

Abandonment Order is approved, the Debtors will be able to obtain $2,000,000. Because the

$2,000,000 will constitute cash collateral proceeds securing Wells Fargo's secured claims against

R.E. Loans, R.E. Loans proposes to turn over the cash collateral proceeds to Wells Fargo in

reduction of R.E. Loans' prepetition indebtedness owed to Wells Fargo, which has consented to

this transaction conditioned upon receiving such proceeds as set forth above.

31. There is no possible downside to allowing the Debtors to consummate the

Forestar Contract and Escrow Agreement. If this Court approves the Motion, the Debtors will

incur minimal expenses and secure the opportunity to receive $2,000,000. On the other hand, if

the Court denies the Motion, the Debtors will be precluded from obtaining the Deposit, to no

apparent benefit. Prior to the Petition Date, the Debtors determined that it was preferable to

transfer the TIRZ Reimbursements for $2 million rather than attempt to maintain and monetize




the TIRZ Reimbursements over time. The Debtors' ability to utilize the TIRZ Reimbursements

would have been dependant on numerous contingencies, including (i) the construction of

finished homes on the Property and the sale of such homes to end users, and (ii) the possibility

that the proceeds available under the TIRZ Reimbursements would be re-allocated for other

projects in the public interest.

32. Accordingly, since consummating the Forestar Contract and Escrow Agreement

reflects sound business judgment decision, this Court should grant the Motion.

V.

NOTICE

33. No trustee, examiner or statutory creditors' committee has been appointed in these

chapter 11 cases. This Motion has been provided to: (i) the Office of the United States Trustee

for the Northern District of Texas; (ii) a combined list of the twenty largest unsecured creditors

of the Debtors, and the twenty largest Noteholders, as defined in the Order Establishing Notice

Procedures and Permitting Debtors in Possession to Serve Insured Depository Institutions by

First-Class Mail [Docket No. 54]; (iii) counsel to Wells Fargo Capital Finance, LLC; (iv) the

Internal Revenue Service; (v) the U.S. Securities and Exchange Commission; and (vi) all parties

in interest who have requested notice. The Debtors respectfully submit that no further notice of

this Motion is required.

34. The Pleadings in these cases and supporting papers are available on the Debtors'

website www.RELoansllc.com, on the Bankruptcy Court's website at ecf.txnb.uscourts.gov,

and may be requested from the Debtors at the following addresses: (a) Stutman, Treister & Glatt

PC, c/o Kendra Johnson, 1901 Avenue of the Stars, 12th Floor, Los Angeles, California 90067

([email protected]), or (b) Gardere Wynne Sewell LLP, c/o Sharon Hawthorne, 1601 Elm

Street, Suite 3000, Dallas, Texas, 75201 ([email protected]).




VI.

CONCLUSION

WHEREFORE, based on the arguments and authorities set forth above, the Debtors

respectfully request that the Court (i) enter an order, with a waiver of the Bankruptcy Rule

6004(h) stay, authorizing the Debtors to consummate the Forestar Contract and Escrow

Agreement and engage in such transactions as described above, and (ii) granting such other and

further relief as the Court deems to be just and proper.

DATED: September 19, 2011 Respectfully submitted by:

/s/ Holland N. O'Neil Stephen A. McCartin (TX 13374700) Holland Neff O'Neil (TX 14864700) Virgil Ochoa (TX 24070358) GARDERE WYNNE SEWELL LLP 3000 Thanksgiving Tower 1601 Elm Street Dallas, TX 75201-4761 Telephone: (214) 999-3000 Facsimile: (214) 999-4667 [email protected] [email protected] [email protected]

and /s/ Jeffrey C. Krause Jeffrey C. Krause (CA 94053) Gregory K. Jones (CA 181072) STUTMAN, TREISTER & GLATT PROFESSIONAL CORPORATION 1901 Avenue of the Stars, 12th Floor Los Angeles, CA 90067 Telephone: (310) 228-5600

Facsimile: (310) 228-5788 [email protected]

[email protected]




DECLARATION OF W. FARLEY DAKAN IN SUPPORT OF EMERGENCY MOTION FOR ORDER

AUTHORIZING DEBTORS TO CONSUMMATE CONTRACT OF SALE AND ESCROW AGREEMENT

WITH FORESTAR (USA) REAL ESTATE GROUP - PAGE - 1

DALLAS 2266625v.3

Stephen A. McCartin (TX 13374700)

Holland Neff O'Neil (TX 14864700)

Virgil Ochoa (TX 24070358)

GARDERE WYNNE SEWELL LLP

3000 Thanksgiving Tower

1601 Elm Street

Dallas, Texas 75201-4761

Telephone: (214) 999-3000

Facsimile: (214) 999-4667

[email protected]

[email protected]

[email protected]

and

Jeffrey C. Krause (Cal. 94053)

Gregory K. Jones (Cal. 181072)

STUTMAN, TREISTER & GLATT

PROFESSIONAL CORPORATION

1901 Avenue of the Stars, 12th Floor

Los Angeles, CA 90067

Tel: (310) 228-5600

Fax: (310) 228-5788

[email protected]

[email protected]



IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

In re: R.E. LOANS, LLC, R.E. FUTURE, LLC, CAPITAL SALVAGE, a California Corporation Debtors.

§ § § § § § § §

Chapter 11 Cases Case No. 11-35865-BJH Jointly Administered

DECLARATION OF W. FARLEY DAKAN

IN SUPPORT OF EMERGENCY MOTION FOR ORDER AUTHORIZING DEBTORS

TO CONSUMMATE CONTRACT OF SALE AND ESCROW AGREEMENT WITH

FORESTAR (USA) REAL ESTATE GROUP

Case 11-35865-bjh11 Doc 60-1 Filed 09/19/11 Entered 09/19/11 22:26:52 Desc Affidavit Farley Dakan Page 1 of 7




DALLAS 2266625v.3

I, W. Farley Dakan, declare as follows:

1. I am over 18 years of age and if called upon I would competently testify to

the matters set forth herein from my own personal knowledge or from knowledge gathered from

my review of relevant documents, or my opinion based upon my experience.

2. During January of 2010, R.E. Loans, LLC, a California limited liability

company ("R.E. Loans"), engaged Mackinac Partners ("Mackinac"), of which I am a managing

director, to provide consulting services. On April 10, 2010, R.E. Loans formally engaged

Mackinac to serve as Chief Restructuring Officer.

3. James A. Weissenborn assumed primary responsibility as the Chief

Restructuring Officer ("CRO") since that date. Mackinac's authority to act on behalf of R.E.

Loans and its wholly owned subsidiaries, Capital Salvage, a California corporation ("Capital

Salvage"), and R.E. Future, LLC, a California limited liability company ("R.E. Future") (with

R.E. Loans and Capital Salvage, the "Debtors") was expanded as of September 13, 2011 (the

“Petition Date”), and Mr. Weissenborn's expanded role was approved on an interim basis by the

Bankruptcy Court.1

4. Since January of 2010, I have provided numerous services to the Debtors.

Among other things, I have assisted in the management of the Debtors' real estate portfolio,

handled general and administrative matters relating to the Debtors' businesses, and assisted in the

overall restructuring of the Debtors. Based upon my personal knowledge of the Debtors, their

business operations, history, industry, and books and records, and based upon information

contained in the Debtors' books and records, I am qualified to give this declaration on behalf of

the Debtors.

1 See Interim Order Authorizing Employment of Mackinac Partners and James Weissenborn on an Interim Basis

From the Petition Date to Provide Interim Management Assistance to Debtors Pursuant to 11 U.S.C. §363 [Doc.

No. 52].





DALLAS 2266625v.3

5. Some of the information presented below is based upon my review of data

regularly compiled by the Debtors in the ordinary course of their business prior to my

involvement.

6. I submit this declaration in support of the Emergency Motion for Order

Authorizing Debtors to Consummate Contract of Sale and Escrow Agreement with Forestar

(USA) Real Estate Group (the "Motion").

A. The Harris County Property

7. On or around January 14, 2008, R.E. Loans made one or more loans in the

aggregate principal amount of $23,000,000 (the "BMC Debt") to Bravo Marshall Communities,

L.P., a Texas limited partnership ("BMC"). The BMC Debt was evidenced by a note payable by

BMC to R.E. Loans (the "BMC Note"), secured by a deed of trust (the "Deed of Trust"),

security agreement, and assignment of leases and rents, executed by BMC in favor of R.E.

Loans. The repayment of the BMC Note was secured by certain real and personal property

located in Harris County, Texas (the "Property"). Capital Salvage acquired a second note

executed by BMC and secured by a second-priority deed of trust on the Property (the "Second

Deed of Trust").

8. In connection with the Deed of Trust, on January 14, 2008, BMC also

executed a Collateral Assignment of Utility Agreement Rights (the "Utility Assignment") in

favor of R.E. Loans. Pursuant to the Utility Assignment, BMC assigned to R.E. Loans certain

tax increment reinvestment zone rights (the "TIRZ Reimbursements") relating to the Property.

A true and correct copy of the Utility Assignment is attached to the Motion as Exhibit "B".

B. BMC's Bankruptcy

9. On September 19, 2008, BMC filed a voluntary petition for relief under

chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern

District of Texas, Houston Division (the "Houston Bankruptcy Court"), Case No. 08-36044-

H3-7 (the "Chapter 7 Case").





DALLAS 2266625v.3

10. Notwithstanding the fact that R.E. Loans had an assignment of the TIRZ

Reimbursements pursuant to the Utility Assignment, BMC stated in its Schedules of assets and

liabilities (the "Schedules") that it owned such TIRZ Reimbursements. R.E. Loans and Capital

Salvage disputed the assertions in BMC's Schedules, but no immediate action was taken to

amend BMC's Schedules.

11. On February 11, 2009, the Houston Bankruptcy Court entered an order

abandoning BMC's interests in the Property (the "Abandonment Order"). The TIRZ

Reimbursements were not included as part of property abandoned within such Abandonment

Order.

12. After the Abandonment Order was entered, Capital Salvage foreclosed on

the Second Deed of Trust, and credit bid at the foreclosure sale. As a result, Capital Salvage

acquired title to the Property, subject to R.E. Loans' first-lien deed of trust, which had been

pledged to Wells Fargo. Based on the foregoing, Capital Salvage acquired title to the Property,

subject to the first-lien deed of trust in favor of R.E. Loans and securing the BMC Note payable

to R.E. Loans in the amount of approximately $23 million.

C. Agreement to Sell Property To Forestar

13. On or around July 11, 2011, Capital Salvage and Forestar (USA) Real

Estate Group, Inc. ("Forestar") entered into the "Contract of Sale and Escrow Agreement with

Forestar (USA) Real Estate Group" (the "Forestar Contract"), whereby Capital Salvage agreed

to sell and transfer the Property and the TIRZ Reimbursements to Forestar. The Forestar

Contract was amended on August 29, 2011, August 31, 2011, and September 6, 2011. A true

and correct copy of the Forestar Contract and amendments are attached to the Motion as Exhibit

“A.”

D. Separation Of The TIRZ Reimbursements From The Sale Of The Property

14. Because BMC had asserted in its Schedules that it owned the TIRZ

Reimbursements relating to the Property, notwithstanding the prior transfer of such rights to R.E.





DALLAS 2266625v.3

Loans, there was an issue regarding whether R.E. Loans or Capital Salvage could transfer clean

title to the TIRZ Reimbursements to Forestar.

15. Employees of Mackinac under my supervision contacted BMC's chapter 7

trustee (the "Chapter 7 Trustee") to discuss BMC's assertion of rights to the TIRZ

Reimbursements.

16. The Chapter 7 Trustee agreed that BMC had improperly included the

TIRZ Reimbursements in its Schedules, and he committed to file a motion to abandon the

estate's interests in the TIRZ Reimbursements (the " TIRZ Abandonment Motion"). A hearing

to consider the TIRZ Abandonment Motion is currently set for September 20, 2011.

17. However, R.E. Loans, Capital Salvage and Forestar wished to close the

sale of the Property when it was scheduled to close, which was before the hearing on the TIRZ

Abandonment Motion. Accordingly, to resolve issues relating to the TIRZ Reimbursements,

R.E. Loans, Capital Salvage, Forestar, and Stewart Title-Kingwood, as escrow agent ("Stewart

Title"), entered into an Escrow Agreement (the "Escrow Agreement"), which was consented to

by Wells Fargo (the first-priority lienholder on the net cash proceeds from the sale). A true and

correct copy of the Escrow Agreement is attached to the Motion as Exhibit “C.”

D. Closing Of Sale (Not Including TIRZ Reimbursements)

18. On or around September 6, 2011, Capital Salvage conveyed the Property

to Forestar pursuant to the Forestar Contract. R.E. Loans (through Capital Salvage) received

approximately $4.9 million of the net proceeds generated by the sale (after payment of property

taxes, brokerage fees and other closing costs). These collateral proceeds were delivered to Wells

Fargo and applied against R.E. Loans' prepetition obligations to Wells Fargo.

19. Additionally, pursuant to the Escrow Agreement, Forestar delivered

$2,000,000 to Stewart Title. As of the Petition Date, the $2,000,000 Deposit remained with

Stewart Title in an escrow account, pending the determination of the TIRZ Abandonment

Motion.





DALLAS 2266625v.3

E. Best Interests Of Debtors To Consummate Forestar Contract And Escrow

Agreement

20. It is in the best interests of the Debtors and their estates to take necessary

action to consummate the Forestar Contract and Escrow Agreement and obtain the holdback. If

the order approving the TIRZ Abandonment Motion is approved, the Debtors will be able to

obtain $2,000,000.

21. There is no possible downside to allowing the Debtors to consummate the

Forestar Contract and Escrow Agreement. If this Court approves the Motion, the Debtors will

incur minimal expenses and secure the opportunity to receive $2,000,000. On the other hand, if

the Court denies the Motion, the Debtors will be precluded from obtaining the Deposit, to no

apparent benefit.

22. Prior to the Petition Date, the Debtors determined that it was preferable to

transfer the TIRZ Reimbursements for $2 million rather than attempt to maintain and monetize

the TIRZ Reimbursements over time. The Debtors' ability to utilize the TIRZ Reimbursements

would have been dependant on numerous contingencies, including (i) the construction of

finished homes on the Property and the sale of such homes to end users and (ii) the possibility

that the proceeds available under the TIRZ Reimbursements would be re-allocated for other

projects in the public interest.





DALLAS 2266625v.3

I declare under penalty of perjury under the laws of the United States of America

that the foregoing is true and correct.

Executed at Austin, Texas, on September 19, 2011.

/s/ W. Farley Dakan W. Farley Dakan


Case 11-35865-bjh11 Doc 60-2 Filed 09/19/11 Entered 09/19/11 22:26:52 Desc Exhibit A Page 1 of 51

Case 11-35865-bjh11 Doc 60-3 Filed 09/19/11 Entered 09/19/11 22:26:52 Desc Exhibit B Page 1 of 10

Case 11-35865-bjh11 Doc 60-4 Filed 09/19/11 Entered 09/19/11 22:26:52 Desc Exhibit C Page 1 of 7

Stephen A. McCartin (TX 13374700) Virgil Ochoa (TX ...emergency motion for order authorizing debtors...

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