In re Victory Construction Co., Inc.

In 1979, real estate developer Fred Roven paid $5,000 to purchase an option on a building on behalf of Roven’s company, Victory Construction Company (Victory) (debtor). Roven signed an option agreement expressing Victory’s interest in purchasing the property by assuming the existing liens on the property. Roven thought he might be able to negotiate with the lienholders to lessen the amounts owed. Roven was unable to restructure the debt, but Victory exercised the option to purchase the property anyway and assumed debts on the property of roughly $2.9 million. Roven apparently saw the property as a speculative opportunity and appeared unbothered by the potential of filing for bankruptcy if Roven were unable to satisfy the debts. Following Victory’s purchase, lienholder John Hadley (creditor) recorded a notice of default on Roven’s lien and scheduled a foreclosure sale of the property. The day before the foreclosure sale, Victory filed for Chapter 11 bankruptcy. Hadley sought relief from the bankruptcy code’s automatic stay, and the court granted relief. Victory appealed and sought a stay pending appeal. Victory owed Hadley $1.35 million and proposed to pay Hadley 8 percent interest as a condition of the stay. The court permitted a stay on the condition that Victory pay Hadley 18 percent interest, and Victory agreed. Victory subsequently proposed a Chapter 11 reorganization plan that included curing previous defaults and reinstating loans from Hadley and California Federal Savings and Loan (Cal Fed) (creditor) at their predefault maturity levels and contractual interest rates of 8 percent and 8.25 percent, respectively. The proposed plan also included personal guarantees from Roven, two Roven associates, and an affiliated entity. The bankruptcy court considered whether Victory’s proposed plan was confirmable under 11 U.S.C. § 1129.