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September 17, 2014

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Judge approves bankruptcy petition filed against Inspirada developers

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Steve Marcus

Inspirada, near Anthem in Henderson, was envisioned as a 13,500-home, 2,000-acre New Urbanist community where people could walk to parks, schools and a casino, but the housing slump has called into question the commitment of developers and buyers and perhaps lowered the value of some of the homes by about $100,000.

Inspirada

Mountain's Edge and Inspirada

A view of the Mountain's Edge master-planned community in the southwest Las Vegas Valley Friday, August 6, 2010. Many people bought into the community with the promise of parks but many of the parks have been scaled back or will not be built. Launch slideshow »

Bankruptcy Judge Bruce Markell in Las Vegas on Thursday approved the involuntary bankruptcy petition filed by banks against South Edge LLC, developer of Henderson's Inspirada planned community.

Lenders led by JPMorgan Chase Bank on Dec. 9 filed the petition, charging defaults under a $585 million credit agreement in which $328 million is still owed. Because of the recession, homebuilders that own the company had stopped buying land in Inspirada to build homes, making it impossible for South Edge to meet its debt obligations.

Homebuilders fought the involuntary petition, but Markell on Thursday granted it and ordered the U.S. Bankruptcy Trustee's office to immediately appoint a disinterested person to supervise South Edge's Chapter 11 bankruptcy estate as trustee.

KB Home, one of the South Edge owners with a 48.5 percent stake, said in a Securities and Exchange Commission filing on Friday that Markell's decision could make it liable under a guarantee for paying the lenders more than $180 million due under the credit agreement.

Los Angeles-based KB Home said if it receives a demand for the $180 million, plus accrued interest and legal fees, it will contest the demand.

``The trustee may or may not pursue remedies proposed by the lenders, including attempted enforcement of alleged obligations of the South Edge members to purchase land parcels from South Edge, which, if successfully enforced, would likely have the effect of reducing the debt owed by South Edge on the loans,'' KB Home said in Friday's filing.

Similar guarantees were made by the other homebuilders that own South Edge and they too may receive demands for payment under the guarantees.

Besides KB Home, the other owners are Focus Property Group, Meritage Homes, Woodside Group, Toll Brothers, Beazer Homes, Kimball Hill Homes and Pardee Homes.

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  1. Wow, this decision by Judge Markell appeared to be a close one based on the pleadings filed by the parties. South Edge LLC, controlled by KB Homes, was represented by one of the most sophisticated bankruptcy lawyers in the Western U.S. Judge Markell is so smart, I thought there was a chance he was going to shut down the involuntary bankruptcy case let alone not appoint a trustee, buying the arguments made by South Edge, LLC.

    Judge Markell's decision came after several days of full blown trial on the facts of the case, necessary to resolve several exotic bankruptcy law issues. As a result, Judge Markell has a full evidentiary record to support his decision.

    The South Edge case is nationally important because it illustrates that the practice of national homebuilders in 2007-2009, walking away from contracts to purchase land, comes with consequences greater than just the loss of purchase money deposits. The problem with walk-aways, such as this one, is that under current securities accounting rules, shareholders in national home building companies are not given any way to anticipate economic losses or litigation costs beyond the loss of the deposits, which are written off in the year of the walk-away. That accounting failure allows the market to inflate the price of publicly traded homebuilder stocks.