Judge rules Kilmer creditors group must try again; Kilmer moves to regain control of embattled companies.

The unsecured creditors committee in the Indian Wells Estates battle received a setback when a U.S. Bankruptcy Court judge ruled the disclosure statement filed in support of its reorganization plan for the companies involved in the luxury-homes project was inadequate.

Meanwhile, the morning before the ruling, Indian Wells founder Eugene Kilmer filed a pair of reorganization plans that, if either is approved, would take control of his bankruptcy-sheltered companies out of the trustee's hands and place them in the hands of a Kilmer-controlled board.

His reorganization plans also state that between $1.5 million and $2 million would be raised to pay the creditors claims, and that the money could possibly be raised through a loan taken against some of the properties owned by the companies.

The only significant difference between the two plans is that one provides for reorganizing each of the 11 separate companies currently in Chapter 11, while the other calls for the reorganization of the 11 consolidated into one bankruptcy case.

The second plan was provided in the event that an unsecured creditors committee proposal to consolidate the 11 is successful.

It was the disclosure statement accompanying this committee proposal that was rejected by the court.

"I think you've got to start all over," said U.S. Bankruptcy Court Judge Vincent Zurzolo, when ruling on March 11 that several parts of the disclosure document needed to be clarified or rewritten.

The unsecured creditors, who hold markers backed by no form of collateral, are playing a key role in a series of legal disputes involving Kilmer's 11 interlocking real estate companies. Kilmer is an aircraft parts manufacturer-turned-developer and father of movie star Val Kilmer.

The bankruptcy court placed companies the control of a trustee Oct. 10.

Kilmer and his family own more than 1,000 acres of property in Chatsworth, 150 acres of which has been subdivided into an elite community of pricey homes called Indian Wells Estates, dubbed the "Bel-Air of the Valley."

Kem Inc. is the holding company for the other 10 real estate companies, each of which owns various pieces of property. Indian Wells Estate Inc. is the company with the most property.

Kilmer placed all of his real estate companies in Chapter 11 bankruptcy proceedings in January 1991. A year later, in January 1992, a series of court hearings began which will eventually decide the fate of the companies.

In February, the unsecured creditors committee submitted a reorganization plan and an accompanying disclosure statement. Following the statement's rejection, the committee plans to submit a new one within the next two months.

In the disclosure statement, the unsecured creditors committee requested that all 11 bankruptcy cases be consolidated into one in a process called substantive consolidation.

"The economic affairs of the debtors are so entangled that substantive consolidation will benefit all creditors, or they will at least realize as great a return as if no consolidation occurred," the document stated.

The disclosure statement called for the consolidation to be decided in a court hearing, but Judge Zurzolo wants the decision to made by a vote of the creditors instead, said Michael Kogan, attorney for the committee. The committee members have no problem with this because that was the procedure they had originally requested but later changed in an earlier document.

The committee's reorganization plan calls for a Chapter 11 liquidation of the companies in bankruptcy, as opposed to converting the companies to Chapter 7 for a liquidation process.

The value of the real estate properties held by the companies would be 33 percent less if the properties were sold in a Chapter 7 liquidation instead of Chapter 11, the disclosure document states.

A Chapter 7 liquidation would "likely" call for a "forced sale" of the property, without reasonable time for exposure of the property in the open market, the document noted. Chapter 11 liquidation might bring a higher price because it would allow from five to seven years for the properties to be sold.

Also, the unsecured creditors committee would still have some influence over the liquidation process in Chapter 11, whereas in a Chapter 7 liquidation only the trustee would be involved, Kogan said.

In a filing commenting on the disclosure statement, U.S. Trustee Marcy Tiffany noted that the committee's 33-percent calculation is "unbelievable."

"The committee reasons that in a Chapter 7, the accelerated sale will reduce the value of assets. This statement is misleading," according to the trustee's statement. "The Chapter 7 process is anything but fast. Indeed, the (Chapter) 11 liquidation will probably result in quicker sales."