Saguaro Ranch, the luxury development nestled in the Tortolita Mountains northwest of Tucson, is now facing foreclosure despite filing for bankruptcy protection.

The developers, led by Stephen Phinny, have defaulted on $50 million in loans, documents filed in the Pima County Recorder’s Office say. The property near West Moore and North Tangerine roads is scheduled for auction May 27.

The borrowers on the loan, which was recorded in December of 2005, are listed on the documents as Saguaro Ranch Investments LLC and Saguaro Ranch Development Corp..

In February, U.S. Bankruptcy Judge Eileen W. Hollowell lifted the stay that was keeping creditors Kennedy Funding Inc. and Anglo-American Financial LLC from moving forward with the foreclosure.

Since then, the development’s bankruptcy attorney, Eric Slocum Sparks, has acted quickly to try to prevent the foreclosure sale. He said he filed a third amended plan – which made changes requested by the judge – for the development to come out of bankruptcy. If approved, it will moot the sale, Sparks said.

The luxury market is improving and several lots in the development are now in escrow, Sparks said. But those sales are contingent upon Hollowell’s approval of the plan.

“There’s close to $6 million sitting in escrow ready to close,” Sparks said.

The delinquent property includes McClintock’s Restaurant, which is still open for dinner seven nights a week and brunch on Sundays, the restaurant’s answering machine says.

Years ago, when Southern Arizona’s housing market was skyrocketing, Phinny aggressively promoted Saguaro Ranch, saying it would become a premier destination for actors and athletes, on a par with high-end communities nationwide.

That was before the market crashed.

Lots in the Marana development, tucked behind a tunnel Phinny had pummeled through a mountain, were once offered for more than $1 million. Now, a lot already taken back by the bank is priced at $234,900 on the Tucson Association of Realtors Multiple Listing Service. Other lots are selling for $315,000 and $330,000.

Several Saguaro Ranch development companies filed for Chapter 11 bankruptcy protection in February 2009. Phinny, whose grandfather, Daniel F. Gerber, founded the baby-food behemoth Gerber Products Co., himself filed for bankruptcy protection a short time later.

Under a Chapter 11 filing, debtors are generally protected from legal action while they work out a plan to repay their creditors. It’s sometimes used as a tool by developers to avoid foreclosure. But even in bankruptcy, borrowers still need to pay back their debts, and the court can lift that protection if creditors can show the debtor has no equity in the property and it’s not necessary for the reorganization.

In court filings, Kennedy Funding and Anglo-American Financial argued just that.

Attorneys representing the creditors said in a motion filed last March that Kennedy Funding is a grossly undersecured creditor holding a claim in excess of $33 million, secured by collateral worth $14.7 million.

“No principal payments have been made on this loan since June 3, 2008, and no interest payments have been made since Oct. 28, 2008,” the motion says. “Kennedy Funding is entitled to relief from stay for lack of adequate protection, and because there is no equity in the collateral and the collateral is not necessary to an effective reorganization.”

The creditors’ attorney, George O. Krauja, did not return a phone call seeking comment.

The motion came before the court for final hearing Feb. 4 and Hollowell granted it. That led Saguaro Ranch’s attorney, Sparks, to file documents requesting that Hollowell reopen the hearing and alter or amend the judgment, but Hollowell denied that request earlier in March.

Just last week, Sparks appealed Hollowell’s decision to the Bankruptcy Appellate Panel of the 9th Circuit in Pasadena, Calif.

Sparks said he’d withdraw that appeal if Hollowell approves the third amended plan, and added he’s confident she’ll do that in time to avoid an auction.

“It’s not going to go forward,” he said. “The court will have approved the plan by then.”

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