The ruling below could be a game changer for the homeowner who fails to file BK until AFTER a foreclosure sale. According to Judge Mark Wallace, there is a period after the auction is concluded and before the Deed Upon Trustee Sale is signed by the trustee where if a bankruptcy case is filed, the automatic stay enjoins the execution of that Deed.
If a BK is filed after the auction but before execution of the deed...typically a 2 or 3 day period, the stay is in place. If the trustee executes the deed while the stay is in place...that execution is a violation of the stay and is legally VOID.
The Court rejects the previous GARNER case in reaching its conclusion. Its unclear if other Judges will follow suit. However, this decision creates a colorable argument that can be used to reverse a f\c sale if a debtor acts quickly file a bankruptcy.
http://www.cacb.uscourts.gov/cacb/Publications.nsf/Opinions/B9A13C77B1CE1F8C882578E1006369DD/$FILE/RS-11-15665-MW_MOD.pdf
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
RIVERSIDE DIVISION
In re:
Raul Gonzalez,
Debtor.
Case No.: No. 6:11-bk-15665-MW
Chapter 7
MEMORANDUM DECISION AND ORDER
WALLACE, J.
This matter comes before the Court on a motion by Rancho Horizon, LLC
("Rancho Horizon") for relief from the automatic stay on the ground of unlawful detainer.
This is the second such motion brought by Rancho Horizon with respect to the same
property, the first motion having been denied without prejudice on May 9, 2011. For the
reasons stated below, the Court denies the motion with prejudice.
FACTUAL BACKGROUND
Debtor Raul Gonzalez ("Gonzalez") is a co-owner of a residence at 2765
Brockton Avenue, Riverside, California (the "Property"). The Property was encumbered by
a deed of trust in favor of OneWest Bank FSB as beneficiary, with Quality Loan Service
Corp. ("Quality Loan Service") as trustee.
On November 15, 2010, Quality Loan Service recorded a Notice of Trustee's
Sale (the "Notice") indicating that the Property would be sold at the main entrance to the
Riverside County Courthouse on December 9, 2010 at 10:00 a.m. Subsequently, the sale
was postponed to February 22, 2011 at 10:00 a.m. At some point during the day of
February 22, Quality Loan Service accepted a bid by Rancho Horizon to purchase the
Property. The record is unclear as to the precise time the final bid was accepted. In its
initial motion for relief from the automatic stay, Rancho Horizon alleged by sworn
declaration that "[t]he non-judicial foreclosure sale took place at approximately 8:00 a.m. on
February 22, 2011."1 In the motion now before the Court, Rancho Horizon alleged in a
second sworn declaration that "[t]he property was in fact auctioned at 10:00 a.m. on
February 22, 2011."2 When the motion was heard on June 21, 2011, Rancho Horizon's
counsel represented to the Court that he had yet another declaration, this one by declarant
Sara Monell, stating the auction closed at 1:27 p.m.3 On the other hand, there is no doubt
or equivocation as to the precise time of Gonzalez's filing of his chapter 7 petition - 1:46
p.m. on February 22, 2011. For his part, Gonzalez contends that as of 1:46 p.m. the
Property had not yet been sold.
On February 25, 2011 Quality Loan Service as grantor executed a Trustee's
Deed Upon Sale (the "Deed") in favor of Rancho Horizon as grantee whereby it conveyed a
fee simple estate in the Property to Rancho Horizon. The record is devoid of any evidence
1
Supplemental Declaration of Robert A. Krasney on Behalf of Rancho Horizon, LLC For Annulment to
Automatic Stay (the "Krasney Declaration") at page 2, lines 12-13, filed April 15, 2011.
2
Supplemental Declaration of Barry Lee O'Connor For Annulment to the Automatic Stay and Validate
Trustee's Sale at page 4, lines 8-9, filed May 24, 2011.
3
The Declaration of Sara Monell was finally filed with the Court on June 29, 2011 and states on page 2, lines
15-16, that "the auction closed at 1:27 p.m. in the afternoon of February 22, 2011."
as to the date of delivery of the Deed or its acceptance by Rancho Horizon. The Deed was
recorded with the Riverside County Recorder on March 2, 2011.
Rancho Horizon filed a complaint against Gonzalez's co-owner (Mario
Jimenez) for unlawful detainer of the Property on February 28, 2011. Mario Jimenez filed a
demurrer on March 7, 2011. Rancho Horizon contends it had no notice of the filing of the
Gonzalez chapter 7 petition at the time it filed the complaint. Gonzalez disputes this point.
Rancho Horizon filed a motion for relief from stay on the basis of unlawful
detainer on April 15, 2011. The motion was heard on May 9, 2011 and was denied without
prejudice principally on the ground that the Krasney Declaration (alleging that the sale
occurred "at approximately 8:00 a.m.") lacked foundation.
The motion now before the Court was filed on May 24, 2011 and heard on
June 21, 2011. Rancho Horizon alleges that it is the owner of the Property and that the
stay should be annulled because Gonzalez has no right to continued occupancy of the
Property. Rancho Horizon contends that relief from stay (including annulment) should be
granted for cause under 11 U.S.C. § 362(d)(1) and under 11 U.S.C. § 362(d)(4) because
the filing of Gonzalez's petition was part of a scheme to hinder, delay or4 defraud creditors.
Also heard on June 21, 2011 was Gonzalez's motion for an order to set aside
the foreclosure sale and to rescind the Deed. The Court continued the hearing on that
motion to September 27, 2011 and scheduled an evidentiary hearing for the same date with
respect to the time of the acceptance of the final bid at the Property's nonjudicial
foreclosure sale.
4
Although Rancho Horizon uses the conjunction "or" - as in "hinder, delay or defraud creditors" - the statute
uses the conjunction "and".
See 11 U.S.C. § 362(d)(4).
DISCUSSION
Although there is a significant dispute between the parties as to the precise
time of the trustee's acceptance of the final bid (and perhaps the only bid) at the nonjudicial
foreclosure sale, it is not necessary to defer a ruling on Rancho Horizon's motion. As
discussed below, Rancho Horizon is not entitled to relief from the automatic stay on the
basis of unlawful detainer even if the acceptance of the final bid by Quality Loan Service
occurred prior to 1:46 p.m. on February 22, 2011. Rancho Horizon fails to meet its burden
of establishing a
prima facie case because it has failed to demonstrate facts that would
support relief from the stay under 11 U.S.C. §§ 362(d)(1) or (d)(4).
A. Postpetition Execution of the Deed
At common law in earlier ages, the ownership of real property was transferred
by "livery of seisin", a ceremony in which the grantor (then called the "feoffor") traveled to
the property to be conveyed and, in the presence of witnesses, declared the contents of the
grant and delivered to the grantee a clod of earth or twig or bough. 2 William Blackstone,
Commentaries *315. Modern law, however, prescribes the use of written deeds to convey
real property. Section 1091 of the California Civil Code provides that an estate in real
property (other than an estate at will or for a term not exceeding one year) can be
transferred only by deed or by operation of law.
The execution, delivery and acceptance of a properly-drawn deed to real
property are no mere formalities or ministerial acts.
5 Rather, they are the essential acts by
which ownership of, and title to, real property are transferred from one person to another. A
deed is not merely evidence of a grant but is the grant itself and operates to transfer title to
5
One California case has suggested that the execution of a deed is only a ministerial act. Ballengee v.
Sadlier
, 179 Cal. App. 3d 1, 4-5 (Ct. App. 1986). However, this case has been limited to its special facts and,
in any event, is of questionable validity in view of its failure to discuss or even cite section 1091 of the
California Civil Code.
See Little v. CFS Serv. Corp., 188 Cal. App. 3d 1354, 1362 (Ct. App. 1987) ("We
believe that
Ballengee should be limited to its facts: an unsuccessful attempt by a junior lienor to circumvent
an antideficiency statute by arranging for his trustee to withhold execution and delivery of the deed to him after
he had purchased at his own sale.").
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the grantee.
See Cal. Civ. Code § 1091; Hamilton v. Hubbard, 134 Cal. 603, 605 (1901);
Drake
v. Martin, 30 Cal. App. 4th 984, 994 (Ct. App. 1994). Of critical importance here is
that there can be no transfer of title to, or ownership of, real property (including, of course,
the Property) unless and until a deed is executed in favor a grantee and such deed is
delivered to, and accepted by, such grantee, unless through a transfer by operation of law.
California law provides that the purchaser at a nonjudicial foreclosure sale
takes title by a trustee's deed, not by operation of law.
Moeller v. Lien, 25 Cal. App. 4th
822, 831 (Ct. App. 1994);
see Brown v. Copp, 105 Cal. App. 2d 1, 6-7 (Ct. App. 1951)
(trustee's deed pursuant to sale under deed of trust conveys absolute legal title to the
purchaser). California's nonjudicial foreclosure statutes (codified in California Civil Code
§§ 2924 - 2924k) specifically envision the issuance of a trustee's deed to the purchaser in
connection with a nonjudicial foreclosure sale and provide that certain recitals in such a
deed create a conclusive presumption in favor of a bona fide purchaser that the sale was in
compliance with relevant legal requirements.
6
California's statutes regulate nonjudicial foreclosures, but the mere regulation
of a sale transaction does not turn the transaction into a transfer by the law's operation. A
transfer by operation of law is to be contrasted with a transfer by operation of the parties to
the transfer. A transfer by operation of law occurs when property is transferred pursuant to
the terms of a statute without any action required by any private party directly relating to the
transfer. One example of a transfer by operation of law is the transfer of property from the
debtor to the bankruptcy estate pursuant to 11 U.S.C. § 541. The mere commencement of
the bankruptcy case triggers the transfer, without the need for any transfer-related activity
by the debtor.
7 Another example is a merger of corporations under California law, where
6
See, e.g., Cal. Civ. Code §§ 2924(c), 2924h, 2924j(a).
7
Note, for example, that no deed from the debtor to the bankruptcy estate's trustee is necessary to effectuate
the transfer of a debtor's real property to the bankruptcy trustee. This is in sharp contrast to the transfer of
title that occurs in a nonjudicial foreclosure. As indicated above, title in a nonjudicial foreclosure is transferred
by a trustee's deed.
Moeller, 25 Cal. App. 4th at 831; see Brown, 105 Cal. App. 2d at 6.
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the surviving corporation succeeds to all of the disappearing corporation's property "without
other transfer". Cal. Corp. Code § 1107(a). In contrast, a transfer that occurs in connection
with a nonjudicial foreclosure sale is utterly unlike transfers that occur in bankruptcy or
through corporate merger because a transfer in a nonjudicial foreclosure requires private
parties to send out notices, hold an auction, accept an offer from the highest bidder and
then issue a trustee's deed to the purchaser. For the foregoing reasons, the Court
concludes that a nonjudicial foreclosure is not a transfer by operation of law and that,
consistent with the California cases and statutes cited above, a deed from the trustee is
required to effectuate the transfer of the real property in a nonjudicial foreclosure.
8
The deed required by California law to convey title to the Property to Rancho
Horizon was executed postpetition on February 25, 2011 (there is no evidence as to the
date the deed was delivered or accepted) and is void,
Schwartz v. United States (In re
Schwartz),
954 F.2d 569, 571 (9th Cir. 1992), unless (1) rescued from voidness by certain
retroactive provisions set forth in section 2924h of the California Civil Code, (2) an
exception to the automatic stay applies, or (3) grounds exist for annulling the stay and
retroactively permitting the execution, delivery and acceptance of the Deed.
See 11 U.S.C.
§ 362(a)(3);
Jewett v. Shabahangi (In re Jewett), 146 B.R. 250, 252 (B.A.P. 9th Cir. 1992).
Accordingly, title to the Property did not pass to Rancho Horizon - unless this result is
altered by the provisions of law referred to above.
B. California Civil Code Section 2924h
Section 2924h of the California Civil Code is a complex statute that governs
bidding rules for the trustee's sale at a nonjudicial foreclosure. The statute contains a
8
A respected commentator has stated that a foreclosure is a transfer by operation of law. 3 Miller & Starr,
California Real Estate § 8.1 (3d ed. 2000). However, the cases cited for this proposition base their decision
on a California statute that has since been repealed - section 700 of the California Code of Civil Procedure.
Section 700 specifically provided for the transfer of title to the purchaser at an execution sale: "Upon the sale
the purchaser acquires all right, title, interest and claim of the debtor thereto." There is no counterpart to
section 700 in the present law governing nonjudicial foreclosures.
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provision - set forth in section 2924h(c) - that deems the trustee's sale to be "final" upon
the acceptance of the last and highest bid, and deemed perfected as of 8 a.m. on the actual
date of the sale if the trustee's deed is recorded within 15 calendar days of the sale. One
court has relied on this provision to hold that the postpetition issuance of a deed does not
violate the automatic stay because the recordation of the deed within 15 days of the sale
causes the sale to relate back to 8 a.m. on the sale date, thereby preceding the filing of a
bankruptcy petition (and, as a corollary, the imposition of the automatic stay).
In re Garner,
208 B.R. 698 (Bankr. N.D. Cal. 1997).
9 For the reasons stated below, this Court
respectfully disagrees with
Garner and holds that section 2924h does not validate the
postpetition execution of a trustee's deed.
A brief review of section 2924h may be helpful in resolving the issue. Section
2924h(a) provides that each and every bid made at a nonjudicial foreclosure is deemed to
be an irrevocable offer. Each subsequent bid cancels the previous bid (and offer). Section
2924h(b)(1) gives the trustee the right to require bidders to prove they can actually pay the
amount they are bidding. Section 2924h(b)(2) gives the trustee the right to require a
deposit from the last and highest bidder "immediately prior to the completion of the sale,
the
completion of the sale being so announced by the fall of the hammer or in another
customary manner
" (emphasis added). Section 2924h(c) provides that in the event the
trustee accepts a check drawn by a credit union or savings and loan association or a cash
equivalent designated in the notice of sale, " . . . the trustee may withhold the issuance of
the trustee's deed . . ." pending the time when the funds used to make the purchase
become available to the payee as a matter of right. Section 2924h(c) goes on to provide
that "[f]or the purposes of this subdivision, the trustee's sale shall be deemed final upon the
9
See also, Hamilton v. Hernandez (In re Hamilton), No. CC-04-1434-MaTK, 2005 Bankr. LEXIS 3427 (B.A.P.
9th Cir. August 1, 2005) (not for publication and of no precedential value).
Cf. Bebensee-Wong v. Fed. Nat'l
Mortgage Assoc.,
248 B.R. 820 (B.A.P. 9th Cir. 2000) (highest bid accepted prepetition and deed recorded
postpetition, but no indication as to whether deed was executed, delivered and accepted prepetition or
postpetition).
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acceptance of the last and highest bid, and shall be deemed perfected as of 8 a.m. on the
actual date of sale if the trustee's deed is recorded within 15 calendar days after the
sale . . . ." An automatic rescission of the "sale" occurs under section 2924h(c) if there is a
failure of consideration in the event funds are not available for withdrawal. Section
2924h(d) provides that if the trustee has not required a deposit pursuant to subdivision
(b)(2) of section 2924h, "the trustee shall complete the sale. If the last and highest bidder
then fails to deliver to the trustee, when demanded, the amount of his or her final bid in
cash [or other specified forms of consideration] . . . , that bidder shall be liable to the trustee
for all damages . . . ."
A sale transaction generally is comprised of two parts: an agreement for sale
and a closing of the sale transaction. In everyday commerce these two parts sometimes
occur simultaneously, such as when an individual purchases a newspaper at a newsstand
by first taking a newspaper out of the rack and then handing the exact change to the
vendor. In other instances there is only a very brief interval between the two, such as when
the cashier rings up the sale (the agreement for sale) and, moments later, accepts cash
from the purchaser and hands the purchaser a receipt (the closing of the sale).
In real estate transactions, where much larger sums of money and more
valuable property change hands, the agreement for sale and the closing of the sale are
usually distinctly different events. Typically, an escrow is opened after an agreement for
sale is signed. The seller deposits a grant deed and the buyer deposits the purchase price.
At the closing, which often occurs weeks after the escrow opened, the escrow officer issues
the deed to the buyer and transmits the purchase price (net of fees and costs) to the seller.
Legal title to the purchased property does not transfer to the buyer at the time of the
agreement for sale but rather at the closing.
Section 2924h uses the word "sale" in a number of places, and it may be
asked whether, in these contexts, "sale" means (1) only the agreement for sale, (2) both
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agreement for sale and closing of the sale, or (3) only the closing of the sale. Close
examination of section 2924h indicates that the statute is using the term to mean only the
agreement for sale as opposed to the other meanings. As discussed above, section
2924h(d) addresses a situation where the trustee has not required a deposit of the funds.
Subdivision (d) permits the trustee to "complete the sale":
(d) If the trustee has not required the last and highest bidder to
deposit the cash, a cashier's check drawn on a state or national
bank [or other specified forms of consideration] . . .
the trustee shall
complete the sale
. If the last and highest bidder then fails to deliver
to the trustee, when demanded, the amount of his or her final bid in
cash, a cashier's check drawn on a state or national bank [or other
specified forms of consideration] . . . that bidder shall be liable to
the trustee for all damages which the trustee may sustain by the
refusal to deliver to the trustee the amount of the final bid . . . ."
(emphases added)
If "sale" in the context of section 2924h(d) means the closing of the sale (or
both the agreement for sale and the closing of the sale), by its very definition the closing of
the sale would entail the payment of the purchase price by the buyer. Section 2924h(d)
then would be contradicting itself by referring to a situation in which, following the
completion of the sale, "the last and highest bidder then fails to deliver to the trustee . . . the
amount of his or her final bid in cash . . . ." In other words, a sale cannot be considered
closed if the buyer has not yet paid the purchase price, and therefore the reference in
section 2924h(d) to a "sale" (i.e., "the trustee shall complete the sale") must mean
something other than the closing of the sale. The logical inference is that "sale" is being
used to denote the agreement for sale, not the closing of the sale and not both the
agreement for sale and the closing of the sale. Interpreted in this fashion, section 2924h(d)
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authorizes the trustee to complete the agreement for sale even if the buyer has not made a
deposit of cash or other specified forms of consideration. In the event the buyer "then fails
to deliver to the trustee, when demanded, the amount of his or her final bid in cash . . .", the
transaction does not close at all, and the would-be buyer is liable to the trustee for
damages.
Section 2924h(b)(2), which states that the completion of the sale is
announced "by the fall of the hammer or in another customary manner", provides additional
support for this interpretation. One would not expect the trustee to simultaneously hand the
buyer the trustee's deed at the moment the hammer falls (if for no other reason than a grant
deed must name the grantee, and the grantee's name may not become known until the very
moment the hammer falls and, after all, it does take some time to prepare the deed). A
more sensible interpretation is that the fall of the hammer marks an offer and an acceptance
- an agreement for sale - whose only conditions to closing are the delivery of the deed to
the buyer and the receipt of the purchase price funds by the trustee or other payee as a
matter of right.
The provision for "automatic rescission" of the "sale" in section 2924h(c)
creates no inference that the statute is using "sale" to mean "closing of the sale" because it
is clear under California law that rescission can occur with respect to an executory contract.
Engle v. Farrell
, 75 Cal. App. 2d 612, 617-18 (Ct. App. 1946) (holding that section 1689 of
the California Civil Code, which provides for rescission, makes no distinction between
executory and executed contracts). Thus, the automatic rescission of the "sale" appears to
refer to the automatic rescission of the agreement for sale that occurred when the trustee's
hammer fell, marking an acceptance of the final bid.
What then of the "deemed final" language in section 2924h(c)? Until the
trustee's deed is delivered the successful bidder is out on a limb: he has tendered a check,
the trustee has accepted the check, but the bidder does not yet have the deed because the
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trustee has chosen to withhold it until the check used to purchase the property clears.
10
Suppose during this interval the trustee gets a higher bid from someone else. Can the
trustee then change his mind and sell to the new, higher bidder? Section 2924h makes it
clear he cannot,
because the agreement for sale is deemed final. The finality of the sale
prevents the trustee from continuing the sale after the hammer falls with the objective of
getting a higher bid from someone else.
Consequently, the "deemed final" provision of section 2924h does not alter the
rule of section 1091 of the California Civil Code that ownership of, and title to, real estate
passes by deed. At the time the petition was filed on February 22, 2011 - even presuming
Quality Loan Service's sale was final - Gonzalez still held the title
11 to the Property (and
was in possession thereof). Quality Loan Service's execution of the Deed on February 25,
2011 violated the automatic stay, and the Deed is therefore void.
In re Schwartz, 954 F.2d
at 571.
There remains the provision of section 2924h(c) that deems the "sale" to be
perfected as of 8 a.m. on the actual date of the sale if the trustee's deed is recorded within
15 calendar days after the sale. This provision is not operative in this case. Because the
Deed was executed postpetition it is void (see discussion above) and because it is void the
recording of a void deed is itself a void act and neither creates nor perfects title. California
courts have consistently held that no title is created by a void deed even if the void deed is
recorded.
Bryce v. O'Brien, 5 Cal. 2d 615, 616 (1936) ("An instrument wholly void, such as
a deed in blank, cannot be made the foundation of a good title, even under the equitable
doctrine of
bona fide purchaser."); Trout v. Taylor, 220 Cal. 652, 655-56 (1934).12 Thus,
10
The authority to withhold the deed in this situation appears in section 2924h(c).
11
Davisson v. Engles (In re Engles), 193 B.R. 23, 25 (Bankr. S.D. Cal. 1996) ("Until the deed from a
prepetition foreclosure sale is recorded, a debtor retains legal title to the property.").
12
The legislative history accompanying the amendment of section 2924h to provide for relation-back
perfection indicates there was a concern about the validity of foreclosure sales where a bankruptcy petition
was filed after the trustee's sale became final but before the deed could be recorded. The legislative history
does not elucidate how the timing of the execution, delivery and acceptance of the deed fits into this analysis
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because no valid deed was recorded within 15 days of the date of the sale (the Deed being
void), the relation-back rule does not apply.
C. Exception to the Automatic Stay
11 U.S.C. § 362(b)(24) provides that the automatic stay does not apply to any
transfer that is not avoidable under 11 U.S.C. § 544 and that is not avoidable under 11
U.S.C. § 549. Rancho Horizon contends that even if the nonjudicial foreclosure sale of the
Property occurred after the petition was filed, the transfer is nevertheless not avoidable
under section 549. For this proposition Rancho Horizon relies upon and cites section
549(c).
13
Section 549(c) prohibits the avoidance of a transfer of an interest in real
property to a "good faith purchaser without knowledge of the commencement of the case
and for present fair equivalent value . . . ." The term "present fair equivalent value" is not
defined in section 549(c). The Bankruptcy Appellate Panel of the Ninth Circuit has held that
"present fair equivalent value" is a more stringent standard than "reasonably equivalent
value."
Shaw v. Cnty. of San Bernardino (In re Shaw), 157 B.R. 151, 153-54 (B.A.P. 9th
Cir. 1993). In
Shaw, it was held that property having a proven fair market value of $76,000
that was sold at a tax sale for $36,049 was not sold for "present fair equivalent value."
In this case, although Rancho Horizon presented evidence that it paid
$167,000 for the Property, it has presented no evidence whatsoever concerning the
nor disclose any intention to legislatively overrule court rulings that the recordation of a void deed neither
creates nor perfects title. In any event, as long as a trustee's deed is executed, delivered and accepted
prepetition, relation-back perfection of a deed recorded after the petition date (or time) would occur under
section 2924h(c).
13
To prevail under 11 U.S.C. § 362(b)(24), Rancho Horizon must show that the transfer is not avoidable
under 11 U.S.C. § 544 and is not avoidable under 11 U.S.C. § 549. Rancho Horizon's arguments in the
motion address only section 549 and omit any discussion of section 544. The Court does not reach Rancho
Horizon's failure to address section 544 because of its failure to make out a prima facie case under section
549.
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Property's fair market value or its present fair equivalent value.
14 As Shaw makes clear, a
forced sale of real property at an auction does not necessarily and in all cases yield a sale
at fair market value. Under Rule 6001 of the Federal Rules of Bankruptcy Procedure,
Rancho Horizon has the burden of proof in this matter.
In re Major, 218 B.R. 501, 504
(Bankr. W.D. Mo. 1998). Rancho Horizon has not carried its burden of proof (nor, for that
matter, has it carried its burden to make out a
prima facie case)15 and therefore its
argument under section 549 fails.
16
D. Relief From the Stay
1. 11 U.S.C. § 362(d)(1)
Rancho Horizon contends that cause exists to lift the automatic stay because,
as of the petition date, Gonzalez had no right
17 to continued occupancy of the premises.
Rancho Horizon further alleges that it acquired title to the Property prepetition and recorded
the Deed within the requisite period.
18
However, as discussed above, Rancho Horizon did
not acquire legal title,
either prepetition or on or after the petition date. Moreover, Gonzalez remains in
possession of the Property.
Rancho Horizon's failure to acquire title precludes it from obtaining relief
under California's unlawful detainer laws. Section 1161a of the California Code of Civil
14
Exhibit "D" to Rancho Horizon's motion is a "Foreclosure Profile Report" by Foreclosure Radar. This
document contains a line item showing the Property's value to be $242,242. It is far from clear this is
admissible evidence of fair market value (and the Court makes no ruling on its admissibility).
15
11 U.S.C. § 362(g)(1); see Truebro, Inc. v. Plumberex Specialty Prods., Inc. (In re Plumberex Specialty
Prods., Inc.),
311 B.R. 551, 557 & n.11 (Bankr. C.D. Cal. 2004).
16
Note that the same analysis applies if the final bid was accepted before, rather than after, the filing of the
petition. Irrespective of the timing of the acceptance of the final bid, the execution, delivery and acceptance of
the Deed are all postpetition transactions.
17
As a technical matter, the right to occupancy of the Property resides in Gonzalez's bankruptcy estate, not
Gonzalez. The right to possession of the Property passed to Gonzalez's bankruptcy estate upon the
commencement of the case. 11 U.S.C. § 541(a)(1). Because this distinction generally is not germane to the
issues before the Court, "Gonzalez" will be used to refer to "Gonzalez's bankruptcy estate" where the context
so requires.
18
Notice of Motion and Motion For Relief From the Automatic Stay or For Order Confirming That the
Automatic Stay Does Not Apply Under 11 U.S.C. § 362(l) (with supporting declarations) by Movant Rancho
Horizon, LLC at 3 (filed May 24, 2011).
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Procedure allows a purchaser at a nonjudicial foreclosure sale to commence an unlawful
detainer action against a holdover trustor-former owner, but only if "title under the sale has
been duly perfected." Cal. Civ. P. § 1161a(b)(3);
Higgins v. Coyne, 75 Cal. App. 2d 69, 72-
73 (Ct. App. 1946). Consequently, Rancho Horizon, having failed to acquire title or to
perfect title, cannot satisfy applicable requirements of California law for maintaining an
unlawful detainer action against Gonzalez. This essential fact militates against a finding
that cause exists to lift the stay to permit Rancho Horizon to initiate or continue an unlawful
detainer action.
By the same token, Gonzalez, being in possession of the Property, has a
protected right under California law to remain in possession.
19 California's forcible entry
and detainer laws protect Gonzalez's right to peaceful and undisturbed possession of the
Property. Cal. Civ. P. Code §§ 1159-1179a.
If Rancho Horizon did not acquire legal title to the Property, did it acquire
equitable title? Under the doctrine of equitable conversion, a buyer under an agreement for
the sale of real property acquires equitable title at the time of the agreement's execution.
Estate of Dwyer
, 159 Cal. 664, 675 (1911); Estate of Reid, 26 Cal. App. 2d 362, 367-68 (Ct.
App. 1938). However, equitable conversion presupposes the existence of a written
agreement for the sale of real property that satisfies the requirements of section 1971 of the
California Code of Civil Procedure. Section 1971 provides as follows:
§ 1971 Grant of Interest or Estate in Land
No estate or interest in real property, other than for leases for a term
not exceeding one year, nor any power over or concerning it, or in
any manner relating thereto, can be created, granted, assigned,
19
Note in this context that it would not be correct to state that Gonzalez only has "bare legal title" to the
Property. On the contrary, Gonzalez has both legal title
and possession. This is not a mere quibble. The law
has long protected possession, and the right to remain in possession of property is an important right
independent of actual title. 2 Frederick Pollock & Frederic Maitland,
History of English Law 29-80 (2d ed.
1899).
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surrendered, or declared, otherwise than by operation of law, or a
conveyance or other instrument in writing, subscribed by the party
creating, granting, assigning, surrendering, or declaring the same,
or by the party's lawful agent thereunto authorized by writing.
In the absence of an agreement satisfying section 1971, the plain language of section 1971
cuts off a buyer's acquisition of equitable title.
20
Rancho Horizon has offered no evidence as to any written agreement (other
than the Deed itself) creating, granting or assigning any interest (legal or equitable) in the
Property that satisfies the requirements of section 1971 of the California Code of Civil
Procedure (or, for that matter, section 1091 of the California Civil Code) and therefore
cannot rely upon the doctrine of equitable conversion to establish an equitable interest in
the Property.
To summarize, Rancho Horizon has neither legal nor equitable title to the
Property. It seeks relief from the automatic stay to commence an unlawful detainer
proceeding against Gonzalez but, lacking legal title, could not prevail in such an action
under California law if it were brought (as the analysis above indicates). As between
Gonzalez and Rancho Horizon, Gonzalez has the right to possess the Property and Rancho
Horizon has no such right at this time. If Rancho Horizon were to oust Gonzalez from
possession, Gonzalez would have the right under California law to the assistance of the
California courts in ousting Rancho Horizon and restoring his possession.
For the foregoing reasons, "cause" does not exist such as would warrant
granting relief from the stay under section 362(d)(1).
20
Although part performance can take an unwritten contract for the sale of land out of the statute of frauds,
payment of the whole of the purchase price, even if it occurred here, is not sufficient part performance.
Woerner v. Woerner
, 171 Cal. 298, 300-01 (1915); 1 Witkin, Summary of California Law § 404 (10th ed.
2005).
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2. 11 U.S.C. § 362(d)(4)
Rancho Horizon also seeks relief from the automatic stay under section
362(d)(4), contending that the Court should find that the filing of Gonzalez's petition was
part of a scheme to hinder, delay or [and]
21 defraud creditors that involved the transfer of all
or part ownership in the Property without the consent of the secured creditor or court
approval. In support of this aspect of its motion, Rancho Horizon asserts that Gonzalez's
co-owner of the Property, Mario Jimenez, filed a chapter 7 petition in bankruptcy case
number 6:10-bk-24074-CB on May 10, 2010 and that relief from stay was granted in
connection with this proceeding. (According to Rancho Horizon, Jimenez received a
discharge on August 26, 2010, a fact that is confirmed by the Court's records). Also
noteworthy is evidence that Jimenez recorded a Quitclaim Deed on April 26, 2010,
conveying the Property to himself and Gonzalez. Furthermore, Jimenez and Gonzalez
conveyed the Property to themselves and Soledad G. Espinoza and Maria de Jesus
Gonzalez on February 24, 2011 in what would appear on its face to be an unauthorized
postpetition transaction.
The ambit of section 362(d)(4) was previously addressed by this Court in
In re
Duncan & Forbes Development, Inc.
, 368 B.R. 27 (Bankr. C.D. Cal. 2006). In that case, the
Court held that relief under section 362(d)(4)(A) is predicated upon a showing of the
following seven elements: (1) the movant holds a security interest in the real property at
issue; (2) the filing of the petition was part of a scheme; (3) one purpose of the scheme was
to hinder creditors; (4) a second purpose of the scheme was to delay creditors; (5) a third
purpose of the plan was to defraud creditors; (6) the scheme involved a transfer of all or
part ownership in real property without consent of the secured creditor or court approval;
(7) the creditor had a right to consent to the transfer (without court approval).
Id. at 31-32.
21
See footnote 4, supra.
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By parallel reasoning, relief under section 362(d)(4)(B) would require a
showing of elements (1) through (5) above and a sixth element, namely, that there were
multiple bankruptcy filings affecting the subject real property.
Rancho Horizon arguably has demonstrated that there have occurred
multiple
22 bankruptcy filings with respect to the Property.
Rancho Horizon fails to satisfy the first element because it has neither legal
title nor equitable title to the Property nor any interest in the Property as a secured creditor.
The fifth element of the analysis under both section 362(d)(4)(A) and section
362(d)(4)(B) requires the movant to make out at least a prima facie case that a purpose of
the scheme was to defraud creditors. As this Court pointed out in
Duncan & Forbes
Development
, a scheme to defraud differs from a scheme to hinder and delay. A scheme to
defraud creditors requires an intent to defraud, "an intent not to pay them at all." 368 B.R.
at 36;
see In re Poissant, 405 B.R. 267, 273-74 (Bankr. N.D. Ohio 2009).
Rancho Horizon has failed to present any evidence that Gonzalez or Jimenez
had an intent not to pay their creditors. The fact that two bankruptcy filings have occurred
with respect to the Property and that an interest in the Property has been conveyed twice
within a one-year time span perhaps is evidence of an intent to hinder or delay creditors but
does not support the conclusion that these transactions are part of a scheme to defraud
creditors. As in
Duncan & Forbes Development, the secured creditor who was the
beneficiary under the deed of trust on the Property (i.e., OneWestBank FSB) was required
to deal with Jimenez's and Gonzalez's bankruptcy cases but fully retained its right to be
paid from its collateral. Like OneWestBank FSB, Rancho Horizon is required to deal with
Gonzalez's bankruptcy proceeding, but that does not mean that Rancho Horizon has been
22
The word "multiple" is defined in Webster's Ninth New Collegiate Dictionary as "something in units of more
than one or two." The bankruptcy filings affecting the Property have been in more than units of one (i.e., there
have been two bankruptcy filings affecting the Property) but not more than units of two. The Court assumes
without deciding that two bankruptcy filings with respect to the Property satisfies the requirement of the statute
that "multiple" bankruptcy filings have occurred.
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defrauded. In short, there is simply no evidence that any creditor has been defrauded or
that there was an intent to defraud any creditor.
Because Rancho Horizon has failed to make a prima facie showing of the first
and fifth elements under
Duncan & Forbes Development, the Court concludes that Rancho
Horizon is not entitled to relief from stay under section 362(d)(4).
E. Annulment of the Stay
Rancho Horizon seeks annulment of the stay. If granted, such relief would be
retroactive in nature.
Lone Star Security & Video Inc. v. Gurrola (In re Gurrola), 328 B.R.
158, 172 (B.A.P. 9th Cir. 2005). Generally, annulment of the stay is the exception rather
than the rule, and should be granted only in unique and compelling circumstances
23 since
the violator is essentially asking the court to exercise its equitable powers and balance the
equities between the parties.
Shaw v. Ehrlich, 294 B.R. 260, 272 (W.D. Va. 2003), aff'd
sub. nom. Wiencko v. Erlich (In re Wiencko),
99 Fed. App'x 466 (4th Cir. 2004); First Am.
Title Ins. Co. v. Lett (In re Lett)
, 238 B.R. 167, 195 (Bankr. W.D. Mo. 1999), aff'd, 1 Fed.
App'x 599 (8th Cir. 2001). In balancing the equities, the significance of the automatic stay
weighs heavily against the party seeking annulment.
Moore v. U.S. Dept. of Hous. & Urban
Dev. (In re Moore),
350 B.R. 650, 655 (Bankr. W.D. Va. 2006). A valid factor upon which a
bankruptcy court may rely in deciding whether to grant annulment is whether relief from stay
would have been granted if the movant had applied for such relief prior to the time of
performing the acts that violated the stay.
Nat'l. Envtl. Waste Corp. v. City of Riverside (In
re Nat'l Envtl. Waste Corp.),
129 F.3d 1052, 1056 (9th Cir. 1997); In re Kissinger, 72 F.3d at
109.
Under these standards Rancho Horizon's request for annulment fails. If
Rancho Horizon hypothetically had moved for relief from the automatic stay within minutes
23
The United States Court of Appeals for the Ninth Circuit has determined that retroactive annulment should
be granted only in extreme circumstances.
Mataya v. Kissinger (In re Kissinger), 72 F.3d 107, 109 (9th Cir.
1995).
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or seconds after Gonzalez filed his bankruptcy petition, relief from stay would have been
denied for all the reasons set forth in this Memorandum Decision and Order. The Court
would not have permitted Quality Loan Service to issue the Deed to Rancho Horizon nor
would the Court have permitted Rancho Horizon to record the Deed. Annulment probably
would be
warranted if, prior to the filing of the bankruptcy petition, Quality Loan Service had
executed and delivered the Deed to Rancho Horizon and Rancho Horizon had accepted the
Deed. However, those are not the facts in this case.
The request for annulment also fails here because of Rancho Horizon's
subsequent conduct in moving for relief in this Court. Rancho Horizon has played fast and
loose with the facts in a series of declarations, each of which was executed under penalty of
perjury. Knowing full well the importance of the precise timing of the acceptance of the final
bid, Rancho Horizon first filed a declaration asserting that the sale occurred at
"approximately 8:00 a.m." on February 22, 2011. This declaration was filed on April 15,
2011. Next, Rancho Horizon filed a declaration stating that "[t]he property was
in fact
auctioned at 10:00 a.m. on February 22, 2011" (emphasis added). This declaration was
filed on May 24, 2011. Finally, on June 29, 2011, Rancho Horizon filed the Declaration of
Sara Monell, stating that "the auction closed at 1:27 p.m. in the afternoon of February 22,
2011." Whether what transpired in this case was the knowing and intentional use of false
declarations or merely a disregard for candor and the truth during the preparation and filing
of declarations is not an issue the Court need determine at this time. Suffice it to say that a
party who seeks annulment has a duty of candor to the court and a corollary duty to
investigate the truth of statements prior to including them in a sworn declaration.
Cf. Fed.
R. Bankr. P. 9011(b). It is a longstanding maxim of equity that "one who comes into equity
must come with clean hands." Equity generally required a connection between the subject
matter in controversy and the party's wrongdoing. Such a connection is present here. A
party who seeks annulment to validate postpetition actions and does so through the use of
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declarations that are either knowingly and intentionally false or made with a disregard for
candor and the truth is not entitled to such relief.
CONCLUSION
For the foregoing reasons, IT IS ORDERED that Rancho Horizon's motion for
relief from the automatic stay is denied with prejudice.
# # #
