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holding that because the debtor had no obligation to pay the redemption price, the tax purchaser did not hold a claim because there was no "right to payment" under § 11 U.S.C. 105
Summary of this case from Town of Beacon Falls v. Christiano (In re Christiano)Opinion
No. 6:14–BK–10231–SY.
01-20-2015
In re Michael Lynn RICHTER, Debtor.
Jenny L. Doling, Law Offices of Jenny L. Doling APLC, Palm Desert, CA, for Debtor. Ian S. Landsberg, Esq., Casey Z. Donoyan, Esq., Landsberg & Associates, Woodland Hills, CA, for Rustling Oaks, LLC.
Jenny L. Doling, Law Offices of Jenny L. Doling APLC, Palm Desert, CA, for Debtor.
Ian S. Landsberg, Esq., Casey Z. Donoyan, Esq., Landsberg & Associates, Woodland Hills, CA, for Rustling Oaks, LLC.
MEMORANDUM DECISION ON RUSTLING OAKS, LLC'S MOTION FOR RELIEF FROM THE AUTOMATIC STAY (UNLAWFUL DETAINER)
SCOTT H. YUN, Bankruptcy Judge.
Before the Court is a motion by Rustling Oaks, LLC (“Rustling Oaks”) for relief from the automatic stay to commence an unlawful detainer proceeding against the debtor Michael Lynn Richter (“Debtor”) and evict Debtor from his residence, which Rustling Oaks purchased at a prepetition foreclosure sale. The sale, however, was subject to Debtor's postsale right of redemption under California law, which is available to the prior owners of real property sold in a nonjudicial foreclosure by a homeowners' association on its lien for delinquent assessments. Debtor confirmed a Chapter 13 plan without objection that he characterizes as exercising this right. The broad issue here is whether relief from the automatic stay is warranted in light of Debtor's purported redemption through his plan.
Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101 –1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001 –9037.
For the reasons set forth below, the Court will regrettably grant Rustling Oaks' motion. The automatic stay as to the property will be annulled retroactively to validate certain actions taken by the foreclosure trustee, and Rustling Oaks will be entitled to begin its unlawful detainer proceeding to gain possession of the property.1. FACTUAL BACKGROUND.
In 2000, Debtor purchased a condominium unit within a country club in Palm Desert, California (the “Residence”). As part of a common interest development, the Residence is subject to a set of covenants, conditions, and restrictions (the “CC & Rs”) enforced by the development's homeowners' association, Marrakesh Community Association (“MCA”); one of those CC & Rs requires the condo owner to pay various assessments to MCA. If assessments are not paid, the CC & Rs allow a trustee designated by MCA to initiate a nonjudicial foreclosure of the Residence.
Debtor became delinquent on his assessments. The delinquencies prompted MCA to execute and record a Notice of Assessment Lien in February 2013, indicating that it had a lien in the amount of $7,206.08 for unpaid assessments, interest, and related fees. In the Notice, MCA designated the law firm Wayne S. Guralnick, APLC (“Guralnick”) to act as the foreclosure trustee.
The delinquencies continued, so Guralnick, on behalf of MCA, began the nonjudicial foreclosure process by recording in May 2013 a Notice of Default and Election to Sell Pursuant to Assessment Lien and the Provisions of the Declaration of Restrictions. Guralnick then recorded a Notice of Trustee's Sale in September 2013, which stated that the Residence would be sold at public auction on October 10, 2013.
The auction took place as scheduled. By this date, the total unpaid debt to MCA reached $18,836. At the auction, Rustling Oaks, a third party unrelated to MCA, became the highest bidder, purchasing the Residence for $36,000. After Rustling Oaks paid the purchase price, Guralnick recorded the Certificate of Foreclosure Sale Subject to Redemption on October 17, 2013. The Certificate informed Debtor that he had 90 days from the sale date to redeem the Residence.
The total debt owed to MCA was paid in full from the sale proceeds.
On January 8, 2014, the final day of the redemption period, Debtor filed his Chapter 13 petition. Formal notice of the bankruptcy filing was provided to MCA and Guralnick, but not to Rustling Oaks. These three entities did not file a proof of claim or otherwise participate in Debtor's bankruptcy case.
Using this district's mandatory form, Debtor then proposed a Chapter 13 plan that he believed was sufficient to redeem the Residence from the foreclosure sale (the “Plan”). Debtor listed MCA in Class 2 of the Plan, which is intended for the “cure and maintenance” of claims secured by a debtor's principal residence. In this class, Debtor proposed to directly pay MCA the ongoing postconfirmation assessments (the maintenance) outside of the Plan and to pay MCA through the Plan a total of $18,836 over 60 months (the cure).
The operative language of the Plan specifically provided, “The postconfirmation monthly mortgage payment will be made by the Debtor directly to ... [MCA],” and, “The Debtor will cure all prepetition arrearages for the primary residence through the Plan Payment as set forth below,” then listing MCA and the $18,836 arrearage.
Although Debtor's intention was to exercise his right of redemption through the Plan, nothing on the face of the Plan (other than possibly the mere inclusion of MCA's name in Class 2) signaled this intention. The Plan's miscellaneous provisions, where a debtor is permitted to add his own custom language, did not mention Rustling Oaks, the prepetition foreclosure sale, or Debtor's right of redemption. Rather, the Plan's treatment of MCA's claim in Class 2 resembled what is commonly proposed for the cure and maintenance of home mortgages in default. Like with the petition, MCA and Guralnick, but not Rustling Oaks, received notice of the Plan, but neither of them filed an objection. The Plan was then confirmed on March 24, 2014.
Debtor did specifically reference his Residence in the Plan by inserting the following language into one of the Plan's form provisions: “Debtor has listed his residence for sale and is aggressively seeking a buyer or reverse mortgage options. A contribution will be made in the 7th month if the property has not sold or been refinanced.”
MCA began receiving payments from the Chapter 13 trustee and Debtor. But Guralnick, on MCA's behalf, returned the checks in May 2014 and informed the trustee and Debtor that MCA could not accept payments for delinquent or ongoing assessments because MCA had been paid in full from the sale proceeds and Rustling Oaks was the new owner of the Residence. Up until then, the trustee was apparently unaware that the Residence had been sold in a prepetition foreclosure sale.
Debtor's counsel then exchanged emails with Guralnick, in which she insisted that her client had successfully redeemed the Residence through the Plan and that she would initiate an adversary proceeding to redress the alleged violations of the automatic stay if this situation between Debtor, Guralnick, MCA, and Rustling Oaks could not be resolved. In response to counsel, Guralnick explained its position, that “the Chapter 13 plan providing [for] the HOA prepetition payments [made] no sense” and that “[i]f [Debtor] wanted to redeem the property, he would need to pay [Rustling Oaks] in full at the time of redemption so that [Rustling Oaks] receives all [of] its funds back.” Although nothing was resolved between the parties, Debtor never filed an adversary proceeding.
Two months later, in July, Guralnick sent letters to Debtor's counsel and the trustee informing them of its intention to record the Trustee's Deed. Receiving no response, Guralnick executed the Trustee's Deed on July 28, 2014, and then recorded it on August 1, 2014, perfecting Rustling Oaks' legal title in the Residence.
On October 7, over six months after confirmation, Rustling Oaks filed its motion for relief from the automatic stay, which Debtor vehemently opposed. An initial hearing on the motion was held on October 29, where the Court heard oral argument and allowed the parties to submit supplemental briefs. Following the submission of those briefs, the Court entertained final oral argument at the continued hearing on December 17.
2. JURISDICTION.
This memorandum decision contains the Court's findings of fact and conclusions of law required by Federal Rule of Civil Procedure 52(a), made applicable to this contested matter by Bankruptcy Rules 7052 and 9014(c). The Court has jurisdiction under 28 U.S.C. § 1334 and 11 U.S.C. § 362, and this is a core proceeding under 28 U.S.C. § 157(b)(2)(G).
3. DISCUSSION.
3.1. Introduction.
An entity seeking to evict a debtor from and gain possession of real property must first obtain relief from the automatic stay under § 362(d) because the stay protects the debtor's physical occupation of real property, a possessory interest under California law. See Eden Place, LLC v. Perl (In re Perl), 513 B.R. 566, 576 (9th Cir. BAP 2014). Here, wishing to initiate an unlawful detainer proceeding against Debtor after a prepetition foreclosure sale and the expiration of the redemption period, Rustling Oaks argues that cause exists under § 362(d)(1) to grant stay relief.
Rustling Oaks did not request relief under § 362(d)(2). Therefore, the Court does not need to consider Debtor's arguments regarding his equity in the Residence and how the Residence is necessary to his reorganization.
Debtor contends that stay relief is not warranted for a number of reasons. His opposition and supplemental brief can be boiled down to essentially three major arguments: (1) That the Bankruptcy Code allows Debtor to redeem the Residence through the Plan; (2) that the Plan's res judicata effect precludes Rustling Oaks from moving for stay relief; and (3) that Rustling Oaks' title is premised on a void Trustee's Deed recorded postpetition, making stay relief for an unlawful detainer proceeding premature at this time. The Court considers each argument below.
3.2. The Unexpired Statutory Right of Redemption in a Chapter 13 Case.
3.2.1. The Right of Redemption under California Law.
In California, an owner facing foreclosure of his real property is entitled to redeem it. There are, however, two separate rights of redemption available to him.
Before the property is sold in the foreclosure sale, the owner has an equitable right of redemption (or equity of redemption), which allows him to pay the entire debt owed to the foreclosing lienholder “at any time prior to the sale to avoid loss of the property.” Knapp v. Doherty, 123 Cal.App.4th 76, 87, 20 Cal.Rptr.3d 1 (2004) (citing Cal. Civ.Code §§ 2903, 2905 ). This redemption has the effect of satisfying the debt, extinguishing the lien, and terminating the power of sale. See Nguyen v. Calhoun, 105 Cal.App.4th 428, 440, 129 Cal.Rptr.2d 436 (2003). But the foreclosure sale extinguishes the owner's right to equitably redeem the property. See Moeller v. Lien, 25 Cal.App.4th 822, 831, 30 Cal.Rptr.2d 777 (1994).
Following the foreclosure sale, a statutory right of redemption (or statutory redemption) may be available under certain circumstances, which gives the now-former owner “an opportunity to regain ownership of the property by paying the foreclosure sale price [to the purchaser], for a period of time after foreclosure.” Alliance Mortg. Co. v. Rothwell, 10 Cal.4th 1226, 1236, 44 Cal.Rptr.2d 352, 900 P.2d 601 (1995). An effective redemption terminates the effect of the sale and restores the former owner to the estate sold at the foreclosure sale. Cal.Civ.Proc.Code § 729.080(d). The purpose of a postsale right of redemption is “to force the purchaser at [the foreclosure] sale to bid the property in at a price approximating its fair value.” Salsbery v. Ritter, 48 Cal.2d 1, 11, 306 P.2d 897 (1957).
The statutory right of redemption under California law though does not exist in all foreclosure scenarios. While a judicial foreclosure sometimes provides the prior owner with this right, a nonjudicial foreclosure generally does not. See Alliance Mortg., 10 Cal.4th at 1236, 44 Cal.Rptr.2d 352, 900 P.2d 601 ; see also Cal.Civ.Proc.Code §§ 726(e), 729.010(a). There is, however, a narrow exception. The nonjudicial foreclosure by a homeowners' association on its lien for delinquent assessments is subject to statutory redemption, allowing the former owner to redeem within 90 days of the foreclosure sale. See Cal. Civ.Code § 5715(b) ; Cal.Civ.Proc.Code § 729.035.
If property within a common interest development is subject to assessments, then a homeowners' association in charge of managing that development is entitled to a lien on the property for the amount of any delinquent assessments. See Cal. Civ.Code § 5675(a). The homeowners' association can enforce the assessment lien by a trustee's sale (i.e., a nonjudicial foreclosure). See id. § 5700(a) (stating that lien “may be enforced in any manner permitted by law, including ... sale by the trustee designated in the notice of delinquent assessment”); id. § 5710(a) (providing that “[a]ny sale by the trustee shall be conducted in accordance with Sections 2924, 2924b, and 2924c applicable to the exercise of powers of sale in mortgages and deeds of trust”).
It is undisputed that Debtor did not equitably or statutorily redeem his Residence in accordance with applicable California law. He did not pay the entire amount of the delinquent assessments prior to the foreclosure sale, and he did not pay the purchase price of the Residence in full within 90 days of the sale. Instead, Debtor filed his petition before the statutory redemption period expired and then proposed and confirmed his Plan that pays MCA, the homeowners' association, the amount of the delinquent assessments over a 60–month term. Debtor characterizes this as his lawful redemption through the Plan. In response, Rustling Oaks contends that the Bankruptcy Code does not allow a plan to do this.
The first issue in this matter is whether the Bankruptcy Code permits Debtor to do what his Plan has proposed. Although this inquiry appears straightforward, the difficulty in addressing the issue is that what has been proposed within the four corners of Debtor's Plan is not the same as what Debtor's papers argues his Plan has done. On the one hand, the Plan provides for the repayment of MCA's $18,836 arrearage, which suggests that Debtor is attempting to cure the default, rather than exercise and modify his statutory right of redemption. See McCarn v. WyHy Fed. Credit Union (In re McCarn), 218 B.R. 154, 162 (10th Cir. BAP 1998) (explaining how exercising a statutory right of redemption “is separate from the ability to ‘cure’ a default in a chapter 13 plan”). On the other hand, Debtor's opposition and supplemental brief, while making some reference to curing defaults and even citing to cases considering the right to cure, have primarily focused on the argument that Debtor exercised his right of redemption through the Plan and that “[f]ederal law allows that redemption to be reorganized in chapter 13.” Due to the inconsistency, Debtor has not articulated a cohesive argument on this first issue.
Citing Multnomah County v. Ivory (In re Ivory), 70 F.3d 73 (9th Cir.1995), Debtor argues that because his Plan has already been confirmed, the Court cannot disturb his Plan. However, as discussed below, the Plan is ambiguous and confusing at best regarding the proposed treatment of the dispute with MCA, Guralnick, and Rustling Oaks. The Court therefore will exercise its inherent power to interpret and enforce its own orders and confirmed plans. See Wilshire Courtyard v. Cal. Franchise Tax Board (In re Wilshire Courtyard), 729 F.3d 1279, 1289–90 (9th Cir.2013).
To alleviate further confusion, the Court believes that the following question better expresses the heart of the first issue: When a foreclosure sale of a debtor's principal residence has occurred prepetition and the debtor then files a Chapter 13 petition before his statutory right to redeem expires, what are his options under the Bankruptcy Code to save his residence?
As a matter of fairness to Debtor and because the Court is sympathetic to Debtor's plight of losing his primary residence, the Court will consider every possible argument that can be extracted from Debtor's papers.
3.2.2. The Curing of Defaults Under § 1322(b)(3) and (b)(5).
Debtor contends that one option to save the Residence is found in the broad cure provisions of § 1322(b)(3) and (b)(5), which set forth that a debtor may propose a plan that “provide[s] for the curing of any default.” “[T]he plain meaning of ‘cure,’ as used in § 1322(b)(3) and (5), provides a debtor with the right to remedy a default and restore matters to the status quo ante. In other words, cure will ify all consequences of default.” Frazer v. Drummond (In re Frazer), 377 B.R. 621, 630 (9th Cir. BAP 2007) (citations omitted). The argument is that the cure provisions would allow Debtor to propose a plan that would basically undo the foreclosure sale and reinstate his presale obligation to pay the assessments to MCA.
Debtor argues that these cure rights are available to him so long as, on the petition date, he retains an interest in the Residence or his right to redeem has not yet expired. However, he fails to acknowledge § 1322(c)(1), a limitation placed on § 1322(b)(3) and (b)(5), that states,
(c) Notwithstanding subsection (b)(2) and applicable nonbankruptcy law
(1) a default with respect to, or that gave rise to, a lien on the debtor's principal residence may be cured under paragraph (3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law....
11 U.S.C. § 1322(c)(1) (emphasis added). The provision was added to the Bankruptcy Code in 1994, see Bankruptcy Reform Act of 1994, Pub.L. No. 103–394, § 301, 108 Stat. 4106, 4131, as a way for Congress to reconcile a circuit split and address when a debtor's right to cure a default under § 1322(b)(3) or (b)(5) is extinguished, see H.R.Rep. No. 103–835, at 52 & n. 18 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3361. Since Debtor seeks to cure a default with respect to a lien on his principal residence and the lien can be enforced via a foreclosure sale, § 1322(c)(1) is an applicable limitation on his Plan. See Frazer, 377 B.R. at 628–29.
Specifically, Congress intended to supersede the rule from In re Roach, 824 F.2d 1370, 1379 (3d Cir.1987) (holding that right to cure “does not extend beyond the entry of a foreclosure judgment”), and to codify the rule from Federal Land Bank of Louisville v. Glenn (In re Glenn), 760 F.2d 1428, 1435 (6th Cir.1985) (“The event we choose as the cut-off date of the statutory right to cure defaults is the sale of the mortgaged premises.”), and In re Clark, 738 F.2d 869, 874 (7th Cir.1984) (holding that debtor can cure after foreclosure judgment but expressing no opinion about debtor's right to cure after foreclosure sale). See H.R.Rep. No. 103–835, at 52 & n. 18 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3361. Prior to § 1322(c)(1)'s addition to the Code, this circuit's bankruptcy appellate panel (the “BAP”) agreed with the majority of the circuits that “the foreclosure sale is the correct point to cutoff the right to cure.” Oregon v. Hurt (In re Hurt), 158 B.R. 154, 160 (9th Cir. BAP 1993) ; see also Or. Dep't of Veterans' Affairs v. Braker (In re Braker), 125 B.R. 798, 801 (9th Cir. BAP 1991).
Under this provision, the right to cure a default involving a lien on a debtor's principal residence is permitted but only “until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.” 11 U.S.C. § 1322(c)(1). Courts are split on when a “residence is sold at a foreclosure sale,” with many adopting the “gavel rule” and others adopting the “deed-delivery rule.”
The courts adopting the gavel rule, including most of the courts of appeals and the BAPs that have considered § 1322(c)(1), conclude that the statutory language is unambiguous, that when property is “sold at a foreclosure sale” refers to a specific event and not to a multistep process, and that this provision cuts off a debtor's right to cure a default at the conclusion of the foreclosure auction, rather than a later point in time. See, e.g., In re Connors, 497 F.3d 314, 319–21 (3d Cir.2007) ; Cain v. Wells Fargo Bank, N.A. (In re Cain), 423 F.3d 617, 620–21 (6th Cir.2005) ; TD Bank, N.A. v. LaPointe (In re LaPointe), 505 B.R. 589, 597 (1st Cir. BAP 2014) ; McCarn, 218 B.R. at 160–62 ; In re Bobo, 246 B.R. 453, 456–59 (Bankr.D.C.2000) ; see also Commercial Fed. Mortg. Corp. v. Smith (In re Smith), 85 F.3d 1555, 1558 n. 3 (11th Cir.1996) (dicta).
In contrast, the other courts, who have adopted the deed-delivery rule, have usually concluded that § 1322(c)(1) is ambiguous and requires looking at legislative history, that when property is “sold at a foreclosure sale” refers to the entire foreclosure process, and that the debtor's right to cure survives until title passes to the purchaser (i.e., when the debtor no longer has any interest in the property) under state law, which is typically when a deed is delivered or recorded. See, e.g., In re Jenkins, 422 B.R. 175, 181–82 (Bankr.E.D.Ark.2010) ; In re Beeman, 235 B.R. 519, 524–26 (Bankr.D.N.H.1999) ; see also Colon v. Option One Mortg. Corp., 319 F.3d 912, 920–21 (7th Cir.2003) (suggesting that debtor has right to cure until at least expiration of all rights of redemption).
This Court agrees with those courts adopting the gavel rule. The language in § 1322(c)(1) is clear and unambiguous. “[T]he preposition ‘at’ in ‘sold at a foreclosure sale’ signifies a discrete event, rather than an ongoing process,” Connors, 497 F.3d at 320, and that discrete event must be the “auction at which the highest bidder purchases the property,” Cain, 423 F.3d at 620 ; accord Connors, 497 F.3d at 322 (holding that “foreclosure sale” is “ ‘completed’ with the fall of the gavel and the vesting of equitable title in the winning bidder”). “To define the word ‘sold’ as the point at which a deed is transferred to the prevailing bidder subsequent to the date of the auction ... removes the words ‘foreclosure sale’ from the statute.” In re Crichlow, 322 B.R. 229, 234 (Bankr.D.Mass.2004). Thus, “[t]he language of section 1322(c)(1) is clear and unambiguous in establishing the date of the actual foreclosure sale as the cut-off for curing a ... default under section 1322(b).” McCarn, 218 B.R. at 160. Because there is no ambiguity in the statute, the Court has no need to consult the legislative history. See United States v. Ron Pair Enters., Inc., 489 U.S. 235, 240–41, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) ; Sloan v. Lewis, 89 U.S. (22 Wall.) 150, 155, 22 L.Ed. 832 (1874) (“If the intention of Congress is manifest from what there appears we need not go further.”).
Even if the Court considered it, the legislative history is inconclusive as to Congress's intent as some courts have concluded. See, e.g., McCarn, 218 B.R. at 161 n. 5. Also, the legislative history does not appear to favor adoption of the deed-delivery rule. That rule is more in line with a prior version of § 1322(c)(1) that appeared in a bill passed by the Senate, which allowed a debtor to cure as long as he “possesse[d] any legal or equitable interest, including a right of redemption, in [the subject] real property” on the petition date. S. 540, 103d Cong. § 301 (as passed by Senate, Apr. 21, 1994), available at http://www.gpo.gov/fdsys/pkg/BILLS-103s540es/pdf/BILLS-103s540es.pdf; see also S.Rep. No. 103–168, at 51 (1993) (“[I]f the debtor still possesses an interest in the land, such as a right of redemption, then the debtors may use preemptive Federal bankruptcy rights to save their homes from foreclosure, notwithstanding State law.”), 1993 WL 444315. However, the bill was never passed by the House and died in the first session of the 103rd Congress. In the second session, the House introduced a new version of the bill that abandoned the language found in the Senate's bill. See H.R. 5116, 103d Cong. § 301 (as introduced by House, Sept. 28, 1994) (allowing debtor to cure “until such residence is sold under such lien and in accordance with applicable nonbankruptcy law”), available at http://www. gpo.gov/fdsys/pkg /BILLS-103hr5116ih/pdf/BILLS-103hr5116ih.pdf. Indeed, “Congress's rejection of the Senate bill in favor of the current language of § 1322(c)(1) is telling.” Connors, 497 F.3d at 322.
If the Court must consider “applicable nonbankruptcy law,” the result remains the same in this case: Property is “sold at a foreclosure sale” at the completion of the foreclosure auction under California law, rather than at the delivery or recordation of the trustee's deed. In a typical trustee's sale, every bid is “deemed to be an irrevocable offer by that bidder,” Cal. Civ.Code § 2924h(a), and the sale is “deemed final upon the acceptance of the last and highest bid,” id. § 2924h(c). Therefore, “[a]s a general rule, a trustee's sale is complete upon acceptance of the final bid” under California law. Nguyen, 105 Cal.App.4th at 441, 129 Cal.Rptr.2d 436.
Further, the owner's right to cure under state law in the form of an equity of redemption also ends when the foreclosure sale occurs, rather than at a later time. See Cal. Civ.Code § 2903 (allowing owner to redeem “before his right of redemption is foreclosed”); Stockwell v. Barnum, 7 Cal.App. 413, 418–19, 94 P. 400 (1908) (concluding that attempted redemption after completion of foreclosure auction but before delivery of trustee's deed was ineffectual). The gavel rule's interpretation of § 1322(c)(1) therefore does not cut off any cure rights a debtor may have under California law.
The addition of a statutory right of redemption to the equation, however, does not extend the point in which property is “sold at a foreclosure sale” from the date of the foreclosure auction to the end of the redemption period. Notwithstanding this postsale right, property is still sold (i.e., equitable title is transferred to the purchaser) at the foreclosure auction. Cf. Foorman v. Wallace, 75 Cal. 552, 556, 17 P. 680 (1888) (stating that certificate of sale is “evidence of a sale, whereby ... the entire equitable title is conditionally vested in the purchaser, subject to be defeated by a redemption”). By redeeming, the prior owner has effectively terminated the sale (i.e., transferred equitable title back) and “restored [himself] to the estate therein sold at the sale.” Cal.Civ.Proc.Code § 729.080(d) ; cf. Bagley v. Ward, 37 Cal. 121, 129 (1869) (“The redemption is virtually a transfer of the certificate of sale.”). Yet, the law still acknowledges that a sale took place. It follows that California law would dictate that property “is sold at a foreclosure sale” on the completion of the foreclosure auction, regardless of whether a statutory right of redemption is available or not.
Lastly, adopting the gavel rule is a logical choice because a foreclosure sale can introduce a third-party purchaser into the relationship. The rule protects such purchasers “by avoiding an interpretation that turns § 1322(c)(1) into a federal vehicle for divesting them of property rights acquired at foreclosure sales.” Connors, 497 F.3d at 323 ; cf. Jim Walter Homes, Inc. v. Spears (In re Thompson), 894 F.2d 1227, 1230 (10th Cir.1990) (pre–§ 1322(c)(1) context) (“Purchase by an independent third party at a foreclosure sale raises enough additional concerns to justify ending the right to cure in bankruptcy at that point.”).
For these reasons, this Court concludes that “§ 1322(c)(1) terminates a debtor's right to cure a ... default when the gavel comes down on the last bid at the foreclosure sale.” Cain, 423 F.3d at 621 (internal quotation marks omitted). Because the Residence “[was] sold at a foreclosure sale that [was] conducted in accordance with applicable nonbankruptcy law” before the petition date, Debtor could no longer utilize the cure provisions of § 1322(b)(3) and (b)(5), as limited by § 1322(c)(1), to cure the delinquent assessments that gave rise to MCA's lien on the Residence.
Debtor has not raised any issues with the foreclosure process. Thus, the Court assumes that the foreclosure sale complied with applicable California law.
3.2.3. The Modification of Claims Under § 1322(b)(2).
Debtor has also singled out § 1322(b)(2) as another argument to save his Residence. Under this provision, a debtor is allowed to propose a plan that will “modify the rights of holders of secured claims ... or of holders of unsecured claims.” 11 U.S.C. § 1322(b)(2). If viable, this would allow Debtor to exercise and modify his statutory right of redemption by paying the redemption price over the duration of his Plan. However, Debtor's ability to do so turns on whether Rustling Oaks is considered a holder of a claim, or more specifically, whether Rustling Oaks holds a “claim” against Debtor or his property by reason of Debtor's right to redeem by paying the redemption price to Rustling Oaks.
Debtor's position is, once again, confusing and contradictory because in the Plan, he purports to treat the claim in dispute as a claim secured only by a security interest in real property that is his principal residence.
Although Debtor referenced § 1322(b)(2) in his supplemental brief, as will be discussed in Part 3.3.2, Debtor's Plan did not demonstrate a modification of his statutory right of redemption.
The Bankruptcy Code defines a “claim” as either a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured,” id. § 101(5)(A), or a “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured,” id. § 101(5)(B). The Supreme Court has “explained that Congress intended by this language to adopt the broadest available definition of ‘claim.’ ” Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) (citing Penn. Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, 558, 563–64, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990), superseded by statute on other grounds, Criminal Victims Protection Act of 1990, Pub. L. No. 101–581, 104 Stat. 2865 ; Ohio v. Kovacs, 469 U.S. 274, 279, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985) ).
Many courts have permitted debtors to modify their postsale right of redemption that arose after a tax sale under § 1322(b)(2), concluding that the third-party purchaser at the tax sale holds a “claim” under either statutory definition. See,
Other courts have disagreed and have not allowed such modifications based on different rationales. See, e.g., Tax 58 v. Froehle (In re Froehle), 286 B.R. 94, 103 (8th Cir. BAP 2002) (concluding that § 1322(b)(2) does not permit debtor to pay redemption price over time based on holding of Justice v. Valley National Bank, 849 F.2d 1078, 1082–83 (8th Cir.1988) ); In re Murray, 276 B.R. 869, 876 (Bankr.N.D.Ill.2002) (holding that § 108(b) limits § 1322(b)(2) with regard to redemptions), abrogated by In re LaMont, 740 F.3d 397 (7th Cir.2014) ; Blue v. Town of Lake Bldg. Corp. (In re Blue), 247 B.R. 748, 751 (Bankr.N.D.Ill.2000) (reasoning that tax purchaser has no right to receive payment from debtor), abrogated by LaMont, 740 F.3d 397 ; see also In re Stage I Land Co., 60 B.R. 539, 542 (Bankr.D.Minn.1986) (chapter 11 context) (concluding that “right of redemption cannot be transformed through the mere filing of a bankruptcy petition into a restructurable debt”), aff'd sub nom. Stage I Land Co. v. United States, 71 B.R. 225 (D.Minn.1986). But none of those cases have thoroughly analyzed whether a statutory right of redemption can be characterized as a “claim.”
e.g., In re LaMont, 740 F.3d 397, 407–09 (7th Cir.2014) ; Salta Grp., Inc. v. McKinney, 380 B.R. 515, 520–21 (C.D.Ill.2008), appeal dismissed sub nom. In re McKinney, 610 F.3d 399 (7th Cir.2010) ; In re Terry, 505 B.R. 660, 665–66 (Bankr.E.D.Penn.2014) ; In re Martin, 496 B.R. 323, 328–29 (Bankr.S.D.N.Y.2013) ; Francis v. Scorpion Grp., LLC (In re Francis), 489 B.R. 262, 268–69 (Bankr.N.D.Ga.2013) ; Hammond v. Allegheny Cnty. Treasurer (In re Hammond), 420 B.R. 633, 636 (Bankr.W.D.Penn.2009) ; In re Bates, 270 B.R. 455, 463–65 (Bankr.N.D.Ill.2001). However, this Court does not share the same view. Neither definition under § 101(5) is broad enough to include this redemption relationship between a new third-party purchaser and a prior owner as a “claim.”
Under the first definition, a “claim” means a “right to payment,” 11 U.S.C. § 101(5)(A), and “[t]he plain meaning of ‘right to payment’ is nothing more nor less than an enforceable obligation,” Davenport, 495 U.S. at 559, 110 S.Ct. 2126. The Supreme Court has suggested that an obligation is enforceable if the debtor can be threatened with the loss of his liberty or property in the event of nonperformance. See id. at 559–60, 110 S.Ct. 2126. Thus, in Davenport, the Court held that a debtor's obligation under a court order in a state criminal action to pay restitution as a condition of probation constituted a “right to payment” and therefore a “claim” since “the obligation is enforceable by the substantial threat of revocation of probation and incarceration.” Id. at 559, 110 S.Ct. 2126.
Courts have relied on this part of the Supreme Court's analysis to conclude that a purchaser holds a “right to payment.” See, e.g., Bates, 270 B.R. at 464 (reasoning that the substantial threat of a debtor losing property, including all of its equity, if the debtor does not redeem “creates a right to payment ... on behalf of the tax purchaser”); McKinney, 380 B.R. at 515 (“Because this ‘substantial threat’ of losing her property hangs over the property owner, the investor [purchaser] is, for all intensive purposes [sic], acting as a creditor to the bankruptcy estate.”). While it is true that a debtor will lose his remaining interest in the property as a consequence of not redeeming, the threat of this loss alone is insufficient to establish the purchaser's “right to payment.” The “right to payment” requires, in addition to enforceability, that there be an obligation. See Davenport, 495 U.S. at 558, 110 S.Ct. 2126 (stating that language of § 101(5) “reflects Congress' broad ... view of the class of obligations that qualify as a ‘claim’ ” (emphasis added)); see also H.R.Rep. No. 95–595, at 309 (1977) (providing that Bankruptcy Code “contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case” (emphasis added)), reprinted in 1978 U.S.C.C.A.N. 5963, 6266; S.Rep. No. 95–989, at 22 (1978) (same), reprinted in 1978 U.S.C.C.A.N. 5787, 5808. Yet, with statutory redemption, what the debtor has is not an obligation or duty to pay the redemption price to avoid losing ownership of the property but a voluntary right or opportunity to pay the redemption price in order to regain ownership. See Alliance
The courts' consideration of this right as an interest in property that becomes property of the estate, rather than an obligation, is also telling. See, e.g., United States ex rel. Block v. Aldrich (In re Rigden), 795 F.2d 727, 731 (9th Cir.1986) (stating that statutory right of redemption is estate property that can be sold by a bankruptcy trustee).
Mortg., 10 Cal.4th at 1236, 44 Cal.Rptr.2d 352, 900 P.2d 601. Without any entity's obligation to pay the redemption price, what Rustling Oaks holds cannot be characterized as a “right to payment” under § 101(5)(A).
A “claim” can also be a “right to an equitable remedy for breach of performance if such breach gives rise to a right of payment.” 11 U.S.C. § 101(5)(B). In other words, a right to an equitable remedy will constitute a claim if monetary payment (i.e., money damages) can be a viable alternative remedy for breach of the underlying obligation. See Top Rank, Inc. v. Ortiz (In re Ortiz), 400 B.R. 755, 766 (C.D.Cal.2009). Thus, a judgment ordering specific performance from a debtor would constitute a “claim” under § 101(5)(B) where a money judgment could function as a sufficient remedy if specific performance is refused. See Kovacs, 469 U.S. at 280–83, 105 S.Ct. 705 (holding that injunction ordering debtor to clean up environmental waste was a “claim” when receiver subsequently sought payment of money from debtor for the costs of that cleanup).
Even assuming that Rustling Oaks' right to receive the Trustee's Deed after the redemption period expires without payment of the redemption price constitutes a “right to an equitable remedy for breach of performance,” this right to an equitable remedy can only become a “claim” if the underlying breach can give rise to a monetary remedy. Those courts that have concluded that a purchaser has a “claim” under § 101(5)(B) argue that a monetary remedy does exist in the form of a debtor's payment of the redemption price. See, e.g., Francis, 489 B.R. at 268–69 ; Bates, 270 B.R. at 464–65. However, they confuse the payment of the redemption price as being the remedy when it actually represents the underlying “obligation” owed to the purchaser. As a result, those courts end up asserting that a debtor's breach for failing to pay the redemption price to the purchaser gives rise to the purchaser's remedy of payment of the redemption price, an argument with questionable value.
To the extent a debtor's failure to redeem within the required period constitutes a breach of performance, the only remedy that the purchaser can obtain is the right to receive the trustee's deed. The purchaser would not be entitled to a money judgment against the debtor for the redemption price, and it would not be entitled to a right to foreclose on the property to be paid from the sale proceeds. The purchaser's only remedy is to receive the deed and full legal title to the property. There are simply no alternative remedies, let alone a monetary one. Therefore, Rustling Oaks' right to delivery of the Trustee's Deed following the expiration of the redemption period is also not a “right to an equitable remedy for breach of performance if such breach gives rise to a right of payment” under § 101(5)(B).
Finally, both in his papers and arguments by his counsel at the hearings on the motion, Debtor has strenuously asserted that Rustling Oaks is not a creditor in his bankruptcy case and thus not a holder of a claim. As a result, he is now bound by that statement and estopped from asserting a contrary one. See Countrywide Home Loans, Inc. v. Hoopai (In re Hoopai), 581 F.3d 1090, 1097 (9th Cir.2009).
Because Rustling Oaks, as a purchaser of property subject to a statutory right of redemption, does not hold a “claim” within the meaning of § 101(5)(A) or (B) by reason of Debtor's right to pay the redemption price, Debtor cannot rely on § 1322(b)(2) to exercise and modify his right of redemption.
Not only is the interpretation of a statutory right of redemption as a “claim” unsupported by the plain language of the Bankruptcy Code, but it also allows a debtor to hold a third-party purchaser hostage for potentially five years by “redeeming” the property over the duration of a Chapter 13 plan. This cannot be what Congress intended when it provided that the Bankruptcy Code “contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case.” H.R.Rep. No. 95–595, at 309 ; S.Rep. No. 95–989, at 22.
3.2.4. The 60–Day Extension Under § 108(b).
Although Debtor can no longer cure under § 1322(b)(3) and (b)(5) and cannot exercise and modify his statutory right of redemption under § 1322(b)(2), that does not preclude Debtor from exercising his redemption right in a Chapter 13 case entirely. Rather, the Court agrees with Rustling Oaks that § 108(b) can be an option.
This Code provision states,
(b) Except as provided in subsection (a) of this section, if applicable nonbankruptcy law ... fixes a period within which the debtor ... may ... cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only ... cure, or perform, as the case may be, before the later of
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 60 days after the order for relief.
11 U.S.C. § 108(b). Exercising a right of redemption created under state law constitutes “cur[ing] a default” or “perform[ing] any other similar act,” falling within the scope of § 108(b). See Connors, 497 F.3d at 321 ; Canney v. Merchants Bank (In re Frazer), 284 F.3d 362, 372–73 (2d Cir.2002) ; Goldberg v. Tynan (In re Tynan), 773 F.2d 177, 179 (7th Cir.1985) ; Johnson v. First Nat'l Bank of Montevideo, Minn., 719 F.2d 270, 278 (8th Cir.1983). If the redemption right has not expired by the petition date, § 108(b) permits its exercise in the bankruptcy case but only before the original expiration date under state law or 60 days after the petition date, whichever is later.
Here, the foreclosure sale took place on October 10, 2013, and California law offered Debtor 90 days, until January 8, 2014, to redeem the Residence. See Cal. Civ.Code § 5715(b) ; Cal.Civ.Proc.Code § 729.035. Since Debtor filed his petition on the last day of the redemption period, § 108(b) extended that period an additional 60 days. Debtor therefore had until March 9, 2014, to exercise his statutory right of redemption. But now that that date has passed without Debtor depositing the redemption price with Guralnick, the § 108(b) option has expired for Debtor as well.
3.3. Res Judicata Effect of a Confirmed Plan.
Even if the Bankruptcy Code does not permit Debtor to cure or redeem through his Plan, Debtor argues that with the Plan now confirmed without an objection or an appeal, res judicata binds Rustling Oaks to the Plan and precludes it from attacking any of the Plan's potentially erroneous or illegal provisions.
It is well understood that “[o]nce a bankruptcy plan is confirmed, it is binding on all parties and all questions that could have been raised pertaining to the plan are entitled to res judicata effect.” Trulis v. Barton, 107 F.3d 685, 691 (9th Cir.1997) (emphasis omitted). “[C]reditors are precluded from asserting any other interest than that provided for them in the confirmed plan,” Fietz v. Great W. Sav. (In re Fietz), 852 F.2d 455, 458 (9th Cir.1988), even if the plan's provisions are illegal, Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083, 1086 (9th Cir.1999). The res judicata effect of a confirmed Chapter 13 plan is partly reflected in § 1327. Cnty. of Ventura Tax Collector v. Brawders (In re Brawders), 325 B.R. 405, 410 (9th Cir. BAP 2005), aff'd, 503 F.3d 856 (9th Cir.2007) (adopting the BAP's opinion as its own). It reads, “The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.” 11 U.S.C. § 1327(a).
In support of his argument that Rustling Oaks is now bound by the confirmed Plan's redemption of the Residence, Debtor cites to Multnomah County v. Ivory (In re Ivory), 70 F.3d 73 (9th Cir.1995), a decision in which the Ninth Circuit concluded that the county, who was the foreclosing lienholder and subsequent purchaser of the debtor's property, was bound by the debtor's Chapter 13 plan's redemption. Id. at 75.
In Ivory, the debtor became delinquent on property taxes for real property located in Oregon, so the county initiated a judicial foreclosure action and obtained a foreclosure judgment against the debtor and the property, resulting in a sale to the county subject to the debtor's right to redeem within two years. Id. at 74. Less than a month before the redemption period would have expired, the debtor filed a petition. Id. He proceeded to file a proof of claim on behalf of the county, listing the amount of unpaid taxes as the county's claim. Id. He then proposed a plan that “cure[d] the property tax default and redeem[ed] the real property,” which was confirmed by the bankruptcy court without objection. Id. After the county rejected the trustee's payments due to expiration of the redemption period and the preconfirmation recordation of the deed, the debtor filed a motion to compel the county to accept the payments as required by the plan. Id. at 74–75.
The bankruptcy court granted the motion, and the district court affirmed. Id. at 75. On appeal to the Ninth Circuit, the court affirmed in a short opinion, rejecting the county's argument that “because it was no longer a creditor of the [debtor] at the time the plan was confirmed, the bankruptcy court was without jurisdiction to include the County in the plan.” Id. Rather, the court reasoned, “Even assuming that the order confirming the plan was in error ..., res judicata precludes the County from bringing what amounts to a collateral challenge to that order. This is so even if the bankruptcy court's error was jurisdictional.” Id. (citations omitted). As a result, the county remained bound by the confirmed plan's redemption.
While Ivory sets forth an important lesson about res judicata, the decision is not as on point for this case as Debtor suggests. As later noted by the BAP, “[t]here is no discussion in Ivory of due process, and the decision says nothing about what notice the county in that case received or how that Chapter 13 plan was worded,” Brawders, 325 B.R. at 416, issues that are raised by Rustling Oaks and relevant here.
3.3.1. Providing Notice to Affected Parties.
A confirmed plan does not have preclusive effect on a party who did not receive notice sufficient to satisfy its due process rights. Cf. Ellett v. Stanislaus, 506 F.3d 774, 777 (9th Cir.2007) (“[A] claim cannot be considered to have been provided for by the plan if a creditor does not receive proper notice of the proceedings.” (internal quotation marks omitted)). The threshold for due process though is low: Due process merely requires “notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objection.” Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950). In the context of a plan, this means “a creditor need only get ordinary notice of [the] Chapter 13 plan to be bound by its terms.” Espinosa v. United Student Aid Funds, Inc., 553 F.3d 1193, 1204 (9th Cir.2008), aff'd, 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010).
Yet, in this case, it appears that Rustling Oaks did not receive any notice. Not only did Debtor fail to give Rustling Oaks formal notice of his bankruptcy case and his Plan by excluding Rustling Oaks from the list of creditors, but Debtor and his counsel also made no attempts to informally contact Rustling Oaks about the bankruptcy. Given this lack of notice, Rustling Oaks' due process rights would be violated if the Court found that it was bound by a plan that it did not know existed.
To the extent Debtor attempts to argue that he could not ascertain the identity of the purchaser of his Residence, this argument would fail. Debtor could have easily reached out to Guralnick, who knew due to conducting the foreclosure auction. Further, the Certificate of Foreclosure Sale, which clearly identified “Rustling Oaks, LLC” as the purchaser, was recorded right after the sale, so Debtor's counsel could have also easily discovered the purchaser's identity at the recorder's office.
Debtor argues though that he did not need to give notice to Rustling Oaks, the third-party purchaser, but instead, notice to MCA, the foreclosing lienholder and secured creditor of Debtor, and to Guralnick, the foreclosure trustee and MCA's agent, was all that was required. This argument, however, ignores “[t]he purpose of notice under the Due Process Clause[, which] is to apprise the affected individual of, and permit adequate preparation for, an impending ‘hearing’ ” before the individual “is finally deprived of his property interests.” Memphis Light, Gas & Water Div. v. Craft, 436 U.S. 1, 14, 16, 98 S.Ct. 1554, 56 L.Ed.2d 30 (1978) (emphasis added) (internal quotation marks omitted). It does not matter that Rustling Oaks never had a contractual or legal relationship with Debtor prior to the foreclosure sale. Since the Plan sought to diminish Rustling Oaks' property interests in the Residence (i.e., either by undoing the foreclosure sale or by making Rustling Oaks' title subject to a 60–month, rather than 90–day, right of redemption), Rustling Oaks is an affected party entitled to notice. Cf. Citicorp Mortg., Inc. v. Brooks (In re Ex–Cel Concrete Co.), 178 B.R. 198, 205 (9th Cir. BAP 1995) (voiding sale free and clear of lienholder's lien because “lack of any notice to [lienholder] constituted constitutional lack of due process which could not confer in personam jurisdiction on the bankruptcy court to adjudicate [lienholder's] property rights”).
3.3.2. Providing Notice of a Plan's Treatment.
Further, even if Rustling Oaks did receive notice about Debtor's bankruptcy case, Debtor's Plan would still not bind Rustling Oaks because the Plan's provisions did not clearly describe what Debtor was trying to accomplish. A “confirmed plan has no preclusive effect on issues that ... were not sufficiently evidenced in a plan to provide adequate notice to the creditor” or other party affected by the plan. Enewally v. Wash. Mut. Bank (In re Enewally), 368 F.3d 1165, 1173 (9th Cir.2004) ; cf. Shook v. CBIC (In re Shook), 278 B.R. 815, 824 (9th Cir. BAP 2002) (“Although a secured creditor is bound by the plan, this does not mean that a debtor can void or otherwise extinguish a creditor's lien without addressing the lien in the plan.”). The Ninth Circuit BAP has explained,
[A] plan should clearly state its intended effect on a given issue. Where it fails to do so it may have no res judicata effect for a variety of reasons: any ambiguity is interpreted against the debtor, any ambiguity may also reflect that the court that originally confirmed the plan did not make any final determination of the matter at issue, and claim preclusion generally does not apply to a “claim” that was not within the parties' expectations of what was being litigated, nor where it would be plainly inconsistent with the fair and equitable implementation of a statutory or constitutional scheme.
Brawders, 325 B.R. at 411. In other words, a plan requires clarity to be binding.
Here, the treatment provided for in the Plan is bare. All that Debtor did was place MCA in Class 2 of the Plan, where he proposed to directly pay MCA its regularly due assessments and to cure MCA's arrearage of $18,836 over 60 months. No additional information was inserted into the Plan. And as previously mentioned, Debtor's counsel's confusion has made it difficult for her to articulate what the Plan is attempting to accomplish. Nevertheless, the two possibilities are both deficient.
If Debtor intended to exercise and modify his statutory right of redemption, then his Plan failed to demonstrate this entirely. First, the statutory redemption under California law is paid to the purchaser, not the foreclosing lienholder. See Cal.Civ.Proc.Code § 729.060(a) (requiring redeeming party to deposit the redemption price with levying officer); id. § 729.080(b) (requiring levying officer to then tender deposit to purchaser). Thus, the party that Debtor needed to provide for in his Plan was Rustling Oaks, not MCA.
Debtor also incorrectly stated the amount necessary to redeem in the Plan. Unlike the equity of redemption price, the statutory redemption price is not the unpaid debt owed to the foreclosing lienholder, but it is essentially the amount paid by the purchaser at the foreclosure sale, along with the purchaser's additional costs and interest. See id. § 729.060(b), (c). Debtor's Plan improperly listed $18,836, the unpaid debt owed to MCA, when it should have used $36,000, the price paid by Rustling Oaks. Due to these two errors, no party could have understood that Debtor was attempting to exercise his right of redemption through the Plan.
If Debtor intended to cure the default to MCA, simply listing MCA's name and the amount of the delinquent assessments in Class 2 was also not enough. While this would have been sufficient in most cases involving the typical cure and maintenance of a secured claim in default, the circumstances in this case (i.e., the occurrence of a prepetition foreclosure sale, the existence of a third-party purchaser, and the payment of a foreclosing lienholder's claim in full from the sale proceeds) required more unequivocal language in the Plan. Debtor's counsel could not rely on the form plan's boilerplate provisions when she knew the circumstances of her client's case were unique. At a minimum, the Plan needed to provide (1) that the prepetition foreclosure sale be set aside and Rustling Oaks' Certificate of Foreclosure Sale rescinded; (2) that the sale proceeds received by all parties, including the $18,836 paid to MCA, be refunded back to Rustling Oaks; and (3) that MCA's assessment lien be reinstated. Without these additional provisions, it was reasonable for MCA and Guralnick to ignore Debtor's Plan. The Plan, in its current form, did not signal Debtor's intention to undo the foreclosure sale or to take away Rustling Oaks' interest in the property.
These deficiencies demonstrate why Ivory has no application in this case. In Ivory, the county was the foreclosing lienholder and the purchaser, and the amount of the debt was the same as the purchase price. See 70 F.3d at 74. That was why the debtor's plan that “cure[s] the property tax default,” as well as “redeem[s] the real property,” could be binding on the county. Id.
Due to the lack of notice, Rustling Oaks is not bound by Debtor's confirmed Plan, and its interest in the Residence remains unaffected by the Plan's provisions. Therefore, nothing precludes Rustling Oaks from moving for stay relief at this time.
3.4. The Postpetition Delivery and Recordation of the Trustee's Deed.
Debtor also objects to Guralnick's postpetition delivery and recordation of the Trustee's Deed, actions taken to transfer and perfect Rustling Oaks' legal title in the Residence but without this Court's approval. According to Debtor, these unauthorized acts violated the automatic stay. See 11 U.S.C. § 362(a)(3) (barring acts “to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate”); Jewett v. Shabahangi (In re Jewett), 146 B.R. 250, 252 (9th Cir. BAP 1992) (holding that postpetition recordation of trustee's deed was “an action against property of the estate” violating the stay), superseded by statute, 1993 Cal. Legis. Serv. ch. 724, § 3 (West) (codified as amended at Cal. Civ.Code § 2924h(c) ). These stay violations would, in turn, be void. See Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571 (9th Cir.1992).
In a nonjudicial foreclosure sale under California law, title to real property is transferred to the purchaser typically by delivery of the trustee's deed, see Dover Mobile Estates v. Fiber Form Prods., Inc., 220 Cal.App.3d 1494, 1498, 270 Cal.Rptr. 183 (1990), and recordation of that deed perfects the purchaser's interest, see Walker v. Cal. Mortg. Serv. (In re Walker), 861 F.2d 597, 600 (9th Cir.1988).
Since Rustling Oaks' ownership of the Residence is premised on what Debtor contends is an invalid Trustee's Deed, Debtor essentially argues that title has not been perfected and that any unlawful detainer proceeding to evict him is premature at this time. See Cal.Civ.Proc.Code § 1161a(b)(3) (allowing purchaser to remove holdover owner from property but only if “title under the sale has been duly perfected”); see also Malkoskie v. Option One Mortg. Corp., 188 Cal.App.4th 968, 974–75, 115 Cal.Rptr.3d 821 (2010). It would follow that stay relief for Rustling Oaks should be denied. However, this argument fails for a number of reasons.
3.4.1. The Ministerial Acts Exception.
First, Guralnick's delivery of the Trustee's Deed constitutes a ministerial act that does not violate the automatic stay. The Ninth Circuit has adopted the ministerial acts exception, which provides that the automatic stay does not prohibit “[m]inisterial acts or automatic occurrences that entail no deliberation, discretion, or judicial involvement” on the part of an actor. McCarthy, Johnson & Miller v. N. Bay Plumbing, Inc. (In re Pettit), 217 F.3d 1072, 1080 (9th Cir.2000). “[W]hen an [actor]'s duty is delineated by, say, a law or a judicial decree with such crystalline clarity that nothing is left to the exercise of the [actor]'s discretion or judgment, the resultant act is ministerial.” Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 974 (1st Cir.1997).
Courts have determined that this exception extends to an actor's postpetition execution, delivery, or recordation of a deed following a prepetition foreclosure or tax sale when the applicable law obligates the actor to take those actions and provides the actor with no discretion. See, e.g., Tracht Gut, LLC v. Cnty. of L.A. Treasurer & Tax Collector (In re Tracht Gut, LLC), 503 B.R. 804, 812 (9th Cir. BAP 2014) (finding no stay violation when county tax collector had no discretion in recording deed under California Revenue and Taxation Code § 3708.1 ); In re Pineda–Pineda, 510 B.R. 648, 653–54 (Bankr.D.Or.2014) (dicta) (concluding that there would be no stay violation when county tax collector issues and records deed due to lack of discretion under Oregon Revised Statutes § 312.200 ); In re Rugroden, 481 B.R. 69, 79 (Bankr.N.D.Cal.2012) (finding no stay violation when IRS official had no discretion in executing deed under 26 U.S.C. § 6338(b) ).
This case is no different. The applicable California statute reads, “If the redemption price is not deposited pursuant to Section 729.060 before the expiration of the redemption period, ... the nonjudicial foreclosure trustee pursuant to Section 729.035shall deliver an executed trustee's deed and comply with the requirements of Section 2924j of the Civil Code.” Cal.Civ.Proc.Code § 729.080(a) (emphasis added).
The original 90–day redemption period expired on January 8, 2014, and the additional 60–day extension period under § 108(b) expired on March 9, 2014. Both deadlines passed without Debtor depositing the redemption price with Guralnick. With the statute's condition precedent met, Guralnick, as the foreclosure trustee, was obligated by the statute to deliver the executed Trustee's Deed to Rustling Oaks, which it did on August 1, 2014. Because California Code of Civil Procedure § 729.080(a) left Guralnick with no discretion, its delivery of the Trustee's Deed must be considered a ministerial act that does not violate the automatic stay.
The record only shows that Guralnick executed the Trustee's Deed on July 28, 2014, and recorded it on August 1, 2014, but there was no declaration or other evidence concerning when Guralnick delivered the Trustee's Deed to Rustling Oaks. Nevertheless, since Guralnick and Rustling Oaks do not contest the fact that the Trustee's Deed has been delivered, the Court will assume that the delivery took place no later than the date of recordation.
3.4.2. The Perfection of Interests Exception Under § 362(b)(3).
Second, Guralnick's postpetition recordation of the Trustee's Deed falls within the automatic stay exception under § 362(b)(3), which states that the automatic stay does not bar “any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee's rights and powers are subject to such perfection under section 546(b) of this title.” 11 U.S.C. § 362(b)(3). Section 546(b), in turn, sets forth that the trustee's rights and powers are subject to any generally applicable law that permits any act to perfect, or to maintain or continue the perfection of, an interest in property to be effective against an entity that acquires rights in such property before the date on which action is taken to effect such perfection, maintenance, or continuation. Id. § 546(b)(1)(A), (B). Put another way, a party's postpetition perfection of its interest in estate property will not violate the stay if state law allows that party's interest to be superior to the interest of any entity (such as a trustee acting as a hypothetical bona fide purchaser) who obtains its interest prior to the date that the act to perfect is performed. See Hayden v. Wells (In re Hayden), 308 B.R. 428, 432 (9th Cir. BAP 2004).
An interest in real property is not perfected until a document conveying the interest has been recorded with the county recorder. See Walker, 861 F.2d at 600. Under California's race-notice recording statute, a subsequent purchaser of real property has priority over an unrecorded conveyance if the purchaser is a bona fide purchaser for value who recorded its conveyance first. See Cal. Civ.Code §§ 1213 –1215. However, there are exceptions permitting a subsequently recorded conveyance to relate back and take priority over another that was recorded first.
One such exception, commonly invoked in bankruptcy cases, is California Civil Code § 2924h(c), which provides that a purchaser's title to real property sold at a trustee's sale is “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.” A purchaser, who records its trustee's deed postpetition but within 15 days of the prepetition sale, would prevail over a hypothetical bona fide purchaser and would not violate the automatic stay under § 362(b)(3). See Bebensee–Wong v. Fed. Nat'l Mortg. Ass'n (In re Bebensee–Wong), 248 B.R. 820, 822–23 (9th Cir. BAP 2000). If the postpetition recordation of the trustee's deed occurs after the 15–day period, then the perfection does not relate back to the sale date. In re Garner, 208 B.R. 698, 701 (Bankr.N.D.Cal.1997). The recordation violates the stay, and the purchaser's title is subject to avoidance by the trustee. Id.
There is no comparable California statute for those who purchase real property at a trustee's sale subject to redemption, such as Rustling Oaks. Nevertheless, California case law explains that Rustling Oaks' title would still defeat the trustee's avoidance powers due to the Certificate of Foreclosure Sale, a document executed and recorded prepetition by Guralnick.
California Civil Code § 2924h(c)'s 15–day relation-back period obviously cannot apply because the earliest a trustee's deed in a trustee's sale subject to redemption can be recorded is 90 days after the foreclosure sale when the right of redemption expires. Cf. Cal. Civ.Code § 5710(a) (making only California Civil Code §§ 2924, 2924b, and 2924c applicable in a trustee's sale by a homeowners' association on its assessment lien).
Although the relevant statute says little about a certificate of sale, related case law explains the legal significance of this document. The certificate of sale is an instrument in which title is created within the meaning of California Civil Code § 1107, Foorman, 75 Cal. at 556, 17 P. 680, as well as “a conveyance within the meaning of the recording act [California Civil Code § 1215 ], by which [the purchaser] is protected from the unrecorded claims of others, of which [the purchaser] did not have notice,” Duff v. Randall, 116 Cal. 226, 231, 48 P. 66 (1897). As a result, recordation of the certificate “charges all subsequent purchasers with notice of the purchaser's title.” Hansen v. G & G Trucking Co., 236 Cal.App.2d 481, 495, 46 Cal.Rptr. 186 (1965). The deed, once delivered after expiration of the redemption period, “gives to the purchaser no new title to the land purchased by him, but is merely evidence that the title has become absolute.” Pollard v. Harlow, 138 Cal. 390, 393, 71 P. 454 (1903) (internal quotation marks omitted) (citing Robinson v. Thornton, 102 Cal. 675, 680, 34 P. 120 (1893) ).
All that California Code of Civil Procedure § 729.040 provides is (1) that following a purchaser's payment of its successful bid, a foreclosure trustee must “execute and deliver a certificate of sale to the purchaser and record a duplicate of the certificate of sale in the office of the county recorder,” Cal.Civ.Proc.Code § 729.040(a), and (2) that the certificate of sale must include a description of the property sold, the date of the foreclosure sale, the price paid for the property, and a statement that the property is subject to a right of redemption, see id. § 729.040(b), (c).
Section 729.040, governing the certificate of sale issued in foreclosure sales, is modeled after former § 700a of the California Code of Civil Procedure, which was in effect until 1983 and governed the certificate of sale issued in execution sales. See Legis. Comm. Comments to Cal.Civ.Proc.Code § 729.040 (1982) (stating that § 729.040 “continues the substance of a portion of subdivision (a) of former Section 700a”). Since there are no published decisions examining certificates of sale under § 729.040 and their effect, the decisions considering certificates of sale under former § 700a are instructive.
The superiority of Rustling Oaks' title is demonstrated by Foorman v. Wallace, 75 Cal. 552, 17 P. 680 (1888). There, a debtor conveyed his real property to an initial transferee, but the initial transferee did not record his deed at that time. Id. Thereafter, the defendant sued and obtained a judgment against the debtor. Id. The judgment was then enforced via a sheriff's execution sale, where the defendant, who had no actual knowledge of the debtor's prior conveyance, purchased the same real property subject to a right of redemption. Id. The sheriff's certificate of sale was recorded shortly afterwards. Id. When no redemption was made, a sheriff's deed was delivered to the defendant. Id. However, after the certificate of sale was recorded but less than a month before the sheriff's deed was delivered, the initial transferee finally recorded his deed. Id. Over a year later, the initial transferee conveyed to the plaintiff by deed. Id. The plaintiff then brought an action against the defendant over the property. Id.
On appeal, the California Supreme Court had to address whether the defendant's title to the real property was paramount to that of the initial transferee when the initial transferee's deed was recorded before the sheriff's deed but after the certificate of sale. See id. at 553–54, 17 P. 680. The court answered in the affirmative and ruled in favor of the defendant. See id. at 558, 17 P. 680.
The court first found that the defendant, despite being a judgment creditor purchasing property at his own execution sale, was a bona fide purchaser for value. Id. at 554, 17 P. 680. Then, reasoning that the certificate of sale is “evidence of the equitable interest which the purchaser has in the land,” the court determined that “the certificate of sale given by the sheriff to [the defendant] was an instrument whereby he acquired ... title.” Id. at 556–57, 558, 17 P. 680. Recordation of the certificate of sale, it followed, had the effect of “impart[ing] constructive notice to all the world” of the defendant's title. Id. at 558, 17 P. 680. Since the defendant's certificate of sale was recorded before the initial transferee's deed (under which the plaintiff claimed) and the defendant had no actual notice of that deed, the court concluded that the defendant's title was superior to the title claimed by the initial transferee and the plaintiff.Id.
Here, the Certificate of Foreclosure Sale was recorded shortly after the foreclosure sale and almost three months before the petition was filed. Despite the postpetition recordation of the Trustee's Deed, Rustling Oaks has priority over a hypothetical bona fide purchaser who perfected its interest on the petition date. Rustling Oaks was a purchaser for value, having paid $36,000 for the Residence, and its conveyance, in the form of the Certificate of Foreclosure Sale, was recorded first and prior to the petition date. It follows that the recordation of the Trustee's Deed, which gave Rustling Oaks no new title, was an act to maintain or continue the perfection of its title in the Residence that does not violate the stay under § 362(b)(3).
3.4.3. Retroactive Annulment of the Stay.
Lastly, Debtor ignores Rustling Oaks' prayer for retroactive annulment of the automatic stay. Section 362(d) “gives the bankruptcy court wide latitude in crafting relief from the automatic stay, including the power to grant retroactive relief from the stay.” Schwartz, 954 F.2d at 572. By retroactively aning the stay, a court can validate an otherwise void act. See Algeran, Inc. v. Advance Ross Corp., 759 F.2d 1421, 1425 (9th Cir.1985).
To determine whether retroactive relief is justified, the bankruptcy court must balance the equities on a case-by-case basis. Nat'l Envtl. Waste Corp. v. City of Riverside (In re Nat'l Envtl. Waste Corp.), 129 F.3d 1052, 1055 (9th Cir.1997). This necessarily requires a court to engage in a multifactor analysis. See Palm v. Klapperman (In re Cady), 266 B.R. 172, 179–80 (9th Cir. BAP 2001), aff'd sub nom. Palm v. Cady (In re Cady), 315 F.3d 1121 (9th Cir.2003) (adopting the BAP's opinion as its own). Here, balancing the equities of this case favors granting retroactive annulment of the stay to validate Guralnick's postpetition delivery and recordation of the Trustee's Deed.
The Ninth Circuit BAP has formulated twelve factors for this analysis: (1) the number of bankruptcy filings; (2) whether the circumstances of a repeat filing indicate an intention to delay or hinder creditors; (3) prejudice to creditors or third parties, including bona fide purchasers, if stay relief is not retroactive; (4) the debtor's overall good faith conduct; (5) whether the creditors knew of the stay but nevertheless took action; (6) whether the debtor is complying with the Bankruptcy Code and Rules; (7) the relative ease of restoring the parties to the status quo ante; (8) the costs of annulment to the debtor and creditors; (9) how quickly creditors moved for annulment, or how quickly the debtor moved to set aside the violative conduct; (10) whether creditors, after learning of the bankruptcy, proceeded to continue violating the stay or moved expeditiously to gain relief; (11) whether annulment will cause irreparable injury to the debtor; and (12) whether stay relief will promote judicial economy or other efficiencies. Fjeldsted v. Lien (In re Fjeldsted), 293 B.R. 12, 25 (9th Cir. BAP 2003). The Ninth Circuit has also mentioned a debtor's failure to object to violative conduct despite knowledge of that conduct and the bankruptcy court's belief that it would have granted stay relief had the violating party moved for it beforehand as other valid factors.See Nat'l Envtl. Waste Corp., 129 F.3d at 1055–56. This Court's discussion only addresses those factors relevant to this case.
Only two factors favor denying retroactive relief. First, MCA and Guralnick both knew and had notice of Debtor's bankruptcy, but Guralnick still proceeded to record the Trustee's Deed without obtaining stay relief beforehand. Guralnick is not a completely innocent actor. Second, restoring the parties to the status quo ante is a relatively simple exercise; all that must be done is for this Court to void the Trustee's Deed. These factors, however, are outweighed by the other, more significant ones.
At the second hearing on the motion, Rustling Oaks' counsel stated that Rustling Oaks incurred additional costs after the foreclosure sale. However, no evidence of those costs was submitted, so they are not part of the Court's record at this time.
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To start with, Debtor's and his counsel's conduct, like Guralnick's, was also not exemplary. Despite knowing that there had been a prepetition foreclosure sale, Debtor's counsel made no attempts to figure out who purchased the Residence and to notify the purchaser about Debtor's bankruptcy and his Plan that supposedly impacted the purchaser's interests. Debtor's counsel also did not draft the Plan in a manner that unambiguously expressed Debtor's intention to exercise his right of redemption. Additionally, Debtor's counsel failed to proactively act to protect her client's interests, waiting until Rustling Oaks filed this stay relief motion in October 2014 to bring all of these issues to the Court's attention. Even though Guralnick explained its position to Debtor's counsel in May 2014 and informed her of its intention to record the Trustee's Deed in July 2014, Debtor's counsel still did nothing despite previously threatening to file an adversary proceeding.
Further, although Debtor will suffer irreparable injury if retroactive relief is granted (i.e., losing his Residence), Debtor's loss is an inevitable one. Rustling Oaks successfully purchased the Residence subject only to Debtor's right of redemption. Since Debtor has not redeemed within the required time and he cannot and has not confirmed a plan that effectively redeems the Residence, there is nothing that Debtor can do, at this point, to save his Residence indefinitely. Rustling Oaks is ultimately entitled to have title to the Residence.
The denial of retroactive relief would only offer Debtor temporary relief; it would not somehow undo the foreclosure sale. Rather, if annulment is denied, that would just mean that Guralnick has to file its own stay relief motion in order to redeliver and re-record the Trustee's Deed, a motion that would certainly be granted. Debtor would have no basis for arguing for the denial of that motion because Rustling Oaks is entitled to have legal title to the Residence and to have the Trustee's Deed delivered and recorded. Granting retroactive relief now, as a result, promotes judicial economy by saving Guralnick the costs and efforts of filing and litigating a new stay relief motion.
Based on a consideration of the relevant factors, retroactive annulment of the automatic stay is appropriate. If Guralnick's postpetition delivery and recordation of the Trustee's Deed were somehow acts that violated the automatic stay and were not covered by any exception, these otherwise void acts are now valid.
3.5. Cause for Relief from the Automatic Stay under § 362(d)(1).
The Court having rejected each of Debtor's arguments, the only remaining issue is whether there is cause under § 362(d)(1) to grant Rustling Oaks relief from the automatic stay to initiate its unlawful detainer proceeding against Debtor.
Cause is not defined by the Bankruptcy Code, so it must be determined on a case-by-case basis. Christensen v. Tucson Estates, Inc. (In re Tucson Estates, Inc.), 912 F.2d 1162, 1166 (9th Cir.1990). After a prepetition foreclosure sale of the debtor's property and prepetition recordation of the trustee's deed, the debtor no longer holds equitable or legal title to the property and the filing of a petition cannot reinstate the debtor's title. Edwards v. Wells Fargo Bank, N.A. (In re Edwards), 454 B.R. 100, 106 (9th Cir. BAP 2011). “Instead, the debtor is essentially a ‘squatter,’ and thus cause for relief from stay is established.” Id. This case is slightly more complicated than that, but Rustling Oaks has still established cause for granting relief.
A prepetition foreclosure sale of the Residence took place, but it was subject to Debtor's statutory right of redemption. Debtor filed his petition prior to the redemption period expiring and prior to the delivery and recordation of the Trustee's Deed. Yet, Debtor did not exercise his right of redemption before the original deadline under California law or the extended deadline under bankruptcy law. He also did not confirm a plan that effectively redeemed the property or set aside the foreclosure sale. He has therefore lost his right of redemption.
Further, given the Court's ruling that the delivery and recordation of the Trustee's Deed either do not violate the stay or are validated by retroactive annulment of the stay, legal title to the property has been transferred and perfected. Debtor no longer has a title interest in the property.
All that remains is Debtor's possessory interest in the property. But because the redemption period has expired, Debtor is no longer entitled to legally possess the property. See First Nat'l Trust & Sav. Bank of San Diego v. Staley, 219 Cal. 225, 227, 25 P.2d 982 (1933). Instead, Debtor is a holdover owner following a foreclosure sale, occupying the property without a lease with the purchaser. Therefore, he is essentially a squatter, which establishes cause under § 362(d)(1).
4. CONCLUSION.
For the foregoing reasons, the Court will grant Rustling Oaks' motion. Cause exists under § 362(d)(1) to grant relief from the automatic stay, and retroactive annulment of the stay is appropriate under the circumstances. The postpetition delivery and recordation of the Trustee's Deed by Guralnick, acting on behalf of MCA, are not void acts. Rustling Oaks, as the entity holding valid title to the Residence, is permitted to initiate an unlawful detainer proceeding against Debtor. But due to a high probability of an appeal by Debtor, Rustling Oaks' requested waiver of the fourteen-day stay under Bankruptcy Rule 4001(a)(3) will be denied.
Counsel for Rustling Oaks is to lodge an order consistent with this memorandum decision within seven days.