Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-4_13-ap-04219/USCOURTS-canb-4_13-ap-04219-0/pdf.json

Parties Involved:
First Citizens Bank & Trust Company
Plaintiff
Emil Shokohi
Defendant
1080 Delaware LLC
Intervenor

Document Text:

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

OAKLAND DIVISION

|

In re |

| No. 11-07128

BERKELEY DELAWARE COURT, LLC, | Chapter 7

|

Debtor. |

______________________________|

|

FIRST CITIZENS BANK & TRUST |

COMPANY, as assignee of |

Christopher R. Barclay, |

Chapter 7 Trustee of Berkeley |

Delaware Court, LLC, | Adv. Pro. No. 13-04219

Plaintiff, |

|

v. |

|

EMIL SHOKOHI, |

Defendant. |

______________________________|

1080 DELAWARE LLC, |

|

Plaintiff-In-Intervention|

MEMORANDUM FINDING LEASE VOIDABLE

The Court heard cross motions for summary judgment in the 

above-captioned adversary proceeding on April 21, 2014. The 

1

The following constitutes

the order of the court. Signed July 18, 2014

________________________________________

William J. Lafferty, III

U.S. Bankruptcy Judge

Entered on Docket 

July 18, 2014

EDWARD J. EMMONS, CLERK 

U.S. BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

Case: 13-04219 Doc# 96 Filed: 07/18/14 Entered: 07/18/14 16:05:43 Page 1 of 13
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appearances made are noted on the record. At the conclusion of

the hearing, the Court determined that relief was appropriate 

under section 549 of the Bankruptcy Code because the lease of 

real property, an apartment in a building previously owned by

Berkeley Delaware Court, LLC, the Debtor in the bankruptcy case

discussed below (the subject transaction) was a post-petition

transfer of property belonging to the estate, and that the

transfer was unauthorized because it was done in contradiction 

of a court order. The transfer did not qualify for the 

exemption established in subsection 549(c) because the transfer 

was not made to a purchaser. For these reasons, the Court 

found the transfer could be avoided pursuant to 549(a). 

At the conclusion of the hearing there was disagreement as 

to whether the effect of the Court’s ruling would be to render 

the lease “void” from the outset, or voidable (ie. void as of 

the date of the entry of summary judgment). The parties had

not previously addressed that issue in their briefs, and the 

Court set a briefing schedule for parties to provide 

authorities to support their respective position for that 

issue. The Plaintiff-In-Intervention and Defendant submitted 

supplemental briefs, docket number 91 and 93, respectively.

There was also an objection filed by the Plaintiff-In2

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Intervention as docket number 95. The disposition of this 

issue renders the objection moot.

Background

Prior to commencement of this action, Berkeley Delaware 

Court, LLC (“Debtor”), the Debtor in two prior bankruptcy 

cases, owned real property in Berkeley, California, on which it 

constructed and ultimately operated an apartment complex. On 

November 5, 2009, well prior to completion of the project, the

Debtor filed its first chapter 11 bankruptcy in the Southern 

District of California.1 In an apparent recognition of the 

difficulties inherent in attempting to confirm a plan in a 

single asset real estate case in which the senior secured 

lender is undersecured, and holds a deficiency claim large 

enough to control any unsecured class in a plan, the Debtor and 

the secured lender, First-Citizens Bank & Trust Company

(“First-Citizens”), came to an arrangement whereby the chapter

11 case was dismissed, the Debtor was given a set amount of 

time to sell or refinance the real property and the lender was 

given a deed in lieu of foreclosure that was placed into 

escrow, to be delivered to lender if the Debtor did not timely

pay off the loan. In addition, in order to preserve the status 

quo and ensure First-Citizen’s ability to take the property 

1 In re Berkeley Delaware Court, LLC, Case No. 09-17100-LA11, Doc. 1,

(Bankr. S.D. Cal. Nov. 5, 2009).

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with as few burdens as possible the Debtor agreed not to 

encumber the property with leases, without the express written 

consent of First-Citizens.2 An order was entered on June 28, 

2010, approving this agreement. The first bankruptcy case was 

dismissed shortly after the June 28 order was issued. An order 

voluntarily dismissing the case was entered on September 9,

2010, and the case was closed on September 14, 2010.3

Unfortunately, the Debtor was unable timely to pay off 

First-Citizens and, facing default under the negotiated 

compromise, and apparently seeking to prevent delivery of the

deed in lieu to the lender, on April 29, 2011, the Debtor filed 

a second chapter 11 bankruptcy case.4 The Debtor neither timely

commenced payments to First-Citizens, nor timely proposed a

confirmable plan within the meaning of section 362(d)(3), and 

the Court concluded that it was required to grant relief from 

stay to lender by order entered on August 11, 2011.5 This

development notwithstanding and notwithstanding the prior court 

2 An Order on Approval of Post-Petition Financing & Compromise of 

Pending Litigation was entered by the bankruptcy court on June 28, 

2010. In re Berkeley Delaware Court, LLC, Case No. 09-17100-LA11, Doc.

100 (Bankr. S.D. Cal. June 28, 2010). According to a settlement

agreement entered into between a Chapter 7 Trustee and First Citizens 

Bank & Trust Company in a subsequent bankruptcy case, the Compromise of 

Pending Litigation effectively sold the property to First Citizens, and 

prohibited the Debtor from leasing the property. First Citizens Bank v. 

Shokohi, Adv. P. No. 13-04219, Doc. 81-2, Ex. C. (Bankr. N.D. Cal. Feb.

20, 2013).

3 In re Berkeley Delaware Court, LLC, Case No. 09-17100-LA11, Doc. 103 

(Bankr. S.D. Cal. Feb. 20, 2013).

4 In re Berkeley Delaware Court, LLC, Case No. 11-07128-LA7, Doc. 1, 

(Bankr. S.D. Cal. Apr. 29, 2011).

5 Id. at Doc. 32.

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approved restriction on leasing the property, an agent for the 

Debtor entered into a lease agreement with the Defendant on

September 5, 2011.6 Pursuant to the lease agreement, the 

Defendant moved into an apartment on the property, and has 

remained in possession thereof from then to the present time.

For reasons not germane to this matter, the court 

converted the case to one under chapter 7 on March 2, 2012.7

During the spring of 2012, Plaintiff-In-Intervention, 1080 

Delaware LLC, purchased the Real Property from First-Citizens.

Although not every aspect of the transaction has been 

explained, it appears the purchase agreement required FirstCitizens to take further action regarding the lease encumbering 

the property. After discussion with representatives of FirstCitizens in November 2012, a settlement agreement was entered

into between the Chapter 7 Trustee and First-Citizens which 

transferred to First-Citizens the Trustee’s power to avoid 

post-petition transactions under section 549 of the Bankruptcy 

Code. The agreement was approved by the bankruptcy court on 

November 26, 2012.8

Well before the transactions described in the preceding 

paragraph, First-Citizens attempted to void the lease in state 

6 First Citizens Bank v. Shokohi, Adv. P. No. 13-04219, Doc. 81-2, Ex. 

C. (Bankr. N.D. Cal. Feb. 20, 2013).

7 In re Berkeley Delaware Court, LLC, Case No. 11-07128-LA7, Doc. 123, 

(Bankr. S.D. Cal. Apr. 29, 2011).

8 In re Berkeley Delaware Court, LLC, Case No. 11-07128-LA7, Doc. 172, 

(Bankr. S.D. Cal. Apr. 29, 2011).

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court. On January 23, 2012, First-Citizens brought an action 

in state court in an attempt to have the lease between Mr. 

Shokohi and the Debtor declared void. The Alameda County 

Superior Court dismissed the case holding First-Citizens could 

not pursue a section 549 action in state court. Additionally, 

four other actions involving the property are pending in 

Alameda County Superior Court: a cross-complaint for emotional 

distress filed by Mr. Shokohi in the aforementioned case, an 

action by Mr. Shokohi for declaratory and injunctive relief 

against the new owner, an unlawful detainer action by the new 

owner against Mr. Shokohi, and an action by the City of 

Berkeley against 1080 Delaware to enforce the pre-petition

agreement requiring Debtor to provide ten units for low income 

tenants at the property. The first three of the actions have 

been stayed pending the outcome of this adversary proceeding.

On February 20, 2013, this adversary proceeding was filed 

in the second bankruptcy case.9 On October 13, 2013, this 

adversary proceeding was transferred to the undersigned judge.

This Court granted 1080 Delaware’s Motion to Intervene on

January 21, 2014.

At the hearing on April 21, 2014, this Court determined 

that section 549 applied to the September 5, 2011, lease 

9 First-Citizens Bank & Trust Co. v. Emil Shokohi (In re Berkeley 

Delaware Court, LLC), Adv. Case. No. 13-04219, Doc. 1 (Bankr. S.D. Cal. 

Feb. 20, 2013).

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agreement. Nevertheless, the Defendant has been living in the 

property over the last several years, and First Citizen’s

initial efforts to terminate the lease under state law have 

caused the tenant to raise defenses under California landlord 

tenant law, and to assert claims for affirmative relief under 

that law.

Consequently, whether section 549 renders the lease 

agreement void or voidable may affect the rights of the parties 

and the disposition of the state court claims.

Discussion

The Plaintiff-In-Intervention contends that although the 

question has no legal import because the Court has already 

ruled in its favor on the motion for summary judgment, the 

Court should find the lease void ab initio. The Plaintiff-InIntervention asserts that sections 549 and 362 work analogously 

to protect from improper transfers of the estate, and 

therefore, their effects should be the same, i.e. a lease found 

in violation of section 549 should be void ab initio.

Defendant, however, argues that nothing in the language of 

section 549 permits a court to find a prohibited transaction

void ab initio. As support for this proposition, Defendant 

highlights the differences between sections 549 and 362 as

discussed in at least one Ninth Circuit opinion. See generally 

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Burkart v. Coleman, (In re Tippett), 542 F. 3d 684, 691 (9th 

Cir. 2008). Defendant asserts that these differences require

that a court construe section 549 to render transfers voidable 

rather than void.

There is nothing in the language of section 549 or 550 

(effect of avoidance) that expressly states that a judgment

determining that a transaction is in violation of section 549

is affective retroactively. Nor is the term “avoid” so defined 

by the Code.

As the parties’ papers demonstrate, however, an effective

contrast may be drawn between the effect of and purpose behind

section 362, and that of section 549. 

The Ninth Circuit has long held that violations of the 

automatic stay are void, not voidable. Although such language 

is not provided expressly in the statute, the conclusion that a 

violation of the stay is void is consistent with the purpose of 

the stay, and supports the policy behind it. Schwartz v. 

United States (In re Schwartz), 954 F.2d 569, 571 (9th Cir. 

1992).

The Ninth Circuit in Schwartz identified an “important and 

fundamental purpose of the automatic stay” as protecting 

debtors from their creditors while bankruptcy proceedings are 

underway. The court stated “[the stay] is designed to protect 

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debtors from all collection efforts while they attempt to 

regain their financial footing.” Id. This holding is

consistent with Congressional intent. See H.R. Rep. No. 595, 

95th Cong., 1st Sess. 340 (1978) (“The automatic stay is one of 

the fundamental debtor protections . . . .”).

The Ninth Circuit has unequivocally held that “[t]ransfers 

in violation of the automatic stay are void.” 40235 Washington 

St. Corp. v. Lusardi, 329 F.3d 1076, 1080 (9th Cir. 2003).

This is necessary to guarantee that the sweeping protections 

offered by the automatic stay are effective. Schwartz at 570.

Requiring the debtor to take affirmative actions to receive the 

benefits of the automatic stay would render section 362 

significantly less effective. Id. (If violations of the stay 

are merely voidable, debtors must spend a considerable amount 

of time and money policing and litigating creditor actions.”);

see also In re Tippett, 542 F.3d 684, 691 (9th Cir. 2008) (“We 

concluded that the purpose of the provision . . . could be 

vindicated only if all violations were rendered void, not 

merely voidable.”). The legal consequence of a transfer being 

void is to say the transfer is “without effect.” See Lusardi

at 1080.

The prohibition on post-petition transfers of section 549

serves a different purpose than the section 362 automatic stay.

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The automatic stay offers broad protections to allow the 

bankruptcy process to function; the avoiding powers afforded by 

section 549 allow for a specific wrong to be corrected,

including one perpetrated by the debtor. Lusardi at 1081 

(“[t]he purpose of section 549, in contrast [to section 362], 

is to provide a just resolution when the debtor himself 

initiates an unauthorized postpetition transfer. The general 

rule in such situations is that the trustee is authorized to 

avoid the transfer in order to protect creditors.”).

Because of this different purpose, section 549 — and

analogous code sections 546, 547, 548 et. al. — function

differently than the section 362 automatic stay. These

sections create litigation tools. By definition, an action 

brought under section 549 requires findings of facts, and legal

conclusions to reach a determination, and a court decree to be 

enforceable. Section 549 actions are subject to a number of 

considerations inapplicable to the automatic stay. The

avoidance power created by section 549 is subject to a statute

of limitations. 11 U.S.C. § 549 (d) (2012). The ability to 

avoid a transfer by invoking section 549 can be rebutted by 

affirmative defenses. Id. at § 549 (c). Furthermore, a trustee 

has the discretion to choose not to bring an action to avoid a

transfer under 549.

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Because section 549 has a different purpose and functions 

differently than section 362, transfers falling under section 

549 are not void as a violation of the automatic stay. Instead,

section 549(a) transfers are voidable. In re Jim L. Shetakis 

Distrib. Co., 401 F. App’x 249, 251 (9th Cir. 2010). In

Shetakis, the Ninth Circuit determined a postpetition lease and 

option to purchase that may be avoided pursuant to section

549(a) was voidable and not void. Id. According to the Ninth

Circuit, “unauthorized transfers of property initiated by the 

debtor are voidable by the trustee under section 549.” Id.

The Ninth Circuit has recognized that there are situations 

in which section 362 and 549 overlap. See Tippett at 691. A 

transaction that is voidable under 549 may also be in violation 

of the section 362 automatic stay provision. However, section 

549 and 362 are not in conflict. The language and legislative 

purpose of section 549 provide for its appropriate application.

Frequently, avoidance under section 549 is appropriate when the 

debtor is a willing participant to the transaction. Id.

Conclusion

Without statutory language to the contrary, legal 

judgments are effective as of the date issued. Section 549 

contains no language to indicate that the effect of a 549 

avoidance judgment was intended to be retroactive. Therefore,

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and for the reasons set forth in this Memorandum, a transfer 

found to be in violation of section 549 is avoided as of the 

date the court issues a judgment of that finding, and not 

before.

Unlike a void transfer under section 362, a transfer that 

is voidable remains effective until action is taken and a 

judgment is entered. Such a transfer, therefore, is not

totally without effect, but is rendered ineffective by a ruling 

of the court avoiding the transfer.

The Plaintiff-In-Intervention is directed to prepare a 

form of Judgment consistent with the Court’s ruling as stated 

on the record during the April 21 hearing and consistent with 

the conclusions reached in this Memorandum.

*END OF MEMORANDUM*

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COURT SERVICE LIST

Ori Katz

Sheppard, Mullin, Richter and Hampton

4 Embarcadero Center 17th Fl.

San Francisco, CA 94111 

J. Barrett Marum

Sheppard Mullin Richter and Hampton

501 W Broadway 19th Fl.

San Diego, CA 92101 

Law Office of Leah Hess 

c/o Leah Hess 

1814 Franklin Street, Suite 805

Oakland, CA 94612

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