Court Opinion

ID: 2757054
Source: CourtListenerOpinion
Date Created: 2014-12-03 19:08:24.637198+00
Date Added: 2024-06-11T10:50:03.227260
License: Public Domain

FILED
                                                           OCT 09 2012
 1
                                                       SUSAN M SPRAUL, CLERK
                                                         U.S. BKCY. APP. PANEL
 2                                                       OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )        BAP No.   AZ-11-1633-JuHlD
                                   )
 6   MATHON FUND, LLC, et al.,     )        Bk. No.   2:05-bk-27993-GNB
                                   )
 7                  Debtor.        )
     ______________________________)
 8                                 )
     GEORGE AND SUSAN TINDALL,     )
 9                                 )
                    Appellants,    )
10                                 )
     v.                            )        M E M O R A N D U M*
11                                 )
     MATHON FUND, LLC, et al.,     )
12                                 )
                    Appellee.      )
13   ______________________________)
14               Argued and Submitted on September 20, 2012
                             at Phoenix, Arizona
15
                            Filed - October 9, 2012
16
               Appeal from the United States Bankruptcy Court
17                       for the District of Arizona
18     Honorable George B. Nielsen, Jr., Bankruptcy Judge, Presiding
                    _____________________________________
19
     Appearances:     Sean Patrick O’Brien, Esq. of Gust Rosenfeld PLC
20                    argued for appellants George and Susan Tindall;
                      Neal H. Bookspan, Esq. of Jaburg & Wilk, P.C.
21                    argued for appellee Mathon Fund, LLC.
                      ____________________________________
22
     Before:   JURY, HOULE**, and DUNN Bankruptcy Judges.
23
24
          *
25          This disposition is not appropriate for publication.
     Although it may be cited for whatever persuasive value it may
26   have (see Fed. R. App. P. 32.1), it has no precedential value.
     See 9th Cir. BAP Rule 8013-1.
27
          **
            Hon. Mark D. Houle, Bankruptcy Judge for the Central
28
     District of California, sitting by designation.

                                      -1-
 1           George and Susan Tindall appeal from the bankruptcy court’s
 2   order denying their Motion to Confirm that the Automatic Stay
 3   Does Not Apply, or in the Alternative, to Allow for Nunc Pro
 4   Tunc Relief From the Automatic Stay (the “Motion for Relief”).
 5   We AFFIRM.
 6                                 I.   FACTS
 7           On July 14, 2003, Aircraft Seal & Gasket Corporation
 8   (“ASGC”), as maker, entered into a promissory note (the “Note”)
 9   with Mathon Fund, LLC (“Mathon” or “Debtor”) in the principal
10   amount of $500,000.    The repayment terms provided for payment of
11   $625,000 in four months.    Herbert Menold (“Herbert”) and Wilbur
12   Hanley (“Wilbur”), principals of ASGC, personally guaranteed the
13   loan.    The loan was secured with business assets of ASGC, and
14   Herbert’s guarantee was secured by real property owned by
15   Herbert.
16           In addition, Herbert’s wife, Rene Role Menold (“Rene”),
17   executed a Deed of Trust dated July 16, 2003 (the “Mathon Deed
18   of Trust”), pledging her sole and separate property located in
19   Corona del Mar, California (the “Property”) as collateral for
20   the Note.    On August 12, 2003, the Mathon Deed of Trust was
21   filed as Instrument No. 2003-000970041 with the Recorder’s
22   Office for the County of Orange, California.
23           ASGC defaulted on the loan.      Herbert and Wilbur executed an
24   extension agreement on March 26, 2004, increasing the repayment
25   amount to $771,250.
26           In February 2005, Rene contracted to sell the Property to
27   the Tindalls.    In March 2005, Mathon received a letter from
28   Chicago Title Insurance Company advising that the Menolds were

                                        -2-
 1   selling the Property to the Tindalls and requesting that Mathon
 2   release the Mathon Deed of Trust.        Mathon declined the request
 3   because the Note had not been paid off.
 4            During this time frame, the Arizona Corporation Commission
 5   commenced a state court action against Mathon.        On April 5,
 6   2005, James Sell (“Sell”) was appointed as the receiver for
 7   Mathon in that action.
 8                            The California Action
 9            On July 20, 2005, Rene filed suit against Mathon in the
10   United States District Court, Central District of California
11   (Case No. SACV05-698-AHS), alleging that Mathon’s lien against
12   the Property was invalid and requesting, among other things, an
13   order rescinding the lien (the “California Action”).
14            Rene applied for permission to serve Mathon pursuant to
15   Civil Rule 4(h)(1)1 which authorizes service of process on a
16   limited liability company under the law of the state in which
17   the federal district is located.        Cal. Corp. Code § 17061(c)(1)2
18
          1
19          Unless otherwise indicated, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532,
20   “Rule” references are to the Federal Rules of Bankruptcy
     Procedure, and “Civil Rule” references are to the Federal Rules
21   of Civil Procedure.
22        2
              This section provides in relevant part:
23
          If an agent for service of process has resigned and has
24        not been replaced or if the designated agent cannot
          with reasonable diligence be found at the address
25        designated for personal delivery of the process, and it
26        is shown by affidavit to the satisfaction of the court
          that process against a limited liability company or
27        foreign limited liability company cannot be served with
          reasonable diligence upon the designated agent by hand
28                                                      (continued...)

                                       -3-
 1   authorizes service on a foreign limited liability company by and
 2   through service on the California Secretary of State.    The
 3   district court entered an order granting Rene’s request.
 4        Mathon failed to appear or respond to Rene’s complaint.
 5   Accordingly, the clerk entered a default against it on
 6   September 13, 2005.   Rene subsequently moved the district court
 7   to enter a default judgment against Mathon declaring its lien
 8   against the Property invalid.   The district court entered a
 9   default judgment against Mathon on November 28, 2005.    Rene
10   recorded the default judgment in the county records, which
11   cleared Mathon’s purported lien from the Property’s title
12   record.
13               The Sale of the Property to the Tindalls
14        The Tindalls, relying on a clear title report, proceeded to
15   purchase the Property for $1,750,000.   In December 2005, Rene
16   transferred the Property to the Tindalls.
17        The Tindalls financed their purchase of the Property
18   through Provident Savings Bank (“Provident”), which recorded its
19
          2
20        (...continued)
         in the manner provided in Section 415.10, subdivision
21       (a) of Section 415.20, or subdivision (a) of
         Section 415.30 of the Code of Civil Procedure, the
22
         court may make an order that the service shall be made
23       upon a domestic limited liability company or upon a
         registered foreign limited liability company by
24       delivering by hand to the Secretary of State, or to any
         person employed in the Secretary of State’s office in
25       the capacity of assistant or deputy, one copy of the
26       process for each defendant to be served, together with
         a copy of the order authorizing the service. Service
27       in this manner shall be deemed complete on the 10th day
         after delivery of the process to the Secretary of
28       State.

                                     -4-
 1   Deed of Trust against the property on that same date.    Provident
 2   paid off the first deed of trust of Washington Mutual, but did
 3   not pay off the Mathon Deed of Trust.    In December 2005,
 4   Provident sold the loan and deed of trust relating to the
 5   Property to Countrywide Home Loans (“Countrywide”).
 6                        The Bankruptcy Filing
 7        Unbeknownst to Rene, before the district court entered the
 8   default judgment in the California Action, Mathon filed a
 9   voluntary petition under chapter 11 on November 13, 2005.    Sell,
10   who was acting as receiver, was appointed as conservator for
11   Mathon.
12                       The Adversary Proceeding
13        On August 25, 2006, Countrywide filed an adversary
14   complaint against Mathon seeking a determination as to its legal
15   interest in the Property vis-a-vis Mathon.    Mathon answered the
16   complaint on September 26, 2006.     On that same date, Mathon
17   filed its third-party complaint against Ticor Title Insurance
18   Company of California, Ticor Title, and United Title Company
19   (collectively, the “Title Companies”), Herbert and Rene, and the
20   Tindalls, as well as a counterclaim against Countrywide.     In its
21   counterclaim and third-party complaint, Mathon sought a
22   determination as to whether the Mathon Deed of Trust was valid
23   and remained a lien against the Property and whether the Mathon
24   Deed of Trust, which had been recorded prior in time to
25   Countrywide’s lien, had priority over Countrywide’s lien.
26        In Count Five, asserted only against Rene, Mathon alleged
27   that entry of the default judgment in the California Action
28   violated the automatic stay.   In connection with Count Five,

                                    -5-
 1   Mathon requested a declaration that the judgment was void and
 2   also sought damages for the stay violation.
 3           Counsel representing both the Title Companies and the
 4   Tindalls filed an answer to the third-party complaint on
 5   October 20, 2006.    Herbert and Rene answered on November 6,
 6   2006.
 7           On May 30, 2008, Mathon filed a motion for partial summary
 8   judgment on Count Five of its third-party complaint.    On
 9   August 14, 2008, the Menolds responded by filing a stipulation
10   wherein Rene agreed that the judgment obtained in the California
11   Action was void.    As part of the stipulation, Rene was dismissed
12   from the adversary proceeding without prejudice.
13           On August 15, 2008, the bankruptcy court entered an order
14   stating that the default judgment entered against Mathon on
15   November 28, 2005 by the district court was void.
16                      The Tindalls’ Motion for Relief
17           Over three years later, on August 25, 2011, the Tindalls
18   filed the Motion for Relief.    The Tindalls argued that the
19   prepetition entry of default against Mathon in the California
20   Action rendered Mathon’s claimed lien invalid under Ninth
21   Circuit law.    The Tindalls reasoned that because a defaulting
22   party has no right to dispute the issue of liability after entry
23   of default, it followed that the mere entry of default
24   conclusively and irrevocably established that Mathon’s lien was
25   invalid.    Alternatively, the Tindalls sought nunc pro tunc
26   relief from stay for entry of the default judgment based on
27   essentially the same reasoning.    In their reply, the Tindalls
28   maintained that nunc pro tunc relief was appropriate under the

                                      -6-
 1   factors set forth in Fjeldsted v. Lien (In re Fjeldsted),
 2   293 B.R. 12 (9th Cir. BAP 2003).
 3           On October 25, 2011, the bankruptcy court held a hearing on
 4   the Motion for Relief.    Debtor argued that it was inequitable to
 5   grant the relief requested because the motion was untimely.
 6   Debtor maintained that the Tindalls had been parties to the
 7   adversary proceeding since 2006 but waited more than three years
 8   after the stipulation was entered into and more than five years
 9   into the litigation to bring their motion.    Debtor argued that
10   it would be “very prejudicial” to it and to the remaining
11   creditors when numerous out-of-state depositions had been taken,
12   the deadline for filing summary judgment motions had passed, and
13   the parties had engaged in extensive briefing on subrogation.
14           The bankruptcy court determined that it was not appropriate
15   to grant nunc pro tunc relief under the circumstances of the
16   case.    The court found that the Tindalls, who were not parties
17   to the California Action, were in essence seeking to set aside
18   the stipulation entered into between Rene and Sells stating that
19   the default judgment was void.    The court observed that the
20   Tindalls waited more than three years after the stipulation was
21   entered into and more than five years after the adversary
22   proceeding was filed to seek retroactive relief from the stay.
23   In addition, the court considered that the unwinding of the
24   stipulation at that late date would have a negative effect on
25   the creditors of the estate.    In the end, the bankruptcy court
26   stated that “the relief requested here really is an end run
27   around the stipulation and that’s why I’m going to deny it.”
28   Hr’g Tr. at 16:23-24, Oct. 25, 2011.

                                      -7-
 1        The bankruptcy court entered the order denying the
 2   Tindalls’ Motion for Relief on October 26, 2011.           The Tindalls
 3   timely appealed.
 4                              II.    JURISDICTION
 5        The bankruptcy court had jurisdiction over this proceeding
 6   under 28 U.S.C. §§ 1334 and 157(b)(2)(G).           We have jurisdiction
 7   under 28 U.S.C. § 158.
 8                                    III.    ISSUE
 9        Whether the bankruptcy court abused its discretion in
10   denying the Tindalls’ motion for the retroactive annulment of
11   the stay.
12                        IV.    STANDARD OF REVIEW
13        A bankruptcy court’s decision to deny retroactive relief
14   from the automatic stay is reviewed for an abuse of discretion.
15   Nat’l Envtl. Waste Corp. v. City of Riverside (In re Nat’l
16   Envtl. Waste Corp.), 129 F.3d 1052 (9th Cir. 1997).            A
17   bankruptcy court abuses its discretion if it applied the wrong
18   legal standard or its findings were illogical, implausible or
19   without support in the record.           TrafficSchool.com, Inc. v.
20   Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).
21                               V.     DISCUSSION
22        When Mathon filed its bankruptcy petition the automatic
23   stay under § 362(a) went into effect.            “The automatic stay is
24   self-executing” and “sweeps broadly, enjoining the commencement
25   or continuation of any judicial . . . proceedings against the
26   debtor. . . .”   Gruntz v. Cnty. of L.A. (In re Gruntz), 202 F.3d
27   1074, 1081-82 (9th Cir. 2000) (en banc).           Here, the district
28   court’s entry of the default judgment after Mathon had filed its

                                             -8-
 1   bankruptcy case was a continuation of a judicial proceeding in
 2   violation of the stay.   § 362(a)(1).    Actions “taken in
 3   violation of the automatic stay are void.”     Id. at 1082 (citing
 4   Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571
 5   (9th Cir. 1992)).
 6        However, under § 362(d)(1), the bankruptcy court has wide
 7   discretion to declare a default judgment taken in violation of
 8   the stay valid if “cause” exists for retroactive annulment of
 9   the stay.   In re Schwartz, 954 F.2d at 572.    In analyzing
10   whether “cause” exists to annul the stay under § 362(d)(1), the
11   bankruptcy court is required to balance the equities of the
12   creditor’s position in comparison with that of the debtor.
13   In re Nat’l Envtl. Waste Corp., 129 F.3d at 1055.     Under this
14   approach, the bankruptcy court considers (1) whether the
15   creditor was aware of the bankruptcy petition and automatic
16   stay; and (2) whether the debtor engaged in unreasonable or
17   inequitable conduct.   Id. at 1055–56.
18        Additional factors for consideration include the number of
19   bankruptcy filings by the debtor; the extent of any prejudice,
20   including to a bona fide purchaser; the debtor’s overall good
21   faith; the debtor’s compliance with the Code; the relative ease
22   of restoring parties to the status quo ante; the costs of
23   annulment to debtors and creditors; how quickly the creditor
24   moved for annulment; whether annulment will cause irreparable
25   injury to the debtor; and whether stay relief will promote
26   judicial economy or other efficiencies.    In re Fjeldsted,
27   293 B.R. at 25.   “In any given case, one factor may so outweigh
28   the others as to be dispositive.” Id.; see also Williams v. Levi

                                    -9-
 1   (In re Williams), 323 B.R. 691 (9th Cir. BAP 2005).     Balancing
 2   the equities of the case requires the bankruptcy court to reach
 3   an equitable conclusion rather than a factual or legal one.    See
 4   Graves v. Myrvang (In re Myrvang), 232 F.3d 1116, 1121 (9th Cir.
 5   2000) (citing Bank of Honolulu v. Anderson (In re Anderson),
 6   833 F.2d 834, 836 (9th Cir. 1987) (per curiam) (appellate courts
 7   use the abuse of discretion standard to review bankruptcy
 8   court’s equitable actions)).
 9        On appeal, the Tindalls argue that the bankruptcy court
10   incorrectly determined that: (1) their Motion for Relief was an
11   attempt to overturn the stipulation; (2) the stipulation was
12   binding on the Tindalls; and (3) as a result, the Tindalls were
13   foreclosed from requesting nunc pro tunc relief.   They also
14   maintain that the court erred by refusing to recognize the
15   effect of the prepetition entry of default which established
16   that Mathon’s lien was invalid and provided an additional ground
17   for granting nunc pro tunc relief.    We disagree with these
18   contentions.
19        We first note that the Tindalls concede what the
20   stipulation says, i.e., that the default judgment against Mathon
21   was obtained in violation of the stay and is void.    Hr’g Tr. at
22   3:4-6, Oct. 25, 2011.   Therefore, it is not particularly
23   relevant whether the stipulation was binding on the Tindalls for
24   purposes of this appeal.
25        By the time the Tindalls’ annulment request was made, the
26   balance of equities had tipped heavily against the Tindalls
27   because of their delay in seeking relief.   The record shows that
28   the Tindalls were parties to the third-party complaint and

                                    -10-
 1   counterclaim filed by Mathon since 2006.     Yet, the Tindalls
 2   waited until five years into the litigation and three years
 3   after the court-approved stipulation to move for retroactive
 4   annulment of the stay.     Why the Tindalls failed to take any
 5   action prior to when they did remains unexplained.3
 6            The record shows that the bankruptcy court properly
 7   balanced the Tindalls’ delay against the interests of Debtor and
 8   the other parties to the litigation.     Since the beginning of the
 9   case, the parties expended fees and costs by taking out-of-state
10   depositions and by engaging in extensive briefing on subrogation
11   issues before the bankruptcy court.      These actions were costly
12   to the bankruptcy estate.     The progression of the litigation for
13   three years after the entry of the stipulation implicitly
14   demonstrates that the parties relied on its declaration that the
15   default judgment was void.     Therefore, according to the
16   bankruptcy court, under these circumstances, it was simply too
17   late to allow the Tindalls to override the stipulation.        We
18   cannot say that the court abused its discretion in this
19   analysis.
20            The bankruptcy court also balanced the impact of the
21   Tindalls’ relief request on the other creditors of the estate.
22   The Tindalls argued that they were bona-fide purchasers of the
23   Property and should not be “punished” to pay the other defrauded
24
          3
            At the hearing on this matter, the Tindalls’ attorney made
25   an offer of proof that the delay was based on a number of pending
26   motions that would obviate the need for their motion. As none of
     the relevant documents are in the record on appeal, we are unable
27   to determine whether the Tindalls’ delay was warranted, even
     assuming it was raised in the bankruptcy court and properly
28   before us.

                                       -11-
 1   creditors of the Ponzi scheme implemented by Debtor.     The court
 2   observed that in Ponzi scheme cases, the bankruptcy law sought
 3   to treat all the victims approximately the same.     The court
 4   noted that this policy would be upset if it granted the Tindalls
 5   retroactive relief.     Again, we cannot say that the court abused
 6   its discretion in this analysis.
 7            Finally, the Tindalls sought retroactive annulment of the
 8   stay on the ground that the clerk’s prepetition entry of default
 9   established Debtor’s liability, and thus retroactive relief
10   would allow the Tindalls to go back to the district court to
11   seek reentry of the default judgment, which would be nothing
12   more than a mere formality and ministerial act.4     In considering
13   the Tindalls’ argument, the record shows that the bankruptcy
14   court balanced the prejudice to Debtor of allowing strangers to
15   the California Action to go back into the district court to seek
16   reentry of the default judgment.     The court was also concerned
17   with whether the estate would have the ability to go before the
18   district court and ask for entry of the default to be withdrawn.
19
          4
20          Although entry of default may establish liability,
     contrary to the Tindalls’ assertion, the entry of a default
21   judgment by the court is not simply a ministerial act. Under
     Civil Rule 55(b), a federal court may enter a default judgment
22
     against a party who has failed to plead or otherwise defend.
23   Under the rule, “[t]he court may conduct hearings or make
     referrals . . . when, to effectuate judgment, it needs to:
24   (A) conduct an accounting; (B) determine the amount of damages;
     (C) establish the truth of any allegation by evidence; or
25   (D) investigate any other matter.” Civil Rule 55(b)(2). Thus,
26   entry of a default judgment is discretionary, Aldabe v. Aldabe,
     616 F.2d 1089, 1092 (9th Cir. 1980), and “may be refused where
27   the court determines no justifiable claim has been alleged or
     that a default judgment is inappropriate for other reasons.”
28   Doe v. Qi, 349 F.Supp.2d 1258, 1271 (N.D. Cal. 2004).

                                       -12-
 1   Accordingly, the bankruptcy court did not find retroactive
 2   annulment of the stay was appropriate in light of the fact that
 3   the Tindalls were not involved in the California Action and
 4   Rene, the violator of the stay, agreed that the default judgment
 5   was void through a stipulation signed three years prior to the
 6   Tindalls’ Motion for Relief.
 7         In sum, a bankruptcy court has “wide latitude” in granting
 8   or denying a request for retroactive annulment of the stay.
 9   In re Schwartz, 954 F.2d at 572; In re Fjeldsted, 293 B.R. at
10   21.   The record shows that the bankruptcy court properly
11   balanced the equities in refusing to annul the stay
12   retroactively.   Indeed, the court considered the Tindalls’ delay
13   in bringing their Motion for Relief to be an almost dispositive
14   factor.   In reality, a consequence of overturning the bankruptcy
15   court’s decision would only perpetuate the delay in resolving
16   this proceeding.
17                            VI.   CONCLUSION
18         Accordingly, we conclude that the bankruptcy court did not
19   err in denying the Tindalls’ Motion for Relief and AFFIRM.
20
21
22
23
24
25
26
27
28

                                    -13-