Court Opinion

ID: 4013597
Source: CourtListenerOpinion
Date Created: 2016-07-07 01:01:21.937463+00
Date Added: 2024-06-11T14:22:39.386091
License: Public Domain

FILED
                                                                 JUL 06 2016
 1                    NOT FOR PUBLICATION
 2                                                           SUSAN M. SPRAUL, CLERK
                                                               U.S. BKCY. APP. PANEL
                                                               OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )        BAP No.    EC-15-1312-TaJuD
                                   )
 6   SHAVER LAKEWOODS DEVELOPMENT )         Bk. No.    1:11-bk-62509
     INC.,                         )
 7                                 )        Adv. No.   1:14-ap-1076
                    Debtor.        )
 8   ______________________________)
                                   )
 9   VERLYN GAINES,                )
                                   )
10                  Appellant,     )
                                   )
11   v.                            )        MEMORANDUM*
                                   )
12   RANDELL PARKER, Chapter 7     )
     Trustee,                      )
13                                 )
                    Appellee.      )
14   ______________________________)
15                   Argued and Submitted on June 23, 2016
                           at Sacramento, California
16
                              Filed – July 6, 2016
17
               Appeal from the United States Bankruptcy Court
18                 for the Eastern District of California
19      Honorable Fredrick E. Clement, Bankruptcy Judge, Presiding
20
     Appearances:     Robert H. Brumfield, III of Brumfield & Hagan,
21                    LLP argued for Appellant; Lisa Anne Holder of
                      Klein Denatale Goldner Cooper Rosenlieb &
22                    Kimball, LLP argued for Appellee.
23
     Before:   TAYLOR, JURY, and DUNN, Bankruptcy Judges.
24
25
26        *
             This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8024-1(c)(2).
 1                              INTRODUCTION
 2        Appellant Verlyn Gaines appeals from a judgment determining
 3   that he did not hold a secured lien against real property owned
 4   by debtor Shaver Lakewoods Development, Inc. and subsequently
 5   sold by the chapter 71 trustee.
 6        We AFFIRM the bankruptcy court.
 7                                 FACTS
 8        Prepetition, Gaines provided lines of credit and other
 9   financing to the Debtor in connection with the development of a
10   planned community in Shaver Lake, California.   Although there
11   were no formal agreements in place, the parties generally agreed
12   that Gaines would be repaid from the proceeds of lots when
13   developed and sold.   The Debtor subsequently sold or transferred
14   several of the lots clandestinely; Gaines received none of the
15   proceeds.
16        After Gaines’ discovery of these transfers, the parties
17   addressed his obvious concern through an “Assignment of
18   Proceeds,” followed by an amendment thereto (jointly, the
19   “Assignment”).   Under the Assignment, the Debtor granted to
20   Gaines right, title, and interest in partial net sale proceeds
21   of 13 lots (collectively, the “Property”); specifically, Gaines
22   was to receive $35,000 from each of the first six lot sales and
23   $70,000 from each of the next seven lot sales, until Gaines
24   received payment in full of all amounts owed on account of the
25   loans and payment of a substantial finders fee.
26
27        1
             Unless otherwise indicated, all chapter and section
28   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

                                       2
 1        The use of the Assignment, as opposed to a trust deed, to
 2   collateralize the Debtor’s obligations to Gaines was a
 3   considered choice.   The Property was subject to an existing deed
 4   of trust, and it contained a due on encumbrance acceleration
 5   clause; the first position lender was entitled to require
 6   immediate payment of the entire amount due on its note if the
 7   Debtor allowed recordation of a junior lien on the Property.
 8   And there was no question that the first position lender took
 9   its acceleration rights seriously; it specifically warned the
10   parties that it would accelerate if Gaines recorded a trust
11   deed.
12        When executed, the Assignment included an attachment
13   describing the Property by legal description.   After execution,
14   Gaines recorded the Assignment with the Fresno County recorder.
15   He failed, however, to perfect any personal property security
16   interest provided by the Assignment through a California
17   secretary of state filing.
18        The Debtor sold nine homes prepetition and paid Gaines as
19   provided by the Assignment.2   The Trustee sold the remaining
20   homes after the Debtor filed its chapter 7 case.3   Gaines
21   asserted a secured claim in the bankruptcy case in the amount of
22   $280,000, based on the Assignment, and claimed entitlement to
23
          2
24           Indeed, Gaines signed partial releases with the title
     company to obtain the funds.
25
          3
             Instead of selling the remaining lots, the Debtor
26   transferred them to insiders and then filed for bankruptcy.
27   Once in bankruptcy, the Trustee recovered the transferred lots
     pursuant to § 550 and obtained authorization to sell the lots
28   free and clear of the insiders’ liens.

                                      3
 1   the postpetition lot sale proceeds.     The Trustee thereafter
 2   commenced an adversary proceeding against Gaines to determine
 3   his entitlement, if any, to the proceeds of the postpetition
 4   sales.
 5        In his adversary complaint, the Trustee asserted that
 6   Gaines did not have a lien against the sale proceeds enforceable
 7   against the Trustee pursuant to §§ 544(a)(l)-(3) and 552 and
 8   that the Assignment was not a lien against the Property; that
 9   the Debtor’s obligations to Gaines were barred by the California
10   statute of limitations as of the petition date; that the finders
11   fee was barred as a matter of law under California law because
12   Gaines was not a licensed broker; and that any debt owed to
13   Gaines was not secured by the sale proceeds of the Property.
14        Gaines sought declaratory relief by counterclaim; he
15   claimed a security interest in all sale proceeds of the Property
16   pursuant to the Assignment and asserted clear title to the lots
17   could not pass until he was paid.     Gaines based his assertion of
18   a secured claim exclusively on an alleged lien encumbering the
19   Property itself; he expressly disclaimed any lien on personal
20   property.   And he took this position consistently throughout the
21   bankruptcy case and now on appeal.
22        The bankruptcy court bifurcated the trial and first
23   determined whether the Assignment created a lien against the
24   Property securing Gaines’ claim.     After trial, it decided the
25   issue in favor of the Trustee.   It found that the Assignment did
26   not describe the Property particularly as collateral or reflect
27   an intent to encumber it; instead, the Assignment provided a
28   security interest in the personal property proceeds from sale of

                                      4
 1   the Property.   The bankruptcy court noted that Gaines expressly
 2   disclaimed a lien against personal property.    And the bankruptcy
 3   court reached the obvious conclusion that Gaines failed to
 4   perfect any personal property security interest, and, thus, any
 5   personal property security interest was subject to set aside
 6   under § 544.
 7         Following entry of judgment in favor of the Trustee, Gaines
 8   timely appealed.
 9                              JURISDICTION
10         The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
11   §§ 1334 and 157(b)(2)(A) and (K).    We have jurisdiction under
12   28 U.S.C. § 158.
13                                 ISSUES
14         Whether the bankruptcy court erred in determining that the
15   Assignment did not create a lien against the Property and, thus,
16   that Gaines’ claim was not secured by the Property.
17                          STANDARDS OF REVIEW
18         We review the bankruptcy court’s legal conclusions de novo.
19   See Los Angeles Cnty. Treasurer & Tax Collector v. Mainline
20   Equip., Inc. (In re Mainline Equip., Inc.), 539 B.R. 165, 167
21   (9th Cir. BAP 2015).   Interpretation of the Assignment is
22   governed by California law.   Under California law, we review
23   issues of contract interpretation de novo.    See Speirs v.
24   Bluefire Ethanol Fuels, Inc., 243 Cal. App. 4th 969, 984 (2015).
25         We may affirm the decision of the bankruptcy court on any
26   basis supported by the record.   See Hooks v. Kitsap Tenant
27   Support Servs., Inc., 816 F.3d 550, 554 (9th Cir. 2016).
28   ///

                                      5
 1                               DISCUSSION
 2        Gaines concisely advances three arguments on appeal: first,
 3   that the Assignment gave rise to a mortgage under California law
 4   and, thus, created a lien in his favor against the Property.
 5   Second, that, in the alternative, an equitable mortgage existed
 6   under California law, resulting in a lien against the Property.
 7   And, third, that the Trustee was not a bona fide purchaser
 8   because the Assignment was recorded.
 9        The bankruptcy court determined that the Assignment did not
10   give rise to a mortgage against the Property.   We agree.
11        In California, a mortgage is “a contract by which specific
12   property . . . is hypothecated for the performance of an act,
13   without the necessity of a change of possession.”   Cal. Civ.
14   Code § 2920(a).   Here, a plain reading of the Assignment fails
15   to establish that the debt owed to Gaines would be secured by
16   the Property.   Save for one immaterial reference,4 there is
17   absolutely no reference to security, collateral, pledge, lien,
18   or hypothecation of the Property itself.
19        This is not surprising; Gaines acknowledged that the
20   parties deliberately refrained from executing a traditional deed
21   of trust because of the first position lender’s warning that a
22   junior trust deed would trigger the acceleration clause in the
23   senior trust deed.   While a particular form is not required to
24   create a mortgage, it is axiomatic that the real property
25   hypothecated in the document must be clearly identified as
26
          4
27           Section 6 provides that “[t]he title to the Assigned
     Proceeds has in no way been previously transferred in whole or
28   in part for the purpose of sale or security.” (Emphasis added).

                                     6
 1   providing security for the subject debt.
 2        Gaines argues that the Assignment clearly describes the
 3   Property through the attachment containing a legal description
 4   of the Property.   But the Assignment’s only reference to this
 5   attachment is the following:   “[The Debtor] owns and is
 6   developing that certain real property known as Shaver Lake Woods
 7   Development, (the ‘Development’).    The remaining unsold lots are
 8   legally described in Exhibit ‘A’ attached hereto and
 9   incorporated herein by reference as if fully set forth at
10   length[.]”    This description may describe the Property, but it
11   does not delineate the collateral provided by the Assignment,
12   and, in isolation or in concert with the Assignment’s clear
13   language, it falls short of a hypothecation of the Property
14   itself.
15         Instead, the Assignment reflects that Gaines obtained only
16   a security interest in the sale proceeds of the Property.    This
17   is an interest in personal property, but Gaines expressly
18   disclaimed any such security interest both before the bankruptcy
19   court and on appeal.   As a result, we need not and do not
20   consider his rights, if any, to a personal property secured
21   claim.
22        Gaines next argues, in the alternative, that the Assignment
23   created an equitable mortgage against the Property.    In
24   California:
25        [E]very express executory agreement in writing,
          whereby the contracting party sufficiently indicates
26        an intention to make . . . property . . . a security
          for a debt or other obligation . . . creates an
27        equitable lien upon the property so indicated, which
          is enforceable against the property in the hands not
28        only of the original contractor, but of his . . .

                                      7
 1        purchasers or encumbrancers with notice.
 2   Clayton Dev. Co. v. Falvey, 206 Cal. App. 3d 438, 443 (1988).5
 3   “[A] promise to give a mortgage or a trust deed on
 4   . . . property as security for a debt will be specifically
 5   enforced by granting an equitable mortgage.”    Id. at 443.   In
 6   other words, “[a]n agreement that . . . property is security for
 7   a debt also gives rise to an equitable mortgage even though it
 8   does not constitute a legal mortgage.”   Id. at 443-44.   And,
 9   importantly, “[s]pecific mention of a security interest is
10   unnecessary if it otherwise appears that the parties intended to
11   create such an interest.”   Id.
12        Here, the parties were aware of the first position lender’s
13   intent to invoke the acceleration clause if a junior lien was
14   recorded against the Property.    They crafted the Assignment to
15   circumvent this problem and by its plain language agreed not to
16   create a mortgage or a security interest in real property.     This
17   was not an instance of mistake or defect.   A litigant that seeks
18   equity must do equity.   Gaines cannot now seek an equitable
19   mortgage, when the Assignment is inconsistent with his claim of
20   a lien on real property and when the mortgage he now seeks would
21   have constituted a knowing impingement on the contractual rights
22   of a third party.
23
24        5
             See also 5 Miller and Starr, Cal. Real Est. § 13:31 (4th
25   ed.) (“An ‘equitable mortgage’ is one that is created by a court
     of equity rather than by the formal act of the parties. Under
26   certain circumstances, the court determines that equity,
27   fairness, and justice warrant enforcement of a security interest
     between the parties despite the fact that no formal mortgage was
28   created or that an attempted creation was defective.”).

                                       8
 1        Given that the Assignment did not supply Gaines with a lien
 2   against the Property and Gaines’ affirmative abandonment of any
 3   personal property secured claim, the bankruptcy court correctly
 4   concluded that Gaines’ claim was unsecured.   Thus, we need not
 5   and do not examine the issue of whether the Trustee was a bona
 6   fide purchaser for the purposes of lien avoidance.
 7                              CONCLUSION
 8        Based on the foregoing, we AFFIRM.
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