Court Opinion

ID: 2649222
Source: CourtListenerOpinion
Date Created: 2014-01-14 22:13:56.801949+00
Date Added: 2024-06-11T12:33:01.508291
License: Public Domain

FILED
                                                                JAN 14, 2014
 1
                                                            SUSAN M. SPRAUL, CLERK
 2                                                            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. CC-13-1264-BaPaKu
                                   )
 6   JOHN E. HUDSON,               )         BK No. 2:13-bk-15622-SK
                                   )
 7             Debtor.             )
     ______________________________)
 8                                 )
     JOHN E. HUDSON,               )
 9                                 )
               Appellant,          )
10                                 )
     v.                            )         MEMORANDUM*
11                                 )
     MARTINGALE INVESTMENTS, LLC; )
12   KATHY A. DOCKERY, Chapter 13 )
     TRUSTEE,                      )
13                                 )
               Appellee.           )
14   ______________________________)
15                  Argued and Submitted on November 21, 2013
                             at Pasadena, California
16
                             Filed - January 14, 2014
17
                Appeal from the United States Bankruptcy Court
18                  for the Central District of California
19         Honorable Sandra R. Klein, Bankruptcy Judge, Presiding
                   ______________________________________
20
     Appearances:     Thomas B. Ure, III, argued for Appellant John E.
21                     Hudson; William S. Fitch argued for Appellee
                       Martingale Investments, LLC.
22                   ______________________________________
23
     Before: BALLINGER, Jr.,** PAPPAS and KURTZ, Bankruptcy Judges.
24
25
     *This disposition is not appropriate for publication. Although it may be cited
26   for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no
     precedential value. See 9th Cir. BAP Rule 8013-1.
27
     **Hon. Eddward P. Ballinger, Jr., Bankruptcy Judge for the District of Arizona,
     sitting by designation.
28
 1        Appellant, John E. Hudson (“Hudson” or “Debtor”), appeals
 2   the bankruptcy court's “Order Granting Motion For Relief From
 3   Stay Under 11 U.S.C. § 362 (Unlawful Detainer)” (the “Stay Lift
 4   Order”).    The Stay Lift Order annulled the automatic stay
 5   retroactive to the bankruptcy petition date.             The central issue
 6   on appeal is whether the bankruptcy court erred in admitting
 7   evidence that a foreclosure sale occurred pre-petition.                 We
 8   REVERSE the bankruptcy court’s ruling that the sale occurred pre-
 9   petition and the order annulling the stay.
10                                      I. FACTS
11        Hudson filed a chapter 131 bankruptcy petition on March 5,
12   2013, at 10:28 a.m., in the Central District of California.
13   According to Appellee, Martingale Investments, LLC
14   (“Martingale”), earlier that day, at 10:01 a.m., a trustee’s sale
15   was completed at which Martingale purchased Hudson’s home located
16   at 1658, 1660, 1662 and 1664 South Vann Ness Avenue, Los Angeles,
17   California (“Property”).        A Trustee’s Deed Upon Sale was issued
18   to Martingale on March 12, 2013 (“Trustee Deed”).               After
19   receiving a Notice to Quit, Hudson did not vacate the Property.
20   On March 26, 2013, Martingale filed a complaint for unlawful
21   detainer in state court.
22        In April, 2013, Martingale filed a motion to lift the stay
23   in order to continue the unlawful detainer action and obtain
24   possession of the Property.         In the stay lift motion, Martingale
25   asserted that it purchased the Property at a foreclosure sale
26
     1 Unless otherwise indicated, all chapter, section and rule references are to the
27   Bankruptcy Code, 11 U.S.C. §§ 101-1532, and to the Federal Rules of Bankruptcy
     Procedure, Rules 1001-9037. The Federal Rules of Evidence are referred to as
28   “FRE.”

                                          - 2 -
 1   just prior to the filing of the petition and that Martingale
 2   subsequently commenced the unlawful detainer action without
 3   knowledge of the bankruptcy filing.           Martingale sought annulment2
 4   of the stay retroactive to the petition date to avoid having to
 5   re-file the unlawful detainer action.            Attached to the stay lift
 6   motion was a declaration of Olivia Reyes, Martingale’s property
 7   manager (the “Reyes Declaration”).
 8          In her declaration, Reyes stated that she was a “custodian”
 9   of Martingale’s books and records with “personal knowledge” of
10   the Hudson account and that Martingale was unaware of the
11   bankruptcy at the time the unlawful detainer action was
12   commenced. More important, Reyes claimed Martingale purchased the
13   Property at a public sale on March 5, 2013, and that the “sale
14   was completed at 10:01 a.m.”         Attached in support of the Reyes
15   Declaration was a report (“Sale Report”) obtained from the
16   trustee who conducted the sale, NDex West, LLC (“NDex”).                 The
17   Sale Report is actually an e-mail message prepared by Priority
18   Posting & Publishing, Inc. (“Priority Posting”) containing
19   essential information about the sale, including the date and time
20   it was conducted, sales price, number of bidders and witnesses,
21   etc.
22          Hudson objected to the stay lift motion, arguing two main
23   points.   First, he claimed there was no admissible evidence that
24   the sale occurred pre-petition because the Sale Report was not
25   properly authenticated and was comprised of inadmissible hearsay
26
27   2 “[S]ection 362 gives the bankruptcy court wide latitude in crafting relief from
     the automatic stay, including the power to grant retroactive relief from the
28   stay.” In re Schwartz, 954 F.2d 569, 572 (9th Cir. 1992).

                                          - 3 -
 1   statements by Reyes, who lacked personal knowledge regarding the
 2   sale.    Second, Hudson argued the post-petition recording of the
 3   Trustee Deed voided the sale.         Hudson attached a declaration to
 4   his objection in which he stated his intention to file a motion
 5   to rescind the sale.3      He also asserted that while the Sale
 6   Report indicated “Sale Conducted at: 10:01 AM,” “conducted” does
 7   not mean the same as “completed” or “concluded.”
 8           Martingale replied, claiming inter alia, that the recording
 9   of the Trustee Deed did not violate the automatic stay because it
10   related back to the date of the trustee sale. Martingale
11   submitted the declaration of Ric Juarez (“Juarez Declaration”),
12   an NDex employee, in which Juarez stated that “the sale was
13   completed at 10:01 a.m.”        The Juarez Declaration also based its
14   conclusion solely on the contents of Priority Posting’s email
15   message.
16           The bankruptcy court held a hearing on the stay relief
17   request on May 15, 2013, and stated:
18     THE COURT: I reviewed the motion, as well as the opposition,
       and the timing is that – - and I believe there is admissible
19     evidence, although Debtor argues there isn’t. The
       foreclosure sale took place at 10:01 a.m. on March 5th.   The
20     bankruptcy case was filed a few minutes later....
21   May 15, 2013 Hr’g Tr. at 1:13-19.          After hearing from the
22   parties, the court addressed Martingale’s counsel:
23     THE COURT: [Y]ou included supplemental evidence regarding the
       time of sale, and it was before the time of the bankruptcy.
24     The foreclosure was at 10:01 and the bankruptcy was at 10:28.
25   May 15, 2013 Hr’g Tr. at 2:19-22.          The bankruptcy court granted
26   the stay lift motion, finding that Martingale’s evidence as to
27
     3 The bankruptcy court docket does not indicate such motion was ever filed.   The
28   administrative case was dismissed by Order dated September 30, 2013.

                                          - 4 -
 1   the time of the sale was admissible and that under California law
 2   the post-petition recording of the Trustee Deed did not violate
 3   the automatic stay.4       On May 21, 2013, the court entered the Stay
 4   Lift Order granting the motion.5          This timely appeal followed.
 5                                 II. JURISDICTION
 6        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
 7   §§ 1334 and 157(b)(2)(A) and (G).           This Court has jurisdiction
 8   under 28 U.S.C. § 158.
 9        We also have an independent duty to determine whether an
10   appeal is moot.6     See United States v. Golden Valley Elec. Ass’n,
11   689 F.3d 1108, 1112 (9th Cir. 2012).            We lack jurisdiction over
12   moot appeals.     I.R.S. v. Pattullo (In re Pattullo), 271 F.3d 898,
13   901 (9th. Cir. 2001).       Generally, the failure to obtain a stay of
14   an order that approves a sale or lifts the automatic stay moots
15   an appeal.    See Onouli-Kona Land Co. v. Estate of Richards
16   (In re Onouli-Kona Land Co.), 846 F.2d 1170, 1171 (9th Cir.
17   1988).   The record indicates Hudson did not obtain a stay of the
18   Stay Lift Order.      However, the issue here is whether there was an
19   automatic stay in effect at the time of the foreclosure sale.
20   See Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571
21   (9th Cir. 1992) (violations of the automatic stay are void, not
22   voidable).    The failure to obtain a stay pending appeal does not
23   prevent us from determining whether the automatic stay was
24
     4 Hudson does not appeal the bankruptcy court’s finding that the recording of the
25   Trustee Deed was not void and did not violate the automatic stay.

26   5 The bankruptcy court annulled the automatic stay under section 362(d)(1).

27   6 Hudson filed a response to this Court’s notice of possible mootness and asserted
     that the matter is not moot. Martingale did not respond and has not otherwise
28   moved for dismissal on mootness grounds.

                                           - 5 -
 1   applicable at the time of the foreclosure sale. If the stay was
 2   in effect, then the sale is void.
 3        We also find that it is possible to grant Hudson effective
 4   relief by vacating the Stay Lift Order. “The test for mootness of
 5   an appeal is whether the appellate court can give the appellant
 6   any effective relief in the event that it decides the matter on
 7   the merits in his favor.   If it can grant such relief, the matter
 8   is not moot.”   Felster Publ’g v. Burrell (In re Burrell),
 9   415 F.3d 994, 998 (9th Cir. 2005) (quoting Garcia v. Lawn,
10   805 F.2d 1400, 1402 (9th Cir. 1986)).      “The basic question in
11   determining mootness is whether there is a present controversy as
12   to which effective relief can be granted.”     See Feldman v. Bomar,
13   518 F.3d 637, 642 (9th Cir. 2008)(quoting Nw. Envtl. Def. Ctr. v.
14   Gordon, 849 F.2d 1241, 1245 (9th Cir. 1988)). Here, there is a
15   live controversy as to whether the foreclosure sale occurred
16   prior to the petition date.
17                                 III. ISSUE
18        Did the bankruptcy court abuse its discretion when it
19   admitted evidence as to the time of the foreclosure sale?
20                         IV. STANDARDS OF REVIEW
21        We review an order granting relief from stay for abuse of
22   discretion.   Veal v. Am. Home Mortg. Servicing, Inc.
23   (In re Veal), 450 B.R. 897, 915 (9th Cir. BAP 2011).      A
24   bankruptcy court’s evidentiary rulings are also reviewed under
25   the abuse of discretion test and should not be reversed unless
26   the error was prejudicial.    Latman v. Burdette, 366 F.3d 774, 786
27   (9th Cir. 2004) (“To reverse on the basis of an erroneous
28   evidentiary ruling, we must conclude both that the bankruptcy

                                     - 6 -
 1   court abused its discretion and that the error was
 2   prejudicial.”).
 3        In applying an abuse of discretion test, we first “determine
 4   de novo whether the [bankruptcy] court identified the correct
 5   legal rule to apply to the relief requested.”               United States v.
 6   Hinkson, 585 F.3d, 1247, 1262 (9th Cir. 2009).               If the bankruptcy
 7   court identified the correct legal rule, we then determine
 8   whether its “application of the correct legal standard [to the
 9   facts] was (1) ‘illogical,’ (2) ‘implausible,’ or (3) without
10   ‘support in inferences that may be drawn from the facts in the
11   record.’”    Id. (quoting Anderson v. City of Bessemer City, N.C.,
12   470 U.S. 564, 577, 105 S. Ct. 1504, 84 L. Ed. 2d 58 (1985)).                  If the
13   bankruptcy court did not identify the correct legal rule, or its
14   application of the correct legal standard to the facts was
15   illogical, implausible, or without support in inferences that may
16   be drawn from the facts in the record, then the bankruptcy court
17   has abused its discretion.         Id.   We may also affirm on any ground
18   supported by the record.        Shanks v. Dressel, 540 F.3d 1082, 1086
19   (9th Cir. 2008).
20                                   V. DISCUSSION
21        Hudson argues that the bankruptcy court erred when it found
22   the Sale Report constituted admissible evidence.7               Specifically,
23   Hudson claims that the Sale Report is unauthenticated because
24   both Reyes and Juarez lacked personal knowledge of the date and
25   time of the sale.
26        With respect to the question of when the Property was sold,
27
     7 The trial court has broad discretion as to whether to admit or exclude evidence.
28   See Burgess v. Premier Corp.,727 F.2d 826, 833 (9th Cir. 1984).

                                           - 7 -
 1   the bankruptcy judge acknowledged Hudson’s objection at the stay
 2   lift hearing, but found there was admissible evidence supporting
 3   Martingale’s position.       The bankruptcy court made no specific
 4   reference to the Sale Report.8         However, because the Sale Report
 5   is the only substantive evidence supporting Martingale’s position
 6   as to the time of the trustee’s sale, it is clear the court gave
 7   it evidentiary value.       If the admission of the Sale Report was an
 8   abuse of discretion and prejudicial, then the Stay Lift Order
 9   must be reversed.
10                        The Business Records Exception
11        Bankruptcy court decisions must be supported by admissible
12   evidence.    All of the evidence supporting the court’s ruling in
13   this case is hearsay.9       FRE 802 requires that when, as here,
14   there is an objection to this type of evidence, it must be
15   excluded unless an exception to the hearsay rule applies.
16        FRE 803(6) sets forth an often-used hearsay exception,
17   commonly referred to as the “business records exception” that
18   provides, in pertinent part:
19     The following are not excluded by the rule against hearsay,
       regardless of whether the declarant is available as a
20     witness:
21     . . .
22      (6) Records of a Regularly Conducted Activity. A record of
            an act, event, condition, opinion, or diagnosis if:
23
24
25   8 The hearing was primarily focused on the debtor’s failed argument    that the
     recording of the Trustee Deed was void and violated the stay.
26
     9 Both the Reyes and Juarez Declarations rely on the time of sale representation
27   contained in the Sale Report. This representation was made out of court, by one
     other than a trial witness and was offered to prove that the trustee’s sale was
28   consummated at the time stated in the report. FRE 801(c).

                                          - 8 -
 1        (A) the record was made at or near the time by -- or
              from information transmitted by -- someone with
 2            knowledge;
 3        (B) the record was kept in the course of a regularly
              conducted activity of a business, organization,
 4            occupation, or calling, whether or not for profit;
 5        (C) making the record was a regular practice of that
              activity;
 6
          (D) all these conditions are shown by the testimony of
 7            the custodian or another qualified witness, . . . ;
              and
 8
          (E) neither the source of the information nor the method
 9            or circumstances of preparation indicate a lack of
              trustworthiness.
10
          As shown below, although Reyes and Juarez are qualified
11
     custodians or witnesses, the proper foundation was not laid for
12
     the admission of the Sale Report.
13
            The Declarants are Custodians or Qualified Witnesses
14                            Under FRE 803(6)
15        The foundational requirement found in FRE 803(6) dictates
16   that offered records be authenticated by testimony from a
17   custodian or other qualified witness from the business.                Hudson
18   argues that because there is no declaration from a party with
19   first–hand knowledge of the time of the sale, the bankruptcy
20   court should have excluded the Sale Report as hearsay.                It is
21   true that both Reyes and Juarez lacked knowledge as to whether
22   the Sale Report was “made at or near the time” by “someone with
23   knowledge.”    But subsection (6) of FRE 803 does not require the
24   business custodian to certify he or she has first–hand knowledge
25   of the facts set forth in the records being authenticated.10                  In
26
     10 It is clear both Reyes and Juarez qualify as authenticating witnesses. First,
27   in their declarations, Reyes states she is “custodian of records” of Martingale,
     and Juarez states he has “custody and control” of the books and records of NDex.
28                                                                       (continued...)

                                          - 9 -
 1   addition, the business records exception does not require the
 2   records’ custodian to lay the foundational evidence for
 3   admission; some other qualified witness can provide the
 4   foundation.     “A witness does not have to be the custodian of
 5   documents offered into evidence to establish Rule 803(6)’s
 6   foundational requirements.”         United States v. Childs, 5 F.3d
7   1328, 1334 (9th Cir. 1998).         “The phrase ‘other qualified
 8   witness’ is broadly interpreted to require only that the witness
 9   understand the record-keeping system.”            Id. (quoting United
10   States v. Ray, 930 F.2d 1368, 1370 (9th Cir. 1991)).                Although
11   Reyes and Juarez did not prepare the Sale Report, their
12   declarations establish that they qualify both as custodians and
13   other qualified witnesses.         The problem here is that neither
14   declaration contains the foundational showing required for
15   admissibility of materials such as the Sale Report, which is not
16   a Martingale document, but is a third party record of Priority
17   Posting found in Martingale’s and NDex’s files.
18            FRE 803(6) Applies to Third Party Business Records
19         Where a business has a substantial interest in the
20   trustworthiness and accuracy of the records, documents received
21   from another business are admissible as business records under
22   FRE 803(6).     The Ninth Circuit has held that a document kept in
23   the regular course of business, but not made by the business, can
24   still qualify as a business record of the enterprise if there is
25   testimony that the document was kept in the regular course of
26
     10(...continued)
27    Second, the declarations establish that Reyes and Juarez “understand the record-
      keeping system.” And both the Reyes and Juarez Declarations establish that they
28    have custody of the Sale Report and are familiar with the record–keeping system.

                                          - 10 -
 1   business and the business regularly relied on the document.
 2   Childs, 5 F.3d at 1334.        In Childs, the Ninth Circuit held that
 3   documents prepared by third parties and incorporated into the
 4   records of an auto dealership were properly admitted based on
 5   witness testimony that the documents were kept in the regular
 6   course of the dealership’s business and were relied upon by the
 7   dealership.     Id.; see also MRT Constr. Inc. v. Hardrives, Inc.,
 8   158 F.3d 478, 483 (9th Cir. 1998)(“[R]ecords a business receives
 9   from others are admissible under [FRE 803(6)] when those records
10   are kept in the regular course of that business, relied upon by
11   that business, and where that business has a substantial interest
12   in the accuracy of the records.”).            Several other circuits also
13   interpret FRE 803(6) to permit admission of documents
14   incorporated into a business’s records that were prepared by
15   third parties.11     Simply put, for the Sale Report12 to be properly
16   admitted, Martingale must establish (through a custodian of
17   record or qualified witness) that it or NDex kept and relied on
18   the Sale Report in the regular course of business.
19             Martingale Failed to Establish the Admissibility
                              of the Sale Report
20
21        The Reyes Declaration referred to (and attached) Priority
22   Posting’s Sale Report as evidence of the time of the sale.
23   Reyes stated that “I have personal knowledge concerning the
24
25   11 United States v. Doe, 960 F.2d 221, 223 (1st Cir. 1992); United States v.
     Jakobetz, 955 F.2d 786, 801 (2d Cir. 1992); United States v. Sokolow, 91 F.3d 396,
26   403 (3d Cir. 1996); United States v. Ullrich, 580 F.2d 765, 772 (5th Cir. 1978);
     United States v. Parker, 749 F.2d 628, 633 (11th Cir. 1984).
27
     12 The Sale Report is “[a] record of an act, event, condition . . .” under
28   FRE 803(6).

                                          - 11 -
 1   method of entry into the records and books.      Those entries are
 2   made at or near the time of the occurrence during the ordinary
 3   course and scope of my duties.”    Reyes then stated that the sale
 4   occurred at 10:01 a.m.
 5           The Juarez Declaration also referred to the Sale Report as
 6   evidence of the time of sale.    Juarez stated that he had “custody
 7   and control of the books and records” and that entries into those
 8   books and records were “made at or near the time of the
 9   occurrence during the ordinary course and scope of my duties.”
10   However, neither Reyes nor Juarez testified that the Sale Report
11   was kept in the regular course of Martingale’s or NDex’s
12   business.
13           The declarations also failed to provide any evidence that
14   either Martingale or NDex relied upon the Sale Report.        No
15   custodian or other qualified witness provided this required
16   foundation.    Thus the declarations fail to provide the necessary
17   foundational showing required under the test set forth in Childs
18   and MRT.     Because the Sale Report lacks proper authentication, it
19   cannot satisfy the business records exception to the hearsay
20   rule.    We conclude that the bankruptcy court abused its
21   discretion when it admitted the Sale Report.
22               Hudson was Prejudiced by the Improper Admission
                                of the Sale Report
23
24           For us to reverse based on an erroneous evidentiary ruling,
25   we must conclude not only that the bankruptcy court abused its
26   discretion, but this error must have been prejudicial.      Latman,
27 366 F.3d at 786; see also Johnson v. Neilson (In re Slatkin),
28   525 F.3d 805, 811 (9th Cir. 2008).       We recognize trial courts are

                                     - 12 -
 1   given broad discretion to choose between two reasonable views of
 2   the evidence. See Anderson v. City of Bessemer City, N.C.,
 3   470 U.S. 564, 573-574, 105 S. Ct. 1504, 1511, 84 L. Ed. 2d 518
 4   (1985).   The Ninth Circuit’s abuse of discretion test as stated
 5   in Hinkson, supra, was founded on the general principles
 6   contained in Anderson.     Both of those cases hold that a trial
 7   court’s findings are not clearly erroneous, even if the appellate
 8   court has a definite and firm conviction that a mistake has been
 9   made, so long as the trial court’s findings were not illogical,
10   implausible and had support in inferences that may be drawn from
11   facts in the record.   See also Lundell v. Ulrich (In re Lundell),
12   236 B.R. 720, 725 (9th Cir. BAP 1999); Amick v. Bradford
13   (In re Bradford), 112 B.R. 347, 352 (9th Cir. BAP 1990).
14        Had the proper foundation been laid, we would find that the
15   bankruptcy court was within its discretion when it considered and
16   accepted the facts from the Sale Report.    However, no
17   foundational witness testified that Martingale or NDex kept and
18   relied upon the Sale Report in the regular course of business.
19   Therefore, the Sale Report cannot be admitted as a business
20   record under FRE 806(6).    Accordingly, the Sale Report is
21   inadmissible, and the bankruptcy court abused its discretion when
22   it considered the Sale Report in granting the stay lift motion.
23        Given the lack of any other evidence in the record of the
24   time of the trustee’s sale, we cannot say that the erroneous
25   admission of the Sale Report was harmless error.    The evidence
26   was critical to the granting of the Stay Lift Order, which
27   retroactively annulled the automatic stay, thereby prejudicing
28   the debtor and his ability to reorganize.

                                     - 13 -
 1                               VI. CONCLUSION
 2        For the foregoing reasons, the bankruptcy court abused its
 3   discretion when it admitted the Sale Report.   We REVERSE the
 4   bankruptcy court’s ruling that the sale occurred pre-petition and
 5   the Stay Lift Order.
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