Court Opinion

ID: 2757108
Source: CourtListenerOpinion
Date Created: 2014-12-03 19:08:31.232331+00
Date Added: 2024-06-11T11:26:53.748226
License: Public Domain

FILED
 1                                                             MAY 10 2012

 2                              ORDERED PUBLISHED          SUSAN M SPRAUL, CLERK
                                                             U.S. BKCY. APP. PANEL
                                                             O F TH E N IN TH C IR C U IT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5
 6   In re:                        )      BAP No.    CC-11-1144-KiMkH
                                   )
 7   FIRST YORKSHIRE HOLDINGS,     )      Bk. No.    SV 10-26058-AA
     INC.,                         )
 8                                 )
                    Debtor.        )
 9   ______________________________)
                                   )
10   FIRST YORKSHIRE HOLDINGS,     )
     INC.,                         )
11                                 )
                    Appellant,     )
12                                 )
     v.                            )      O P I N I O N
13                                 )
     PACIFICA L 22, LLC.,          )
14                                 )
                    Appellee.      )
15   ______________________________)
16
17                  Argued and Submitted on October 21, 2011
                             at Pasadena, California
18
                              Filed - May 10, 2012
19
              Appeal from the United States Bankruptcy Court
20                for the Central District of California
21            Hon. Alan M. Ahart, Bankruptcy Judge, Presiding
                    _____________________________________
22
23   Appearances:     Moses S. Bardavid of the Law Offices of Moses S.
                      Bardavid, for Appellant First Yorkshire Holdings,
24                    Inc.; Martin W. Phillips of the Law Offices of
                      Martin W. Phillips, argued for Appellee Pacifica L
25                    22, LLC.
26
27   Before: KIRSCHER, MARKELL, and HOLLOWELL, Bankruptcy Judges.
28
 1   KIRSCHER, Bankruptcy Judge:
 2
 3        Appellant, debtor First Yorkshire Holdings, Inc. (“First
 4   Yorkshire”), appeals an order from the bankruptcy court granting
 5   appellee, Pacifica L 22, LLC (“Pacifica”), relief from the
 6   automatic stay under 11 U.S.C. § 362(d)(2) and (d)(4).1   As we
 7   find the bankruptcy court abused its discretion by failing to
 8   make any findings on the equity and value of First Yorkshire’s
 9   property interest in its junior deed of trust under § 362(d)(2),
10   We VACATE and REMAND with instructions to enter findings.    We
11   also find the bankruptcy court abused its discretion in granting
12   relief under § 362(d)(4), when relief under § 362(d)(4)
13   potentially could affect other non-debtor parties, and because
14   the bankruptcy court failed to make any findings on that matter.
15   We VACATE that portion of the order granting relief under
16   § 364(d)(4)and REMAND with instructions to enter findings.
17                    I. FACTUAL AND PROCEDURAL BACKGROUND
18   A.   Prepetition events.
19        First Yorkshire is a Delaware corporation formed for the
20   sole purpose of acquiring and thereafter selling interests in
21   real property.    Since its inception, First Yorkshire obtained an
22   interest in three separate parcels of real property in Southern
23   California.   This encumbered real property is located on Tryon
24   Road in Los Angeles, California (the “Real Property”).
25
26        1
             Unless otherwise indicated, all chapter, section and rule
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
27   to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
     The Federal Rules of Civil Procedure will be referred to as
28   “FRCP.”
                                     - 2 -
 1        On January 22, 2009, non-debtor borrower Alejandro Elias
 2   Weissmann (“Weissmann”) obtained a purchase money loan in the
 3   amount of $1.32 million from East West Bank to purchase the Real
 4   Property.   In exchange for the loan, Weissmann executed a note
 5   and a first deed of trust in favor of East West Bank.   On January
 6   26, 2009, Weissmann executed a grant deed gifting the Real
 7   Property to Serron Investments, Inc. (“Serron”), which took the
 8   Real Property subject to the note and East West Bank’s first deed
 9   of trust.   East West Bank’s first deed of trust was recorded in
10   Los Angeles County on January 30, 2009.   Weissmann’s grant deed
11   to Serron was recorded in Los Angeles County on September 22,
12   2009.
13        On April 9, 2010, Serron executed two more deeds of trust on
14   the Real Property: a second deed of trust in favor of First
15   Yorkshire (“FY’s Lien Interest”)in the amount of $265,000, and a
16   third deed of trust in favor of Durham Development, Inc. in the
17   amount of $245,000.    The second and third deeds of trust were
18   recorded in Los Angeles County several months later on November
19   30, 2010.   Meanwhile, on September 15, 2010, East West Bank
20   assigned its interest in the note and first deed of trust to
21   Pacifica.   The Assignment of Deed of Trust was recorded in Los
22   Angeles County on September 22, 2010.
23        On December 22, 2010, Serron executed a grant deed granting
24   back to Weissmann a 25% interest in the Real Property, thereby
25   making them co-owners.   First Yorkshire filed a chapter 11
26   petition for relief on December 23, 2010, just 23 days after
27   recording its FY’s Lien Interest.
28

                                    - 3 -
 1   B.   Pacifica’s motion for relief from stay.2
 2        FY’s Lien Interest on the Real Property is listed in
 3   Schedule A.   On January 31, 2011, Pacifica moved for relief from
 4   stay under § 362(d)(1), (d)(2)(A) and (B), and (d)(4) (the “Stay
 5   Relief Motion”).    To support its motion, Pacifica offered the
 6   note, the deeds of trust, the assignment, a declaration from a
 7   real estate broker opining on the Real Property’s fair market
 8   value, and a declaration from Manoj Chawla (“Chawla”), Pacifica’s
 9   general manager.
10        According to Pacifica, a Notice of Default had been recorded
11   on the Real Property on August 23, 2010, a Notice of Sale had
12   been recorded on November 30, 2010, and a foreclosure sale was
13   scheduled for February 28, 2011.    As of January 19, 2011, the
14   total debt owed to Pacifica on the Real Property was
15   $1,386,326.40.     First Yorkshire was owed at least $265,000.
16   Based solely on an exterior inspection conducted on January 14,
17   2011, Pacifica’s real estate broker valued the Real Property at
18   $1.5 million.    Assuming estimated costs of sale at $120,000,
19   Pacifica asserted that the debt on the Real Property exceeded its
20   interest, thus leaving no “equity” in the Real Property for FY’s
21   Lien Interest.
22        Pacifica further contended that the transfer or issuance of
23   the grant deed from Weissmann to Serron (and then partially back
24
25        2
             Pacifica moved for relief from stay in First Yorkshire’s
     bankruptcy because FY’s Lien Interest in the Real Property (and
26   the rights contained therein) is considered property of the
     estate, which would invoke the stay under § 362(a). See First
27   Fed. Bank of Cal. v. Cogar (In re Cogar), 210 B.R. 803, 809 (9th
     Cir. BAP 1997)(property is defined broadly under § 541 and
28   includes liens held by the debtor on property of a third party).
                                     - 4 -
 1   to Weissmann), and the issuance of junior trust deeds by Serron
 2   to First Yorkshire and Durham Development, Inc., manifested acts
 3   of fraud and bad faith supporting the extraordinary relief
 4   allowed under § 362(d)(4).   Pacifica asserted in an affidavit
 5   attached in support of its Stay Relief Motion that “it appear[ed]
 6   [First Yorkshire] and other parties claiming fractional interests
 7   in the [P]roperty [were] preparing a series of [bankruptcy]
 8   filings based on these recent transfers of interest.”
 9        First Yorkshire’s opposition to the Stay Relief Motion
10   included a declaration from its principal, Oscar Broederlow
11   (“Broederlow”), and a certified appraisal valuing the Real
12   Property at $2 million.   First Yorkshire argued that Pacifica’s
13   claim under § 362(d)(1) failed because Pacifica made no clear
14   argument as to why it was not adequately protected, and lack of
15   payments did not automatically entitle it to relief from stay.
16   In any event, First Yorkshire offered to pay Pacifica 5%
17   interest-only payments on Pacifica’s loan as a good faith
18   adequate protection payment.3
19        First Yorkshire contended that Pacifica’s claim under
20   § 362(d)(2)(A) and (B) also failed because, based on the Real
21   Property’s value of $2 million, First Yorkshire had equity in the
22   Real Property and, according to Broederlow, the Real Property was
23   “an essential piece of an effective reorganization that [was] in
24   prospect.”
25        Finally, First Yorkshire rejected Pacifica’s allegations of
26
27        3
             Because the bankruptcy court did not grant Pacifica
     relief under § 362(d)(1), we need not address that issue any
28   further.
                                     - 5 -
 1   fraud and bad faith under § 362(d)(4).    First Yorkshire asserted
 2   that it did not promptly record its second deed of trust only
 3   because the Real Property owners were in continuous negotiations
 4   with East West Bank for a loan modification, and a recorded
 5   second deed of trust could have been detrimental to that process.
 6   First Yorkshire further asserted that the Real Property owners
 7   were negotiating with potential buyers and hoped to secure an
 8   offer that would pay off in full the debt to Pacifica and First
 9   Yorkshire.
10        In its tentative ruling dated March 1, 2011, the bankruptcy
11   court expressed its inclination to grant the Stay Relief Motion
12   under § 362(d)(2) because “this debtor has no equity in the
13   [Real] [P]roperty and this debtor has not demonstrated that the
14   [Real] [P]roperty is necessary for this debtor’s reorganization.”
15    (Emphasis in original).    The court was also inclined to grant
16   relief under § 362(d)(4), but the tentative ruling did not
17   articulate the basis for that inclination.
18        The bankruptcy court held a hearing on the Stay Relief
19   Motion on March 2, 2011.    Both parties were given the opportunity
20   to argue their positions.    First Yorkshire asserted that its note
21   and second deed of trust were property of the estate, and that it
22   had equity in the Real Property based on its valuation of $2
23   million.   Pacifica contended that no equity could exist for First
24   Yorkshire because it did not have an ownership interest in the
25   Real Property.   Pacifica also asserted what it believed were
26   facts supporting its claim under § 362(d)(4).    First Yorkshire
27   rejected Pacifica’s § 362(d)(4) claim, contending that none of
28   the underlying actions by the Real Property owners or First

                                     - 6 -
 1   Yorkshire were unlawful, nor did they support such a claim.
 2   First Yorkshire further noted that its Schedule A disclosed a
 3   security interest in a second property, as well as a fee interest
 4   in a third.
 5        After hearing argument from the parties, the bankruptcy
 6   court granted the Stay Relief Motion under § 362(d)(2) for the
 7   reasons stated in its tentative ruling, but it declined to grant
 8   relief under § 362(d)(4).    In seeking clarification of the
 9   ruling, counsel for First Yorkshire inquired:
10        COUNSEL:   All right.   And so no 362(d)(4)?
11        COURT: But no 362(d)(4) relief.    Otherwise, my tentative
          stands.
12
13   Hr’g Tr. 9:13-15, Mar. 2, 2011.    The court instructed Pacifica’s
14   counsel to prepare the order.    Hr’g Tr. 9:19-20.
15        Shortly thereafter, Pacifica lodged its proposed order
16   granting the Stay Relief Motion under § 362(d)(2).    First
17   Yorkshire thereafter objected to Pacifica’s lodged order and
18   submitted its own proposed order.    Two weeks later, on March 28,
19   2011, the bankruptcy court entered its own order granting the
20   Stay Relief Motion under both § 362(d)(2) and (d)(4) (the “Stay
21   Relief Order”).   The top portion of the order read: “CHANGES MADE
22   BY COURT.”    First Yorkshire timely appealed the Stay Relief Order
23   on April 1, 2011.4
24
          4
             On October 3, 2011, First Yorkshire filed an emergency
25   motion for stay pending appeal due to an October 4 foreclosure
     sale of the Real Property. The Panel entered an order on October
26   4, 2011, granting the stay to maintain the status quo on appeal,
     which will remain in effect until entry of our written
27   disposition. The stay will be vacated by separate order
     effective upon the date the mandate is issued to the bankruptcy
28                                                      (continued...)

                                     - 7 -
 1                            II. JURISDICTION
 2        The bankruptcy court had jurisdiction under 28 U.S.C.
 3   §§ 1334 and 157(b)(2)(G).   We have jurisdiction under 28 U.S.C.
 4   § 158.
 5                                III. ISSUES
 6   1.   Did the bankruptcy court abuse its discretion in granting
 7   the Stay Relief Motion under § 362(d)(2)?
 8   2.   Did the bankruptcy court abuse its discretion in granting
 9   the Stay Relief Motion under § 362(d)(4)?
10                         IV. STANDARD OF REVIEW
11        We review a bankruptcy court’s order granting relief from
12   the automatic stay for an abuse of discretion.     Arneson v.
13   Farmers Ins. Exch. (In re Arneson), 282 B.R. 883, 887 (9th Cir.
14   BAP 2002).   To determine whether the bankruptcy court abused its
15   discretion, we conduct a two-step inquiry: (1) we review de novo
16   whether the bankruptcy court “identified the correct legal rule
17   to apply to the relief requested” and (2) if it did, whether the
18   bankruptcy court's application of the legal standard was
19   illogical, implausible or “without support in inferences that may
20   be drawn from the facts in the record.”     United States v.
21   Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009)(en banc).
22                               V. DISCUSSION
23   A.   The bankruptcy court abused its discretion when it granted
          the Stay Relief Motion under § 362(d)(2).
24
          Equity, for purposes of § 362(d)(2)(A), is the difference
25
26        4
           (...continued)
     court; however, given that the Panel is vacating and remanding
27   for further findings and for conducting other matters in
     accordance with our opinion, the automatic stay under § 362 will
28   remain in effect.
                                     - 8 -
 1   between the value of the property and all encumbrances on it.
 2   Sun Valley Newspapers, Inc. v. Sun World Corp. (In re Sun Valley
 3   Newspapers, Inc.),171 B.R. 71, 75 (9th Cir. BAP 1994)(citing
 4   Stewart v. Gurley, 745 F.2d 1194, 1196 (9th Cir. 1984)).    “The
 5   concept of ‘equity’ in property is based on the premise that the
 6   property itself has some economic value to its owner.”     Scripps
 7   GSB I, LLC, v A Partners, LLC (In re A Partners, LLC), 344 B.R.
 8   114, 121 (Bankr. E.D. Cal. 2006)(emphasis added).   Such
 9   conclusion is further supported by the definition of equity:    “An
10   ownership interest” determined by “the amount by which the value
11   of or an interest in property exceeds secured claims or liens.”
12   Black’s Law Dictionary 560 (7th ed. 1999).
13        No doubt exists, however, that FY’s Lien Interest on a third
14   party’s real property constitutes property of First Yorkshire’s
15   bankruptcy estate under § 541.    First Fed. Bank of Cal. v. Cogar
16   (In re Cogar), 210 B.R. 803, 809 (9th Cir. BAP 1997)(property is
17   defined broadly under § 541 and includes a lien held by the
18   debtor on property of a third party; however, such lien does not
19   allow debtor to restructure the terms of a priority lien held by
20   a creditor of the third party).
21        First Yorkshire contends the bankruptcy court erred in
22   granting relief under § 362(d)(2) because, based on a valuation
23   of the Real Property at $2 million and the prospect of a sale, it
24   was clear that First Yorkshire had equity in the Real Property,
25   and that its secured lien had value, thus proving its necessity
26   for an effective reorganization.    The bankruptcy court issued no
27   findings as to what value it considered in granting the Stay
28   Relief Motion.   We can not decipher from the record what

                                      - 9 -
 1   methodology was used in determining value and consequently equity
 2   or the lack of equity in FY’s Lien Interest.    Did the bankruptcy
 3   court use Pacifica’s proffered value of $1,500,000 or First
 4   Yorkshire’s value of $2,000,000, or some other value?    What costs
 5   or expenses of sale may have decreased the value remaining to
 6   secure the several liens on the property?    Other alternative
 7   valuations may also be available to determine the value of FY’s
 8   Lien Interest, such as soliciting opinions from mortgage brokers
 9   as to the value of FY’s Lien Interest depending on whether it is
10   secured or unsecured.   Other factors may also impact value such
11   as statutory rights of the lien holder, i.e., the right to
12   collect rents on default; the right to foreclose on default; the
13   right to receive notice of the default in a senior lien; the
14   right to purchase the property at a foreclosure sale; the right
15   to redeem; the right to take title to the property in lieu of
16   foreclosure with the consent of the owners; and the right to cure
17   defaults owed to senior creditors.     See Cal. Civ. Code §§ 2924,
18   2927.
19        Section 362(d)(2) requires the bankruptcy court, on request
20   of a party in interest, to grant relief from the automatic stay
21   when debtor has no equity in the property, and the property is
22   not necessary to debtor’s effective reorganization.    Pursuant to
23   § 362(g), the moving party has the burden of proof on the issue
24   of debtor’s equity; the debtor has the burden of proof on all
25   other issues.   Pacifica had the burden to establish that First
26   Yorkshire did not have equity in FY’s Lien Interest, and as
27   noted, we are unable to determine what value the bankruptcy court
28   used in determining the lack of equity.

                                   - 10 -
 1        First Yorkshire contends on appeal that it provided evidence
 2   of its financial ability to exert its rights as a junior lien
 3   holder to either redeem or reinstate the loan.    This issue was
 4   never specifically raised before the bankruptcy court.    We
 5   generally will not consider issues raised for the first time on
 6   appeal.   United States v. Pimentel-Flores, 339 F.3d 959, 967 (9th
 7   Cir. 2003) and will not do so here.    Such assertions by First
 8   Yorkshire were unnecessary as Pacifica failed to carry its burden
 9   in clearly establishing that First Yorkshire did not have equity
10   in FY’s Lien Interest.   The requirements of § 362(d)(2) are
11   conjunctive and with Pacifica failing to carry its burden, First
12   Yorkshire was not required to go forward on whether FY’s Lien
13   Interest was necessary to an effective reorganization.    See In re
14   A Partners, LLC, 344 B.R. at 126 (If debtor has no equity in
15   property then debtor must establish that property is necessary to
16   an effective reorganization.).
17        The Stay Relief Motion is a contested motion under Rule 9014
18   and is subject to FRCP 52(a), which requires the bankruptcy court
19   to find the facts specifically and state its conclusions of law
20   separately.   In the absence of complete findings, we may vacate a
21   judgment and remand the case to the bankruptcy court to make the
22   required findings.   See United States. v. Ameline, 409 F.3d 1073
23   (9th Cir. 2005).
24        Accordingly, the bankruptcy court abused its discretion by
25   failing to make findings establishing value and determining that
26   First Yorkshire did not have equity in FY’s Lien Interest.     We
27   VACATE and REMAND for further proceedings in accordance with this
28   decision.

                                   - 11 -
 1   B.   The bankruptcy court abused its discretion when in granted
          the Stay Relief Motion under § 362(d)(4).
 2
          The special relief afforded creditors in § 362(d)(4)5 was
 3
     added in 2005 under BAPCPA.   It permits the bankruptcy court to
 4
     grant in rem relief from the automatic stay in order to address
 5
     schemes using bankruptcy to thwart legitimate foreclosure efforts
 6
     through one or more transfers of interest in real property.      If
 7
     the court’s order granting relief under § 362(d)(4) is recorded
 8
     in compliance with applicable state law, it is binding in any
 9
     other bankruptcy case filed in the next two years purporting to
10
     affect the same real property.    See § 362(d)(4), § 362(b)(20).
11
          To obtain relief under § 362(d)(4), the court must find
12
     three elements to be present.    First, debtor’s bankruptcy filing
13
     must have been part of a scheme.    Second, the object of the
14
15        5
              Until December 22, 2010, § 362(d)(4) read as follows:
16   (d) On request of a party in interest and after notice and a
     hearing, the court shall grant relief from the stay . . . such as
17   by terminating, annulling, modifying, or conditioning such stay--
18        (4)with respect to a stay of an act against real property
          under subsection (a), by a creditor whose claim is secured
19        by an interest in such real property, if the court finds
          that the filing of the petition was part of a scheme to
20        delay, hinder, and defraud creditors that involved either--
               (A) transfer of all or part ownership of, or other
21             interest in, such real property without the consent of
               the secured creditor or court approval; or
22             (B) multiple bankruptcy filings affecting such real
               property (emphasis added).
23
     The revised statute, as amended by the Bankruptcy Technical
24   Corrections Act of 2010, Pub. L. No. 111-327, 124 Stat. 3557
     (2010) (effective December 22, 2010) eliminated the conjunctive
25   “and” in paragraph (4) and replaced it with the disjunctive “or.”
     Therefore, the party seeking relief from stay under § 362(d)(4)
26   must show only a scheme by debtor to delay, hinder, or defraud,
     just as in § 727(a)(2).
27        In the stay Relief Order entered on March 28, 2011, the
     bankruptcy court erroneously applied the older version of
28   paragraph (4). Upon remand, it should apply the amended statute.
                                     - 12 -
 1   scheme must be to delay, hinder, or defraud creditors.   Third,
 2   the scheme must involve either (a) the transfer of some interest
 3   in the real property without the secured creditor’s consent or
 4   court approval, or (b) multiple bankruptcy filings affecting the
 5   property.6   For the court to grant relief under § 362(d)(4), and
 6   thus trigger two years of prospective relief as to the subject
 7   real property, it must affirmatively find that the three elements
 8   above are present.   In re Abdul Muhaimin, 343 B.R. at 169 (“The
 9   precise language is: ‘if the court finds . . . .’   For the court
10   to make such an affirmative finding, it must have proof of the
11   elements required to justify such relief.”).
12         As recognized by the bankruptcy court in In re Abdul
13   Muhaimin, relief under § 362(d)(4) has serious implications.    By
14   seeking relief under § 362(d)(4), the creditor requests specific
15   prospective protection against not only the debtor, but also
16   every non-debtor, co-owner, and subsequent owner of the property.
17   Id.   If granted, such relief nullifies the ability of the debtor
18   and any other third party with an interest in the property to
19   obtain the benefits of the automatic stay in future bankruptcy
20   cases for a period of two years.   Id.
21         First Yorkshire contends that the bankruptcy court violated
22   its due process rights when it entered relief under § 362(d)(4)
23   despite stating at the hearing that such relief was not justified
24
25         6
             As noted by one bankruptcy court, § 362(g) would appear
     to put the burden of proof of these elements on the debtor as the
26   opposing party. In re Abdul Muhaimin, 343 B.R. 159, 169 (Bankr.
     D. Md. 2006). However, the court concluded that such a result is
27   nonsensical. We agree. In any event, Pacifica has never
     contended that it did not have the burden of proof on this issue.
28

                                   - 13 -
 1   on the record.   While we disagree that First Yorkshire was denied
 2   due process since it had ample opportunity to defend the Stay
 3   Relief Motion, we do note that the Stay Relief Order contains no
 4   findings whatsoever establishing why Pacifica was entitled to
 5   such relief.   Because the Stay Relief Motion is a contested
 6   matter under Rule 9014 it is subject to FRCP 52(a), which
 7   requires the bankruptcy court to find the facts specifically and
 8   state its conclusions of law separately.
 9        In the absence of complete findings, we may vacate a
10   judgment and remand the case to the bankruptcy court to make the
11   required findings.   See United States. v. Ameline, 409 F.3d 1073
12   (9th Cir. 2005).   We note that a bankruptcy court’s failure to
13   make factual findings as required by FRCP 52(a) does not require
14   reversal and remand unless a full understanding of the issues
15   under review is not possible without aid of the findings.    See
16   Simeonoff v. Hiner, 249 F.3d 883, 891 (9th Cir. 2001).     Here, it
17   is not clear without further findings from the bankruptcy court
18   that Pacifica carried its burden of proof on all of the elements
19   for relief from stay under § 362(d)(4).     Findings are
20   particularly important here because of the in rem nature of the
21   Stay Relief Order and the detrimental effect it has on parties
22   besides First Yorkshire.
23        Accordingly, we VACATE the portion of the Stay Relief Order
24   granting relief under § 362(d)(4) and REMAND with instructions
25   that the bankruptcy court make the required findings supporting
26   such relief.
27                              VI. CONCLUSION
28        For the foregoing reasons, we VACATE the order granting the

                                    - 14 -
 1   Stay Relief Order under § 362(d)(2) and granting relief under
 2   § 362(d)(4) and REMAND these matters to the bankruptcy court to
 3   enter findings and to conduct other matters in accordance with
 4   our opinion.
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