Finally, after 37 years, the wait is over. Purchasers at foreclosure sales and Landlords who were both victims of squatters and unscrupulous bankruptcy attorneys no longer have to pay to play. All creditors and owners can ignore a skeleton filing of a Chapter 7 or 13 after a state court unlawful detainer judgment. The consequences were severe. After the Sheriff posts the lock out notice, a fraudulent bankruptcy filing could delay the eviction for two the three months as the creditor would have to get relief, then get back in line with the Sheriff.
The 9th Circuit in Eden Place, LLC vs. Sholem Perl, decided on January 8, 2016, that the debtor had no legal or equitable interest remaining in the property at the time of his eviction. An unlawful detainer judgment and writ of possession entered pursuant to California Code of Civil Procedure § 415.46 bestowed legal title and all rights of possession upon Eden Place. Accordingly, Eden Place did
not violate the automatic stay provisions of 11 U.S.C. § 362(a). A copy of the opinion is here: Eden Place 9th Circ. Opinion.
You can watch the oral argument here:
Sholem Perl and a joint tenant owned a single-family duplex in Los Angeles, California. He is also a Rabbi.
After refinancing, Perl defaulted on his mortgage payments, and Bank of America instituted foreclosure proceedings. The property was sold to Eden
Place through a non-judicial foreclosure sale on March 20, 2013. Eden Place timely recorded the trustee’s deed nine days later.
Despite the legal transfer of title, Perl refused to vacate the premises. Eden Place served Perl with a three-day notice to quit, and later served Perl with two unlawful detainer complaints, one for each side of the duplex. In response, Perl filed a complaint against Eden Place to set aside the trustee’s sale (Complaint to Set Aside Sale), and Eden Place filed a cross-complaint for damages, trespass, and interference with prospective economic advantage (Cross-Complaint), and a motion to expunge Perl’s lis pendens. On June 11, 2013, the state court entered judgment in
favor of Eden Place on the unlawful detainer actions, resulting in a judgment for possession and restitution. Three days later, the state court entered a Writ of Possession in favor of Eden Place. Sometime between June 14 and June 24, the Los Angeles County Sheriff posted the lockout notice.
On June 19, the state court heard Perl’s motion to stay the unlawful detainer proceedings and set various conditions for a stay.
Once Perl failed to meet the conditions, the unlawful detainer judgment for possession remained in effect, culminating in eviction by the Sheriff.
B. Bankruptcy Court Proceedings
Rather than complying with the state court requirements to stay the unlawful detainer proceedings, Perl filed a “skeletal” chapter 13 bankruptcy petition pro se. He failed to file any schedules, financial affairs statement, or proposed plan of reorganization. Although not listed as a creditor,
Eden Place learned of the bankruptcy filing from Perl’s counsel, who informed Eden Place that no exceptions to the automatic stay applied and that any eviction would violate the automatic stay.
Perl also filed a notice of removal in the three state court actions (Complaint to Set Aside Sale, Cross-Complaint, and Unlawful Detainer Actions). Because there was a previously scheduled state court hearing to expunge the lis pendens on the property, Eden Place sought to remand the three state court actions and also sought relief from the automatic stay (Stay Relief Motion). Eden Place argued, in the alternative, that the automatic stay did not apply because the property was not property of the estate. Specifically, Eden Place argued that, prior to the filing of the bankruptcy petition by Perl, Eden Place purchased the property at a trustee’s sale, recorded the trustee’s deed, and obtained a judgment and writ of possession.
Before the bankruptcy court held a hearing on the Stay Relief Motion, the Sheriff proceeded with the lockout and evicted Perl. As a result, Perl was unable to remove some of his personal belongings. Perl then filed an emergency motion to enforce the automatic stay, arguing that the eviction interfered with protectable equitable interests based on his continued possessory interest in the premises.
Over Eden Place’s objection, the bankruptcy judge determined that Perl’s “bare possessory interest, coupled with the possibility of some sort of relief [from the pending litigation]” gave “the bankruptcy estate a protected interest that is subject to the automatic stay.” Accordingly, the bankruptcy court determined that Eden Place had violated the automatic stay when it evicted Perl, and that the eviction was void. The bankruptcy court stayed its determination regarding contempt sanctions because Perl had not yet offered evidence of damages. Although Eden Place later filed a status report pursuant to the bankruptcy court’s order, Perl never filed anything further in his bankruptcy case.
Eventually, the bankruptcy case was dismissed for Perl’s failure to appear at the creditor’s meeting. Eden Place timely appealed the bankruptcy court’s order to the BAP. Perl never regained possession because in state court, once possession is lost, it cannot be restored except through a new unlawful detainer. Eden Place’s counsel, Ronald Richards took a gamble by risking the contempt based upon the law being divided amongst bankruptcy judges in the Central District of California. Prior to this non-binding decision, 37 years had passed without any landlord or property owner appealing the contention that relief from the automatic stay was required post unlawful detainer judgment. It took a courageous client and fearless attorney to spend the time, risk, and money to change the law by simply getting a court of precedential authority to finally make a ruling that was binding on all District Courts and Bankruptcy Courts in the State of California.
C. BAP Proceedings
The BAP determined that it had jurisdiction over the appeal because Eden Place remained subject to a claim for damages based on the bankruptcy court’s finding that Eden Place violated the automatic stay. After examining its jurisdiction, the BAP turned to the “sole issue” before it: whether “at the time Perl filed his bankruptcy petition, he had any remaining interest in the Residence protected by the automatic stay.” Applying California law, the BAP held that Perl’s ownership interest was terminated prepetition when Eden Place purchased the property at the trustee’s sale. Nevertheless, the BAP held that Perl had a recognizable equitable interest in the property by virtue of his physical occupancy, notwithstanding the
illegality of his continued occupancy.
The BAP noted that “changing the locks on the Residence, locking inside Perl’s personal property, which was also property of the estate, was an act to exercise control over property of the estate in violation of” the automatic stay. Thus, the BAP affirmed the bankruptcy court’s ruling, and Eden Place filed a timely appeal to this court. First, the BAP issued an unpublished decision. Then, after Eden Place filed a motion for reconsideration, the BAP sua sponte ordered the opinion published. This increased its importance because now most bankruptcy courts in the 9th Circuit would be compelled to be bound the decision. The decision has been quoted in many other cases and treatises. Most Courts have concluded that BAP authority is controlling on the Bankruptcy Court within this district pursuant to Windmill Farms and Proudfoot and as applicable to the case in chief.
The merits of this case is whether Eden Place violated the automatic stay? The 9th Circuit panel started from the premise that the filing of a bankruptcy petition creates the bankruptcy estate, which includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. 541(a)(1). The bankruptcy filing acts as an automatic stay of “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate. . . .” 11 U.S.C. § 362(a)(3). The violation of the automatic stay inquiry determines whether the debtor, in isolation, has any protectable legal, equitable, or possessory interest. See Ramirez v. Fuselier (In re Ramirez), 183 B.R. 583, 587 (B.A.P. 9th Cir. 1995); see also 11 U.S.C. § 362(a)(3). Thus, the question in this case is whether Perl had any remaining legal or equitable possessory interest in the property after Eden Place properly recorded the trustee’s deed from the non-judicial foreclosure sale, and after the state court fully adjudicated in the unlawful detainer proceedings Perl’s remaining possessory interest in the premises. See id.
Courts look to state law to determine property interests in bankruptcy proceedings. See Butner v. United States, 440 U.S. 48, 54–55 (1979). The 9th Circuited concluded that under California law, entry of judgment and a writ of possession following unlawful detainer proceedings extinguishes all other legal and equitable possessory interests in the real property at issue. See Vella v. Hudgins, 572 P.2d 28, 30 (Cal.
The BAP correctly determined that Perl had no remaining legal interest in the property because, when Eden Place purchased the property at the foreclosure sale and recorded its deed within fifteen days of the sale, any legal interest Perl retained in the property was extinguished. See Wells Fargo Bank v. Neilsen, 178 Cal. App. 4th 602, 613–14 (2009), as modified; see also Cal. Civ. Code. § 2924h(c). But, the BAP went further, reasoning that Perl’s unlawful possession bestowed equitable possessory rights upon him, which he retained until the Sheriff actually dispossessed him of the
property by executing the writ of possession. See In re Perl, 513 B.R. at 574–76. However, whether Perl had actual possession of the property when he filed for bankruptcy has no bearing on whether he had a cognizable possessory interest in the property.
In resolving this issue, the unlawful detainer statutory provisions are the point of departure for the Court’s analysis. California’s unlawful detainer statutory scheme was designed to adjudicate the right to possession of realty between a landlord and tenant when the tenant is in violation of the lease. See Knowles v. Robinson, 387 P.2d 833, 836–37 (Cal. 1963). The unlawful detainer provisions authorize a summary proceeding that adjudicates the right to immediate possession of the property. See Vella, 572 P.2d at 30. For this reason, claims regarding title to the property are not generally litigated in an unlawful detainer proceeding. See id.
One exception to the rule that title is not generally determined in an unlawful detainer proceeding is found in California Code of Civil Procedure § 1161a, governing the right of possession by a party initiating an unlawful detainer proceeding after obtaining title at a nonjudicial foreclosure sale.4 See id. The exception allows for “a narrow and sharply focused examination of title.” Id.; see also Mortg. Guarantee Co. v. Smith, 50 P.2d 835, 836 (Cal. Ct. App. 1935) (noting that in actions brought under § 1161a, title is determined “as a necessary element of the remedy of unlawful detainer”).
In California, an unlawful detainer proceeding is quasi in rem and, accordingly, a judgment rendered in an unlawful detainer proceeding is “not binding upon the world, but conclusive only between the parties and their privies.” Park v. Powers, 42 P.2d 75, 79 (Cal. 1935). Pursuant to Code of
Civil Procedure § 415.46,5 no occupant of the premises retains any possessory interest of any kind following service of the writ of possession. See Cal. Code Civ. Proc. § 715.020(d) (explaining that “if the summons, complaint, and prejudgment claim of right to possession were served upon the occupants in accordance with Section 415.46, no occupant of the premises, whether or not the occupant is named in the judgment for possession, may object to the enforcement of the judgment . . .”)
The 9th Circuit opened that the BAP may have considered itself bound to follow its prior decision in Williams v. Levi (In re Williams), 323 B.R. 691 (9th Cir. BAP 2005), and the cases upon which In re Williams relied. See id. at 699 (citing Di Giorgio v. Lee (In re Di Giorgio), 200 B.R 664 (C.D. Cal. 1996), and Westside Apartments, LLC v. Butler (In re Butler), 271 B.R. 867, 876–77 (Bankr. C.D. Cal. 2002)). However, they were not persuaded that those cases engaged in the proper analysis. Ever since Butler collided with In re Smith, 105 B.R. 50, 53–54 (Bankr.C.D.Cal.1989), which held that a debtor-tenant has no legal or equitable interest in rented property once a judgment for possession has been entered in favor of the landlord, the Downtown LA Courthouse has had a legal stand off ever since. No one would appeal these cases. The incentive was just not there. Finally, Eden Place committed the resources to do so. This is especially remarkable after they lost in the BAP.
The earliest case espousing the reasoning adopted by the BAP is In re DiGiorgio. The DiGiorgios were the defendants in an unlawful detainer action. They subsequently entered into a Stipulation for Judgment, forfeiting the lease and providing for the issuance of a writ of possession. See 200 B.R. at 667. After the writ of possession was issued by the court, but before it was executed, the DiGiorgios filed a voluntary petition for bankruptcy. See id. Relying on California Code of Civil Procedure § 715.050, the Sheriff’s Department indicated its intent to enforce the writ of possession without seeking relief from the automatic stay.
In addition to ruling that § 715.050 was preempted by the Bankruptcy Code, the district court held that, although the DiGiorgios had no legal possessory interest in the tenancy at the time of the filing of the bankruptcy petition, they retained an equitable possessory interest by virtue of their continued physical presence. See id. at 670–71. This holding was repeated in In re Butler, and adopted by the BAP in In re Williams, see 323 B.R. at 699. In In re Butler, the court relied upon California Civil Code § 1006. See 271 B.R. at 870–71. Of course, neither the BAP nor a bankruptcy judge can strike down a state law or overrule a California Court of Appeal but for literally 20 years, no one did anything about it. It is the quirks of a federal systems with many generals and not enough law makers who can really only be Circuit Court judges.
That statute provides:
Title by Occupancy; extent Occupancy for any period confers a title sufficient against all except the state and those who have title by prescription, accession, transfer, will, or succession; but the title conferred by occupancy is not a sufficient interest in real property to enable the occupant
or the occupant’s privies to commence or maintain an action to quiet title, unless the occupancy has ripened into title by prescription.
The bankruptcy court concluded that, under California case law, “the mere possession of real estate is constantly treated as property, which may be purchased and sold, and for the recovery of which an action may be maintained against one having no better title.” In re Butler, 271 B.R. at 871
(citations omitted) (emphasis added).
The flaw in the bankruptcy court’s analysis is that the unlawful detainer proceedings under § 1161a are expressly designed to determine who has superior title to the property, including the right to immediate possession. See Vella, 572 P.2d at 30. As a result, the prevailing party in the
unlawful detainer proceeding under § 1161a has “better title” than the evicted resident. In re Butler, 271 B.R. at 871. The conclusion that the occupying resident retains an equitable possessory interest is inconsistent with § 1161a, which contemplates a final and binding adjudication of legal title and rights of immediate possession. See Mortg. Guarantee Co., 50 P.2d at 836; see also Vella, 572 P.2d at 30. We therefore conclude that because Perl had no remaining interest in the property, legal or equitable, when the bankruptcy petition was filed, the bankruptcy court erred in
concluding that Eden Place violated the automatic stay by executing the writ of possession.
The unlawful detainer judgment and writ of possession entered pursuant to California Code Civil Procedure § 415.46 bestowed legal title and all rights of possession upon Eden Place. See Vella, 572 P.2d at 30. Thus, at the time of the filing of the bankruptcy petition, Perl had been completely
divested of all legal and equitable possessory rights that would otherwise be protected by the automatic stay. See id. Consequently, the Sheriff’s lockout did not violate the automatic stay because no legal or equitable interests in the property remained to become part of the bankruptcy estate.
See id.; see also 11 U.S.C. § 541(a)(1) (describing the bankruptcy estate as consisting of “all legal or equitable interests of the debtor in property as of the commencement of the case”).
The bankruptcy court erred when it ruled that Eden Place violated the automatic stay provisions of the Bankruptcy Code. Perl had no legal or equitable interest remaining in the property after issuance of the unlawful detainer judgment and writ of possession in state court. The 9th Circuit therefore reversed the bankruptcy court order.