TERRY L. MYERS, Bankruptcy Judge.
In this chapter 7 case,
The Annulment Motion was heard on October 17, 2018, and taken under advisement following evidence and oral argument.
Lawrence McKay ("Debtor") filed a voluntary chapter 11 petition for relief on April 19, 2012. Doc. No. 1. On May 3, 2012, Debtor filed his schedules and statement of financial affairs ("SOFA"). Doc. No. 22. He listed among his 20 largest unsecured creditors "Wells Fargo Hm [Home] Mortgag[e]" (hereafter "WFHM") as holding an unliquidated and disputed unsecured claim of $354,946. Debtor described that claim as: "FHA Real Estate Mortgage on property in Sparks, NV. Co-signer on son's home. Debtor has no interest." Id. at 3. Debtor's assertion that he had no interest in the Nevada real property was echoed by his schedule A, which disclosed "none." Id. at 6. His schedule F disclosed WFHM as an unliquidated and disputed unsecured creditor in a fashion similar to his statement of 20 largest creditors. Id. at 25. Debtor's schedule H indicated his co-debtor on the WFHM obligation was his son, Brian McKay, who Debtor described as being the "Principal obligor and deeded owner of property." Id. at 27. And, in his SOFA, Debtor asserted that a WFHM foreclosure occurred in April 2012 on the Sparks, Nevada property. Id. at 36.
The real property at issue in all these disclosures is 4329 Clearwood Drive, Sparks, Nevada, 89436 (the "Property"). That was made clear in Debtor's chapter 11 disclosure statement filed on December 12, 2012. See Doc. No. 75 at 4, 7.
The disclosure statement's "corrected schedules" also listed Foothills at Wingfield HOA (the "HOA") as an unsecured nonpriority creditor, for "HOA Dues re Sparks, NV" in an unknown amount. Doc. No. 75 at 29.
Notwithstanding the references Debtor made to these other previously undisclosed creditors on the proposed "corrected" schedules, the disclosure statement and plan were not served on parties other than those receiving electronic service. See Doc. Nos. 75, 76 at Notice of Electronic Filing (NEF) (showing that Wells Fargo Bank was served via its counsel, and that there was no service on WFHM, the HOA, or Fuller Jenkins).
On January 4, 2013, three weeks after the disclosure statement and plan were filed, the case was converted to a chapter 7 liquidation. See Doc. Nos. 79 (decision), 80 (order).
On February 6, 2013, a month after conversion to chapter 7, Debtor amended schedules A, D, and F, and filed the requisite statement of intention. Doc. No. 99. He indicated in his amended schedule A that the Property was "owned by son and Debtor as joint tenants" but also inconsistently characterized the "Nature of Debtor's Interest in Property" as "Unknown." Id. at 4. Amended schedule D showed WFHM as the creditor secured by the Property. Id. at 12. The statement of intention proposed surrender of the Property to this creditor. Id. at 24. The same filing added the HOA to schedule F, and Fuller Jenkins was listed there as representing the HOA. Id. at 17-18.
There is no certificate of service or other proof of service of these amended schedules. Additionally, the docket entry for the amendments that was prepared by Debtor's counsel affirmatively indicates that "Creditors are not being added to the mailing matrix." However, at the hearing on the Annulment Motion, Debtor's attorney, D. Blair Clark, testified that it was the practice of his office to send copies of amended schedules to any party identified therein which had not previously received notice. But he conceded under examination that the documents of record contained no detail—such as certificates of service—that would establish any such notification actually occurred. And while the February 6, 2013 amendment to the schedules, as executed by Clark and filed with the Court, states: "Pursuant to Federal Rule of Bankruptcy Procedure 1009(a), I certify that notice of the filing of the amendment(s) listed above has been given this day to any and all entities affected by the amendment
The following day, February 7, 2013, Debtor's counsel filed an application for compensation. Doc. No. 102. The notice of that application, Doc. No. 103, contained a certificate of service with a copy of the master mailing list ("MML") dated as of February 7. This MML does not include either the HOA or Fuller Jenkins. Doc. No. 103 at 4-6. The chapter 7 trustee later, on March 28, 2013, filed a motion seeking a sale order (regarding different property of the estate) and a notice of hearing on such motion. Doc. Nos. 118, 119. The MML used by Trustee dated March 28, 2013, shows WFHM, but does not show either the HOA or Fuller Jenkins. Doc. No. 118-1. Thus, while Debtor added the HOA and Fuller Jenkins in his amended schedules, the record does not establish that Debtor served them or added their addresses to the MML.
On June 18, 2013, Wells Fargo Bank filed a motion for relief from the § 362(a) stay in order to foreclose its interest in the Property. Doc. Nos. 132, 134.
Debtor's discharge was entered on February 25, 2014. Ex. 210 (Doc. No. 154). The certificate of service regarding that discharge also does not indicate that either the HOA or Fuller Jenkins was listed or served. Doc. No. 155 at 3-5.
Trustee's notice of final report was thereafter issued on May 20, 2015. It was not served on the HOA or Fuller Jenkins. Doc. Nos. 180, 181. The case was closed on July 28, 2015. Doc. No. 185.
On June 12, 2018, SFR sought to reopen the case. Doc. No. 187. That motion was granted and the case was reopened on June 14, 2018. Doc. No. 189. The Annulment Motion followed.
In addition to the facts established by the Court's record as noted above, the evidence at hearing on October 17, 2018, establishes the following.
1. On November 16, 2011, the HOA through its agent and attorney, the firm of Fuller Jenkins Clarkson,
2. On October 12, 2012, the HOA through Fuller Jenkins recorded a Notice of Trustee/Foreclosure Sale. Pursuant thereto, a sale of the Property occurred on November 13, 2012, and the Property "reverted" to the HOA.
3. Fuller Jenkins, on behalf of the HOA, received a trustee's sale guaranty ("TSG") from a title company dated December 29, 2011. Ex. 213 (referencing Order No. 6221213). Since the TSG predates Debtor's bankruptcy filing, it showed no exceptions or other notifications related to Debtor's bankruptcy. Id.
4. A "publication endorsement" to the TSG was later issued by the title company under Order No. 6221213 on October 5, 2012. See Ex. 214 ("TSG Endorsement"). The TSG Endorsement stated that, subsequent to the December 29, 2011 date of the TSG, additional matters shown by the public record which would affect the assurances in that guarantee included, inter alia, the following:
Id.
5. The HOA completed the Nevada foreclosure process and acquired the Property on January 8, 2013, by way of a Trustee's Deed Upon Sale. Ex. 215.
6. Over five months later, on or about April 22, 2013, SFR purchased the Property from the HOA.
7. The HOA then transferred the Property to SFR on May 9, 2013, by a quitclaim deed. Ex. 207.
8. Though Wells Fargo Bank had received a July 11, 2013, order terminating the stay in order to foreclose its deed of trust, it did not pursue such foreclosure.
9. After SFR's purchase of the Property in May 2013, and after its post-purchase investments in the Property, Wells Fargo on May 26, 2017, commenced an action to quiet title to the Property and for declaratory relief in the U.S. District Court for the District of Nevada, Case No. 3:17-cv-00332-LRH-WGC (the "Nevada Action").
Thus, as outlined above from the hearing evidence and the Court's own docket and record:
There were two witnesses at hearing, Debtor's counsel, Clark, and SFR's principle, Hardin. Hardin explained that SFR paid about $5,000 for the Property.
According to Hardin, SFR owns approximately 610 properties. He could not identify, even in approximate terms, how many of those properties were acquired through purchases from HOAs, though he did admit that the Property at issue was not the first. Of the properties SFR acquired, he said a "small percentage" of them "had bankruptcy issues."
Hardin testified that SFR relied on HOAs and their foreclosure trustees to address all issues related to the foreclosure and sale of the properties. He said he does not get or review any title reports, and in this situation did not recall ever seeing the TSG until the hearing. He stated that he had no knowledge of the "Order no. 6221213" that was referred to in the Trustee's deed by which SFR acquired ownership of the Property.
The Nevada Action, and other submissions of the parties, reflect a highly contentious situation existing in Nevada between the holders of deed of trust or mortgage interests in residential real property, and the powers of an HOA to make assessments against such property and to foreclose the property to satisfy such assessments. As summarized by the Nevada Bankruptcy Court in one decision:
See Doc. No. 217-1 (In re Leeds, 589 B.R. 186, 194 (Bankr. D. Nev. 2018)) at internal p. 9.
Despite the undercurrents impacting the parties' positions and arguments, the Annulment Motion here is straightforward. SFR claims a lack of knowledge about Debtor's bankruptcy and the impact of that bankruptcy on the conveyance of the Property to it by the Quitclaim Deed on May 9, 2013. It therefore asks the Court to annul the stay under § 362(d). Wells Fargo opposes the Annulment Motion.
The Bankruptcy Appellate Panel of the Ninth Circuit has held:
SFR argues that Wells Fargo lacks standing to oppose the Annulment Motion. SFR cites to a number of cases that hold a creditor does not have standing to challenge a violation of the automatic stay. Those cases are neither relevant nor persuasive in the context of this case. As the Leeds court explained:
Leeds, 589 B.R. at 203 n.28.
The Court has not located, and the parties have not cited, any authority regarding whether a secured creditor with a putatively avoided or foreclosed consensual lien has standing to challenge an annulment motion. However, this Court has previously addressed standing requirements generally:
Beach v. Bank of America (In re Beach), 447 B.R. 313, 322-23 (Bankr. D. Idaho 2011).
Wells Fargo's mortgage interest in the Property was either actually or arguably extinguished under Nevada law by the HOA's sale which—as the Court discusses below—was conducted in violation of § 362. The Property was then sold to SFR. Now, SFR necessarily asks this Court to validate the HOA foreclosure, a precursor to the effectiveness of the sale, by annulling the stay. Should the Court grant SFR's Annulment Motion, the effect would be to permanently divest Wells Fargo of its interest in the Property. Wells Fargo has alleged harm suffered due to the conduct of the HOA and SFR, and it attempts to prevent perpetuation of that harm by opposing SFR's annulment request. As explained by the Leeds court, SFR has "no natural enemies other than the wiped out lien creditor." Based upon the facts of this case, the Court concludes Wells Fargo has both constitutional and prudential standing to oppose the Annulment Motion.
The automatic stay arises immediately on the filing of a bankruptcy petition. See § 362(a). It is "applicable to all entities" whether or not they are creditors of the debtor. Id. It stays, inter alia, "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[.]" § 362(a)(3). Property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." § 541(a)(1).
An act taken in violation of the automatic stay is void ab initio. See Schwartz v. U.S. (In re Schwartz), 954 F.2d 569, 571 (9th Cir. 1992). Thus, the purchase of property of a bankruptcy estate in violation of the automatic stay is void and the purchaser does not obtain valid legal title. 40235 Washington St. Corp. v. Lusardi (In re 40235 Washington St. Corp.), 329 F.3d 1076, 1080 (9th Cir. 2003) (purchase of bankruptcy estate property at county tax sale conducted in violation of automatic stay was without effect).
The HOA filed its Notice of Default and Election to Sell in December 2011, which was prior to Debtor's chapter 11 filing on April 19, 2012. However, subsequent to the bankruptcy filing, the HOA recorded the Notice of Trustee/Foreclosure Sale (Oct. 11, 2012), conducted such sale, purchased the Property in which Debtor had an interest, and recorded the Trustee's Deed (Nov. 12, 2012). Notice of the bankruptcy case, or other knowledge of the existence of it, certainly has consequences. See § 362(k); see also Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1191 (9th Cir. 2003). However, even acts taken without knowledge of the bankruptcy violate the stay. See In re Andrus, 2004 WL 2216493, *10 (Bankr. D. Idaho Sept. 23, 2004).
The HOA's postpetition acts of foreclosing, acquiring, and selling the Property are void ab initio. Schwartz, 954 F.2d at 572-73. Thus, the HOA did not obtain valid, legal title to the Property through its foreclosure sale. Consequently, SFR did not obtain valid, legal title when it purchased the Property from the HOA.
The question is whether SFR has met its burden of persuading the Court that the stay should be annulled in order to rejuvenate the HOA's foreclosure and acquisition of the Property.
The party who violated the stay may seek an order from the bankruptcy court to annul the automatic stay for cause under § 362(d)(1). In re Leeds, 589 B.R. 186 at 192-93 (citing Schwartz, 954 F.2d at 572-73). Annulment "has the effect of retroactively validating acts that otherwise violate the stay." Lonestar Sec. & Video, Inc. v. Gurrola (In re Gurrola), 328 B.R. 158, 172 (9th Cir. BAP 2005); see, e.g., Ceralde v. The Bank of N.Y. Mellon (In re Ceralde), 2013 WL 4007861 (9th Cir. BAP Aug. 6, 2013).
Whether "cause" exists under Section 362(d)(1) to annul the stay is determined under a "balancing of the equities" test. See In re Fjeldsted, 293 B.R. 12, 24 (9th Cir. BAP 2003). The following factors may be considered:
Leeds, 589 B.R. at 193 (citing Fjeldsted, 293 B.R. at 25). The twelve Fjeldsted factors simply provide an analytical framework and any one factor may be dispositive in comparison to the others. Id. Thus, determining whether annulment is proper is made on a case by case basis.
As noted by the Ninth Circuit Court of Appeals, "[m]any courts have focused on two factors in determining whether cause exists to grant [retroactive] relief from the stay: (1) whether the creditor was aware of the bankruptcy petition; and (2) whether the debtor engaged in unreasonable or inequitable conduct" Nat'l Envtl. Waste Corp., 129 F.3d at 1055. A leading bankruptcy treatise explains annulment "validate[s] action taken by a party at a time when the party was unaware of the stay." 3 Collier on Bankruptcy ¶ 362.07[1] (Richard Levin & Henry J. Sommer Eds., 16th ed.).
Whether the HOA or SFR had notice of the bankruptcy and, therefore, the stay, is of paramount importance to the determination of whether to grant the Annulment Motion. In filing and advocating the Annulment Motion, SFR relies in large part on its own professed lack of notice or knowledge of Debtor's bankruptcy at the time it purchased the Property from the HOA. And nothing in the evidence clearly establishes that SFR was aware of the issues related to Debtor's bankruptcy at the time of that purchase. However, SFR cannot use its professed ignorance to divorce itself from the problems of its predecessor in interest. Because the HOA's acquisition of the property is a condition precedent to SFR's interest, and because stay violations are void ab initio, the material question is whether the HOA's violations of § 362(a) can be annulled. Since the HOA is not before the Court, the burden is on SFR as movant to establish annulment of the HOA's stay violations is warranted.
The question for the Court, therefore, is whether the HOA was aware of or put on notice of Debtor's ownership interest in the Property and Debtor's bankruptcy case when it foreclosed and purchased the Property on November 13, 2012. The record is rife with evidence that the HOA knew Debtor was one of two owners of the Property as far back as February 2008. The declaration of the HOA's president explains that "Brian McKay and Lawrence D. McKay" obtained title to the Property on or around February 6, 2008. Doc. No. 220-1 at 1. Similarly, the HOA's accounting system lists "Brian & Lawrence D McKay" as owners of the Property, showing a "settled" date of February 6, 2008. Doc. No. 220-4 at 28. Further, each of the notices regarding the delinquencies in paying HOA fees and subsequent notices of intent to sell the Property listed "Brian McKay" and "Lawrence D. McKay" as owners. See, e.g., Doc. No. 220-4 at 22, 24. Most importantly, prior to its foreclosure and purchase the HOA obtained the TSG, which provided that title to the Property was "vested in" Brian McKay and Lawrence D. McKay as joint tenants. Ex. 213 at 3. It is absolutely clear from the record that the HOA knew Debtor had an interest in the Property prior to its November 2012 foreclosure and purchase of the Property.
There is also evidence in the record that the HOA had notice of Debtor's bankruptcy at the time it foreclosed and purchased the Property.
Here, the October 5, 2012 TSG Endorsement provided notice of an Idaho bankruptcy case involving an individual named "Lawrence D. McKay," although the title company did not verify that the Lawrence D. McKay in bankruptcy was the same Lawrence D. McKay with an interest in the Property. Had the HOA investigated the Idaho bankruptcy case, it would have discovered the debtor listed a $354,946.00 debt associated with real property in Sparks, Nevada, and that Brian McKay was listed as the "principle obligor" of that debt. Doc. No. 22 at 3, 25, 27. Inquiry would have also revealed that the address of the Property—4329 Clearwood Drive, Sparks, NV 89436—was listed seven times in Debtor's schedules, as the address for codebtor "Nevada Granite Industries." Doc. No. 22 at 27, 40. This information, along with its knowledge that Lawrence D. McKay had an ownership interest in the Property, was sufficient to alert the HOA to the fact that further acts regarding the Property, including its foreclosure and purchase, may violate the stay.
The HOA chose to ignore the warning provided by the TSG Endorsement and proceeded with its foreclosure sale without further inquiry. The Court cannot from this record find that the HOA would be entitled to annulment. Accordingly, SFR has not met its burden of proving there is cause to annul the stay. The Annulment Motion will be denied.
SFR has standing to bring the current Annulment Motion and Wells Fargo has standing to oppose that relief. The record establishes that the HOA and SFR violated the automatic stay in foreclosing and purchasing the Property. SFR has not proven that annulment under § 362(d) is warranted, and the Annulment Motion will be denied. The Court will enter an order accordingly.
