Martin R. Barash, United States Bankruptcy Judge.
Creditor ULRS, Inc. ("ULRS") has filed a motion for relief from the automatic stay under Bankruptcy Code section 362(a) (the "Motion"). Case Dkt. 12. As modified and supplemented over the course of several hearings, the Motion seeks (A) annulment of the automatic stay, as of the petition date, with respect to (i) entry of certain orders by the Superior Court of California, County of Los Angeles ("Superior Court") directing the sale of residential real property located at 22437 La Quilla, Chatsworth, CA (the "Property"), free and clear of certain liens allegedly arising from certain UCC filings (the "UCC Liens"), and issuing an Order to Show Cause setting a hearing to determine the validity of those liens, and (ii) the closing of the sale of the Property to certain third-party purchasers, and the recordation of a grant deed and other documentation effectuating that sale; and/or (B) to the extent necessary, relief from the automatic stay to permit ULRS, the Superior Court, and third-party purchasers to proceed anew with all of the foregoing.
The third-party purchasers of the Property, Afaf Rashid Makar and Fayez Fami Kalil, Trustees of the Saint Mary Living Trust dated March 15, 2018 (the "Purchasers"), filed their own motion (the "Purchasers' Motion") requesting annulment of the automatic stay, effectively validating their purchase of and title to the Property. Case Dkt. 41. The debtor in possession, Badax, LLC (the "Debtor"), opposes both the Motion and Purchaser's Motion (collectively, the "Motions").
After multiple rounds of briefing and several hearings, the Court has determined to grant the following relief: (i) annulment of the automatic stay as of the petition date, effectively validating entry of the above-referenced orders of the Superior Court, the sale of the Property to the Purchasers (including recordation of a grant deed effectuating that sale), and (ii) relief from the automatic stay to permit the Superior Court to determine the validity, extent and priority of the UCC Liens asserted in the sale proceeds of the Property owing to the Debtor, and distribute the sale proceeds on account of such liens in accordance with its ruling thereon; provided, however, that that relief from stay will not be granted to permit the collection of any debt other than may be represented by the UCC Liens or against any property of the Debtor or its estate other than the sale proceeds of the Property.
ULRS is the assignee of Delta Aliraq, Inc. ("Delta"). On March 18, 2015, Delta obtained a judgment in the Superior Court in excess of $6.5 million against an individual named David Weisman, his wife Barbara Anne Klein, and two limited liability corporations, Davro, LLC and Delta Alpha Xray, LLC. On January 27, 2016, ULRS filed a complaint against the foregoing judgment debtors, the Debtor (whose sole managing member and owner is Klein), and other related entities, seeking avoidance and recovery of fraudulent transfers under California Civil Code section 3439.04(a) and a creditor's suit to execute on property of the judgment debtors held by a third party pursuant to California Code of Civil Procedure section 708.210.
The Superior Court also granted judgment on the creditors' suit. The Superior Court held that "[t]itle to [the Property] is nominally held in the name of Badax, but Plaintiff has established by clear and convincing evidence that the record title does not represent the true beneficial title." Statement of Decision at 18. As the court explained, Badax held only a partial beneficial interest in the property:
Id. at 18-19. Thus, the Superior Court not only held that Plaintiff was entitled to judgment on the fraudulent transfer claim but effectively implemented that judgment by declaring the relative ownership interests in the Property:
Id. at 19.
Based on its conclusion that ULRS and the Debtor were tenants in common in the Property, the Superior Court granted the remedy of partition, directing Klein (i.e., Badax) to sell the Property, charging repayment of a $500,000 loan taken out by Klein against Klein's (i.e., the Debtor's) share of the sale proceeds, and, if the Property was not sold within 90 days, indicating it would appoint a receiver to sell the Property. Id. at 19-20. On October 15, 2018, the Superior Court filed its Judgment in Favor of ULRS, implementing its Statement of Decision. Case Dkt. 12 at Ex. 3 (the "State Court Judgment").
On or about December 17, 2019, the Debtor and Klein, its managing member, filed a notice of appeal from the State Court Judgment. See Case Dkt. 33, Ex. C.
On June 3, 2019, the Superior Court held a hearing on an application by ULRS to enforce the State Court Judgment and order the sale of the Property, and on June 19, 2019, the Superior Court entered its order granting that application (the "Enforcement Order"). See Case Dkt. 51, Ex. 11. The Enforcement Order directs sale of the Property to the Purchasers on specified terms and conditions. The Enforcement Order notes that while preparation of the Enforcement Order was pending, the parties reached a settlement agreement, on June 7, 2019, giving effect to the terms reflected in the order. Id., Exs. 11 and 12. Based on that settlement agreement, the Superior Court indicated it would not appoint a receiver to sell the Property. Id., Ex. 11 at 52.
On June 10, 2019, in accordance with the settlement agreement and Enforcement Order, the Debtor and the Purchasers entered into a California Residential Purchase Agreement and Joint Escrow Instructions for the sale of the Property, for the purchase price of $2,375,000. Case Dkt. 33, Ex. I (the "Sale Agreement."). The Sale Agreement contemplated that escrow would close 30 days after acceptance, i.e., July 10, 2019. Id. at 1.
On or about June 14, 2019, an entity called Arcturus International, LLC ("Arcturus") recorded a UCC financing statement naming the Debtor as a debtor and asserting an interest in the Property. Case Dkt. 12 at 124. Several days later, Arcturus recorded a second, similar UCC financing statement. Id. Arcturus asserts that it holds a debt secured by a lien against fixtures at the Property. Case Dkt. 28, Ex. 7.
On or about July 8, 2019, ULRS filed in the Superior Court its Ex Parte Application for Order Determining the UCC Financing Statement of Arcturus International, LLC Is Unenforceable or in the Alternative, Ordering the Sale of the House at 22437 La Quilla and Placing Badax, LLC's Proceeds Into Escrow Until a Determination on Arcturus International, LLC's UCC Financing Statement Can Be Made (the "Ex Parte Application"). Case Dkt. 12, Ex. 4. Among other things, the Ex Parte Application asserts that Arcturus is under the control of the judgment debtors, that the UCC financing statements do not represent enforceable liens, and that they are part of a continued effort of the judgment debtors to frustrate the enforcement of the State Court Judgment. Id.
On July 10, 2019, the Superior Court held a hearing on the Ex Parte Application. The court ruled that the Property should be sold free and clear of the alleged liens, with such liens to attach to the net proceeds of the sale, pending a determination of the validity of those liens. Case Dkt. 51, Ex. 9 (Superior Court Minutes).
On July 11, 2019, at 3:06 p.m. Pacific Daylight Time (the "Petition Date"), the Debtor filed its voluntary petition for relief under chapter 11 of the Bankruptcy Code. Case Dkt. 1.
On the same date—but at a time that the evidentiary record before this Court does not establish—the Superior Court entered its order granting in part and denying in part the Ex Parte Application (the "Ex Parte Order"). Case Dkt. 12, Ex. 5. The Ex Parte Order provided that the validity and enforceability of the UCC financing statements would be determined at a hearing to held on August 2, 2019. In the meantime, the Ex Parte Order "expunged" the UCC financing statements from the property records but "preserved" them "as to the proceeds from the sale of the property." The Ex Parte Order further
On July 11, 2019, at 4:53 p.m., the Debtor's state court counsel, Edward Kim sent an email advising that the Debtor had filed its chapter 11 petition to ULRS' state court counsel, Michael Murray, Arcturus' counsel, Bruce Ahearn, and escrow officers, Eloisa Morales, Julie Gardner and Kathi Jesse. Case Dkt. 33 at Ex. J. An hour later, at 5:52 p.m., Kim sent an email to the same recipients advising that a Notice of Stay of Proceedings had been filed in the Superior Court. Id. At 7:28 p.m., Kim forwarded that email to Stephen Kaseno, who is identified on the Sale Agreement as one of the real estate brokers for the Purchasers. Id.
At 5:12 p.m. that day, Murray sent an email to escrow officers Morales and Gardner, as well as a representative of the title company, stating "I know you have seen the bankruptcy filing by Badax that puts everything on hold. However, I did want you to know I finally received the signed orders from the judge and am forwarding them so you have them [and] can clear the last issue on title while we deal with the bankruptcy." Case Dkt. 51, Ex. 14.
At 11:20 p.m. that evening, the Purchasers sent their own email to Morales advising the escrow company of the bankruptcy filing, demanding the immediate return of the purchase price (which had been remitted to escrow the day prior), less the original earnest money deposit, and advising of their belief that the escrow would not close as scheduled. Case Dkt. 53, Ex. D. The following morning, the Purchasers sent another email to Morales, purporting to memorialize a telephone conversation in which Morales allegedly stated that she had been advised to proceed with the closing notwithstanding the Debtor's bankruptcy filing. Id.
On July 12, 2019, well after the Petition Date, the escrow company appears to have closed the transaction and caused a grant deed to be recorded, transferring title in the Property to the Purchasers. See Case Dkt. 33, Ex. K; Case Dkt. 53, Ex. A at ¶13. The Purchasers believe that the closing costs they remitted to escrow have been disbursed but that the purchase price they paid into escrow has not. Case Dkt. 53, Ex. A. at ¶13.
ULRS and the Purchasers request that the Court annul the automatic stay effective as of the Petition Date, so that the entry of the Ex Parte Orders (which may have been entered after the Petition Date) and the sale and transfer of the Property to the Purchasers (which clearly occurred after the Petition Date) are validated. If not validated retroactively, ULRS requests relief from stay prospectively to permit the Superior Court to re-enter its Ex Parte Orders and the sale of the Property reimplemented. In either event, ULRS requests relief from stay to permit the Superior Court to adjudicate the validity of the UCC Liens and allow the distribution of Property sales proceeds in accordance with that determination. The Debtor opposes any relief that would validate or
Pursuant to Bankruptcy Code section 362, the filing of the Debtor's chapter 11 case operated as a stay of "the continuation... of a judicial ... proceeding against the debtor that was ... commenced before the commencement of the [the chapter 11 case] and to recover a claim against the debtor that arose before the commencement of [the chapter 11 case]," "the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of [the chapter 11 case]," and "[an] act to obtain possession of property of the estate." 11 U.S.C. § 362(a)(1), (2) & (3).
Here, the closing of the sale transaction and transfer of title to the Property to the Purchasers after the Petition Date clearly violated the automatic stay. Further, depending on the time the Ex Parte Orders were entered by the Superior Court, the entry of those orders also may have violated the automatic stay. Actions taken in violation of the stay are void. Schwartz v. United States (In re Schwartz), 954 F.2d 569, 572 (9th Cir. 1992).
Bankruptcy Code section 362(d) provides "on request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying or conditioning such stay for — cause [.]" 11 U.S.C. § 362(d)(1).
The Ninth Circuit Court of Appeals has held that this statute "gives the bankruptcy court wide latitude in crafting relief from the automatic stay, including the power to grant retroactive relief from the stay." Id. (emphasis added). Retroactive relief validates acts that violate the automatic stay and otherwise would be void. Id. at 573; Lone Star Sec. & Video, Inc. v. Gurrola (In re Gurrola), 328 B.R. 158, 172 (9th Cir. BAP 2005).
In deciding whether to annul the stay retroactively, a bankruptcy court ordinarily should examine the circumstances of the specific case and balance the equities of the parties' respective positions. See In re Nat'l Envtl. Waste Corp., 129 F.3d 1052, 1055 (9th Cir. 1997); Fjeldsted v. Lien (In re Fjeldsted), 293 B.R. 12, 24 (9th Cir. BAP 2003). Under this approach, a bankruptcy court considers "(1) whether the creditor was aware of the bankruptcy petition; and (2) whether the debtor engaged in unreasonable or inequitable conduct, or prejudice would result to the creditor." In re Nat'l Envtl. Waste Corp., 129 F.3d at 1055. A bankruptcy court also should consider twelve additional factors that may be relevant to deciding whether retroactive annulment of the stay is justified:
See In re Fjeldsted, 293 B.R. at 25; see also Gasprom, Inc. v. Fateh (In re Gasprom, Inc.), 500 B.R. 598 (9th Cir. BAP 2013).
These factors, however, "are merely a framework for analysis and not a scorecard," and thus "[i]n any given case, one factor may so outweigh the others as to be dispositive." In re Fjeldsted, 293 B.R. at 25. The debtor bears the ultimate burden of proving that the request for retroactive relief from the stay should be denied. Souang v. Fularon (In re Fularon), 2011 WL 4485202, *5 (9th Cir. BAP July 11, 2011) (citing In re Nat'l Envtl. Waste Corp., 191 B.R. 832, 836 (Bankr. C.D. Cal. 1996) (debtor has the burden of proof under section 362(g)(2) to demonstrate that cause does not exist to annul the stay), aff'd, 129 F.3d 1052 (9th Cir. 1997)).
Separate and apart from the issue of retroactive relief, Bankruptcy Code section 362(d)(1) also operates prospectively to lift the automatic stay upon a showing of "cause." The term "cause" is not defined in the statute but is to be construed by bankruptcy courts on a case-by-case basis. In re Tucson Estates, Inc., 912 F.2d 1162, 1166 (9th Cir. 1990).
In determining whether "cause" exists to permit litigation outside the bankruptcy court to proceed, courts have identified a series of factors that are potentially relevant to the inquiry. Truebro, Inc. v. Plumberex Specialty Prods., Inc. (In re Plumberex Specialty Prods., Inc.), 311 B.R. 551, 558 (Bankr. C.D. Cal. 2004) (citing In re Curtis, 40 B.R. 795, 799-800 (Bankr. D. Utah 1984) and other authorities). These factors, which have come to be known as the "Curtis factors," are as follows:
Id.
The Ninth Circuit Bankruptcy Appellate Panel has recognized that "the Curtis factors are appropriate, nonexclusive, factors to consider in deciding whether to grant relief from the automatic stay to allow pending litigation to continue in another forum." In re Kronemyer, 405 B.R. 915, 921 (9th Cir. BAP 2009). While the Curtis factors are widely used to determine the existence of "cause," not all of the factors are relevant in every case, nor is a court required to give each factor equal weight. Plumberex, 311 B.R. at 560.
The Court below considers each of the factors relevant to stay annulment under In re Nat'l Envtl. Waste Corp. and In re Fjeldsted in order to determine whether annulment is appropriate.
1. Creditor Awareness of the Bankruptcy Case. The record is clear that creditor ULRS and the Purchasers were aware of the Debtor's bankruptcy case at the time the sale of the Property was closed. In most cases, the creditors' awareness of the bankruptcy (and by implication the automatic stay) weighs against annulment because it is the creditor who has violated the stay and who seeks annulment. But here, the creditor and the third-party purchaser who are seeking annulment are not the ones who violated the stay.
Although it appears that the escrow company violated the stay when it closed the sale and recorded the grant deed, there is nothing in the record to suggest that ULRS or the Purchasers did anything after learning of the bankruptcy to cause this result. Indeed, the Purchasers expressed to the escrow company their belief the sale should not proceed. Under these circumstances, the knowledge that URLS and the Purchaser had of the bankruptcy does not weigh against annulment.
Nor does the knowledge of the escrow company—even though this conclusion may appear counterintuitive. The escrow company clearly knew of the bankruptcy case and violated the automatic stay, but is not one of the parties seeking relief, and is not one of the parties with a real economic interest in the sale.
To be sure, the escrow company will benefit if the sale is validated. Validation of the sale will likely validate the escrow fees charged by the escrow company and may limit the escrow company's exposure for stay violation damages. But these interests pale in comparison to those of (i) ULRS, which is seeking to realize a recovery on its 66% tenant in common interest in the Property, and (ii) the Purchasers who are seeking delivery of the Property, for which they have parted with $2,375,000. As an equitable matter, the knowledge and conduct of the escrow company
2. The Debtor's Unreasonable or Inequitable Conduct; Prejudice to the Creditor. ULRS argues that the Debtor acted unreasonably and inequitably by filing this bankruptcy case, by doing so shortly after the hearing on the Ex Parte Application, and by attempting to stall entry of the Ex Parte Order. The Court agrees. Based on the totality of the circumstances, the Court finds that the filing of the bankruptcy case lacks a legitimate reorganizational objective and therefore lacks good faith.
In seeking to determine whether a petition is filed in good faith, the debtor's "subjective intent" is not determinative. Marsch v. Marsch (In re Marsch), 36 F.3d 825, 827-28 (9th Cir. 1994). Rather, the good faith inquiry focuses on the manifest purpose of the petition filing and whether the debtor is seeking to achieve thereby "objectives outside the legitimate scope of the bankruptcy laws." Id. Put another way, the good faith standard requires the bankruptcy court to ascertain "whether [the] debtor is attempting to unreasonably deter and harass creditors or attempting to effect a speedy, efficient reorganization on a feasible basis." Id. (citing In re Arnold, 806 F.2d 937, 939 (9th Cir. 1986).
The Debtor contends that it filed chapter 11 to reorganize and that the Property is essential to that reorganization. But there is little in the record to suggest that the Debtor—a corporate entity—has any business to reorganize. The Statement of Financial Affairs reveals that in the two years preceding the bankruptcy filing the Debtor had no income whatsoever. Case Dkt. 24 at 1. The Debtor's only assets are the residential Property, an "office buildout," a "communications platform," some office furniture, some vacant land and a 1964 Chevrolet valued at $4,000. Case Dkt. 18 at 4-6.
The Debtor does not really argue that it has established business operations to reorganize. The Debtor simply contends that the "Chatsworth Property is a necessary component of Debtor's plan, as rents collected at the Property will be used to partially fund Debtor's plan or Debtor will sell the property and use sale proceeds to pay creditors." Case Dkt. 61 at 3.
The evidence offered by the Debtor is even less compelling. The sum total of the testimony offered in support of the Debtor's good faith is the following generic statement by Klein: "This case was not filed in bad faith to thwart URLS in its efforts to sell the Property. This case was filed so that the Debtor can seek to restructure and/or liquidate assets in an orderly manner to maximize value and payments to creditors of this bankruptcy estate." There is no evidence to establish the nature and extent of the Debtor's business activities, the nature and extent of the income the Debtor may be generating, or how that income might be adequate to confirm a feasible plan.
More importantly, the Debtor's contention that a feasible reorganization is possible here is premised on a fallacy. The Debtor's argument assumes that the Debtor is entitled to retain and use the Property,
The Debtor hypothetically might be able to reorganize under chapter 11 if it succeeds in its appeal of the Statement of Decision and State Court Judgment. But there is no evidence in the record on which to assess the likelihood of reversal, or the likelihood of any appellate decision being made in time to "effect a speedy, efficient reorganization on a feasible basis."
Based on the record before the Court, there is no basis to conclude that a speedy, efficient and feasible reorganization is realistic here. It appears instead that the Debtor filed this case—at the last conceivable moment—in desperation and in an effort to delay implementation of the Statement of Decision and State Court Judgment.
Notwithstanding the foregoing, the Court notes that it is not persuaded by ULRS's argument that the Debtor is improperly using chapter 11 as a substitute for a supersedeas bond. Relying on In re Marsch, 36 F.3d 825, ULRS argues that the Debtor filed this case in an effort to obtain a stay of the Statement of Decision and State Court Judgment without posting a supersedeas bond, as required by California law. But the Ninth Circuit found the filing was made in bad faith there because the Debtor could have afforded to post the bond and chose not to. Id. at 829. In Marshall v. Marshall (In re Marshall), 721 F.3d 1032, 1048 (9th Cir. 2013), the Ninth Circuit reached the contrary conclusion where it appeared that the debtor did not have the means to post a bond.
Here, it appears that the Debtor had approximately $1,800 in the bank on the Petition Date, which is far less than the $850,000 bond set by the Superior Court. The Court therefore does not base is conclusion of bad faith merely on the Debtor's failure to obtain a bond. The Court bases its conclusion on the necessity of reversal to the success of any reorganization and the failure of the Debtor to demonstrate that reversal realistically can be achieved in a "speedy, efficient" manner.
To the extent the Debtor's chapter 11 filing seeks to preserve its ability to sell the property free and clear of the coownership interests of ULRS, the Court notes that a chapter 11 filing is unnecessary.
Irrespective, the denial of annulment would prejudice the creditor, ULRS. As reflected in the Statement of Decision, ULRS is assignee of a judgment and partial owner of the Property by virtue of a fraudulent transfer, which the Superior Court found was effectuated with the actual intent to hinder, delay and defraud creditors. The rights assigned ULRS were prejudiced prepetition by that fraudulent transfer. They will be prejudiced further if the Court denies annulment and grants the Debtor an open-ended delay—particularly where that delay is premised on either (i) a prospective reorganization that the Debtor has failed to show is realistic, or (ii) a liquidation of the property, which the Debtor already negotiated and, but for the stay, completely implemented.
3. Number of Prior Bankruptcy Cases. This is the Debtor's first bankruptcy case. This factor weighs against annulment.
4. In a Repeat Filing, the Intent to Delay or Hinder Creditors. Because this is the Debtor's first bankruptcy case, this factor does not apply.
5. Extent of Prejudice to Creditors or Third Parties, Including a Bona Fide Purchaser. In addition to the prejudice that creditor ULRS will suffer (discussed above), the denial of annulment and the attendant delay will prejudice the Purchasers, who at this point have neither their money nor the Property. The Debtor does not explain or demonstrate how, when and at what cost the rights of the Purchaser will be addressed in this case. If the sale is not validated, the Purchasers undoubtedly will incur legal fees, risk and further delay in an effort to recover the closing costs that the escrow company already has disbursed to third parties, as well as the purchase price that remains on deposit. Likewise, the Purchasers may have a claim against the Debtor's estate for breach of the Sale Agreement—a claim it is not clear that the Debtor has the wherewithal to satisfy. If the Court grants annulment and validates the sale, the Purchasers should receive clean title to the Property and avoid these problems.
6. Debtor's overall good faith (totality of the circumstances test). The Debtor's overall good faith is addressed in section B.2 above. As explained there, the Debtor's filing of this case was not in good faith.
7. Whether creditors knew of stay but nonetheless took action, thus compounding the problem. As discussed in section B.1 above, neither of the parties seeking relief in the Motions took action to compound the problems created by the Debtor's
8. Whether the debtor has complied, and is otherwise complying, with the Bankruptcy Code and the Bankruptcy Rules. As a general matter, it appears that the Debtor is complying with its obligations as a debtor in possession. ULRS argues that the Debtor is not in compliance with its obligations under the Bankruptcy Code, but the Court does not find that these allegations are substantiated by the evidentiary record. There appear to be potential issues surrounding the Debtor's use of the Property (which may or may not be outside the ordinary course of business) and the Debtor's use of rents generated from the Property, in which it holds only a 34% interest. But the Court is not (yet) persuaded that the Debtor has violated its legal obligations with respect to these matters.
9. The relative ease of restoring parties to the status quo ante. The Debtor has failed to demonstrate that the parties can easily be restored to the status quo. As noted above, the Debtor does not explain or demonstrate how, when and at what cost the rights of the Purchasers can be restored to the status quo ante. It seems more likely than not that the Purchasers will have to incur additional costs, risks and delay in order for their rights to be restored.
10. The costs of annulment to debtors and creditors. By validating the sale, annulment will reduce the legal costs necessary to make ULRS and the Purchasers whole. It also will reduce ULRS' legal costs in addressing those issues. It will, however, preclude the Debtor (if it is not already precluded) from retaining the Property and using it as, part of a chapter 11 plan.
11. How quickly creditors moved for annulment, or how quickly debtors moved to set aside the sale or violative conduct. The case was filed on July 11, 2019. ULRS filed the Motion on July 19, 2019. The Purchasers filed the Purchasers' Motion, which is supplemental to the Motion—on August 16, 2019. Based on the foregoing, the Court finds that the Motions seeking annulment were promptly filed.
12. Whether, after learning of the bankruptcy, creditors proceeded to take steps in continued violation of the stay, or whether they moved expeditiously to gain relief. As discussed above in Section B.1, neither ULRS nor the Purchasers took steps in violation of the automatic stay once they learned of the Debtor's case. If anything, their communications to the escrow company sought to prevent the transaction from being closed.
13. Whether annulment of the stay will cause irreparable injury to the debtor. If the stay is annulled and the sale validated, the Debtor will no longer hold an interest in the Property. This result would be irreversible. But it would not be accurate to describe this result as irreparable injury — at least not on the record before the Court. As discussed above, the Debtor has failed to demonstrate that it can remain a co-tenant in the Property and nevertheless confirm a plan under which it retains its interest in the Property. The reason partition and sale exists as a remedy under state law is that disagreement by co-tenants regarding the use or disposition of real property is not tenable. That there is no provision of the Bankruptcy Code to deal with this situation other than section 363(h), which authorizes sale of the property, underscores this problem. Further, the Debtor has failed to demonstrate the likelihood of a prompt, successful reversal of
14. Whether stay relief will promote judicial economy or other efficiencies. The Court finds that annulling the stay would promote judicial economy. Validation of the sale would simplify the proceedings in this chapter 11 case, avoid litigation that otherwise would be required to restore the Purchasers to the status quo ante, and/or avoid the necessity of additional or duplicate proceedings in the Superior Court to redo actions necessary to implement the State Court Judgment. Annulment will not obviate the need for some court to adjudicate the validity of the UCC Liens and determine whether they must be satisfied from the proceeds of the Property. But annulment—which would implement the Superior Court's unstayed orders—will substantially reduce the amount of collateral litigation among the parties.
Based on the foregoing analysis, the Court concludes that the weight of the factors supports annulment of the automatic stay with respect to entry of the Ex Parte Orders and closing of the sale of the Property, including the recordation of a grant deed transferring title to the Purchasers.
In light of the Court's conclusion that annulment of the automatic stay is appropriate with respect to the Ex Parte Orders and the sale closing, the only remaining issue is whether it is appropriate to let the Superior Court adjudicate the UCC Liens and permit distribution of the sale proceeds in accordance with that ruling. The appropriate analysis of this issue requires that the Court consider each of the Curtis factors.
1. Whether the relief will result in a partial or complete resolution of the issues. Permitting the Superior Court to adjudicate the UCC Liens and distribute the proceeds would result in a complete resolution of the outstanding issues. At that point, the Debtor would receive the value of its former interest in the Property. It might or might not elect to proceed with a chapter 11 reorganization, but the litigation over implementation of the Superior Court's partition and sale order would be complete.
2. The lack of any connection with or interference with the bankruptcy case. Adjudication of the UCC Liens has a connection to this bankruptcy case. It will determine how much of the Debtor's 34% interest in the sales proceeds will be available to the Debtor. But the adjudication of those liens by the Superior Court would not interfere with the administration of this case. Based on the Superior Court's prior scheduling of a hearing on the UCC Liens—prior to commencement of this case—it appears that the Superior Court is prepared to adjudicate the matter promptly and without delay.
3. Whether the foreign proceeding involves the debtor as a fiduciary. The remaining litigation before the Superior Court does not involve the debtor acting as a fiduciary. As such, this factor does not apply.
4. Whether a specialized tribunal has been established to hear the particular cause of action and whether that tribunal has the expertise to hear such cases. There is no special tribunal established to adjudicate the issue of the UCC Liens. The
5. Whether the debtor's insurance carrier has assumed full financial responsibility for defending the litigation. The question posed by the UCC Liens is whether they are valid and entitled to a share of the sale proceeds. It does not involve any liability for which insurance may exist. This factor is not applicable.
6. Whether the action essentially involves third parties, and the debtor functions only as a bailee or conduit for the goods or proceeds in question. The question posed by the UCC Lien litigation does not involve the Debtor merely serving as a bailee or conduit. This factor is not applicable.
7. Whether the litigation in another forum would prejudice the interests of other creditors, the creditor's committee and other interested parties. Litigation of the UCC Liens in the Superior Court will not prejudice any creditors. The Superior Court is at least as well equipped as this Court to determine the validity of liens.
8. Whether the judgment claim arising from the foreign action is subject to equitable subordination. There is nothing in the record to suggest a basis on which the claims of the UCC Lien Holders may be equitably subordinated.
9. The movant's success in the foreign proceeding would result in a judicial lien avoidable by the debtor under Section 522(f). By its express terms, section 522(b judgment liens pursuant to section 522 (f). Accordingly, this factor does not apply here, where the debtor is a corporate entity.
10. The interests of judicial economy and the expeditious and economical determination of litigation for the parties. Judicial economy, as well as the expeditious and economical determination of the UCC Liens will be served by allowing that determination to be made by the Superior Court, which has years invested in the underlying litigation (including a trial), is familiar with the parties and their affiliations, and has demonstrated a willingness to make the determination promptly and without delay. Litigation of the UCC Liens in this Court would impose a substantial learning curve on the Court, which otherwise can be avoided by allowing the matter to be determined in the Superior Court.
11. Whether the foreign proceedings have progressed to the point where the parties are prepared for trial. The parties already have had a trial on the underlying judgment, as well as the subsequent fraudulent transfer action. This action is very mature. As for the UCC Liens, it appears the Superior Court is willing to adjudicate the matter expeditiously, pursuant to an order to show cause. It therefore appears that little must be done to prepare for a determination of this issue.
12. The impact of the stay and the "balance of hurt." Enforcement of the stay will leave the proceeds of the Property (at least as to the Debtor) in limbo. If the validity of the UCC Liens is not promptly litigated the Debtor will not know how much value is available to satisfy the claims of its creditors, thereby delaying administration of its case and the realization of any amounts by the Debtor's creditors on their claims. Notably, the relief to be granted would not extend to claims other than those represented by the UCC Liens and would extend to the determination of any collateral interest other than is asserted in the Property. Thus, the balance of hurt resulting from a denial of stay relief here would be borne by creditors, rather than the Debtor, who does not appear to have any business operations or any business need for the proceeds of the sale of the Property.
Based on the foregoing analysis, the Court concludes that the weight of the factors supports granting relief from of the automatic stay to let the Superior Court adjudicate the UCC Liens and permit distribution of the sale proceeds in accordance with that ruling.
Accordingly, the Court will enter a separate order granting: (i) annulment of the automatic stay as of the Petition Date, with respect to entry of the Ex Parte Orders and consummation of the sale of the Property to the Purchasers (including recordation of the grant deed transferring the Property to the Purchasers), and (ii) relief from the automatic stay to permit the Superior Court to determine the validity, extent and priority of the UCC Liens asserted in the sale proceeds of the Property owing to the Debtor, and distribute the sale proceeds in accordance with its ruling thereon.
