ORDER REGARDING MOTION FOR RETROACTIVE RELIEF FROM AUTOMATIC STAY1

MIKE K. NAKAGAWA, Bankruptcy Judge.

On November 14, 2018, the court heard the Motion for Retroactive Relief from Stay brought by KE Aloha Holdings, LLC Series VI and KE Aloha Holdings, LLC ("RAS Motion"). The appearances of counsel were noted on the record. After arguments were presented, the matter was taken under submission.

BACKGROUND

On June 5, 2013, a voluntary Chapter 7 petition ("Petition") was filed by Joseph Lum Lung, Jr. and Kirsten K. Lum Lung ("Debtors"). (ECF No. 1). The Chapter 7 proceeding was assigned for administration to a panel Chapter 7 trustee, Joseph B. Atkins ("Chapter 7 Trustee"). A verified creditor matrix ("Creditor Matrix") was included with the petition, listing the names and addresses of the Debtors' creditors. A notice of the Chapter 7 bankruptcy, as well as a July 8, 2013 meeting of creditors was sent to all creditors appearing on the matrix. (ECF No. 7). The notice also included a deadline of September 6, 2013, for any objections to discharge or to dischargeability of debts to be filed.

Attached to the Petition were the Debtors' schedule of assets and liabilities ("Schedules") along with their Statement of Financial Affairs. On their Schedule "A," Debtors listed a primary residence located at 86 Magical Mystery Lane in Henderson, Nevada 89074 ("Residence") at a value of $105,000, with the intention that the Residence would be surrendered. On their Schedule "C," Debtors did not claim the Residence as exempt under the Nevada homestead exemption. On their Schedule "D," Debtors listed "Hsbc/ms" as having a claim in the amount of $253,084.00 secured by a first mortgage against the Residence. Debtors also listed three separate homeowner associations ("HOA") with claims secured by the Residence: Legacy Village Property Owners ("Legacy"), c/o Colonial Property Management with a claim of $348.00, Sandstone Community Recreation Area ("Sandstone") c/o Nevada Association Services with a claim of $1,398.00, and Strawberry Fields HOA ("Strawberry Fields") c/o Nevada Association Services, Inc. with a claim of $1,941.00. All of the creditors listed on Schedule "D," including the three HOAs, were included on the Creditor Matrix.2

On September 9, 2013, a Chapter 7 discharge was entered (ECF No. 23) inasmuch as the Debtors had completed their meeting of creditors and no interested party filed a complaint objecting to discharge.

On November 12, 2013, an order was entered granting the Chapter 7 Trustee's application to employ a real estate agent to market the Residence. (ECF No. 27).

On March 24, 2014, a motion for relief from stay and for abandonment was filed by Caliber Home Loans, Inc. ("Caliber"). (ECF No. 28). Caliber alleged that it is the holder of the promissory note secured by the Residence. It alleged that relief from stay should be granted to allow Caliber to pursue a foreclosure of the Residence and that the Residence should be abandoned by the Chapter 7 Trustee because it is of no benefit to the bankruptcy estate. Notice of the hearing on the RAS Motion was served on the Creditor Matrix. (ECF No. 30).

On April 14, 2014, Debtors filed an amended Schedule "F" that added as an unsecured creditor, KE Aloha Holding, LLC ("KE Aloha"), c/o Robert B Noggle, Esq., 376 E. Warm Springs Road, Suite 125, Las Vegas, Nevada 89119. (ECF No. 32). There is no information about the basis for the claim other than "case number A14-694370C" and the amount is listed as "Unknown."

On May 2, 2014, an order was entered granting the Caliber motion for relief from stay and for abandonment of the Residence inasmuch as no objections or opposition was filed by the Debtors or the Chapter 7 Trustee. (ECF No. 35).

On November 17, 2014, a final decree was entered ("Final Decree") closing the Chapter 7 case and discharging the Chapter 7 Trustee of any further duties in the case. (ECF No. 44).3

On July 17, 2018, KE Aloha filed a motion to reopen the bankruptcy case ("Reopening Motion"). (ECF No. 49). Notice of the Reopening Motion was given electronically to the former Chapter 7 Trustee, the Debtors' former bankruptcy counsel, the Office of the United States Trustee ("UST"), and counsel for Caliber. (ECF No. 50). Additional notice was provided by first class mail to the Creditor Matrix. (ECF No. 57). Further notice was provided to the Debtors at their current address. (ECF No. 60).

On October 4, 2018, an order was entered reopening the case. (ECF No. 61).

On October 8, 2018, KE Aloha filed the instant RAS Motion. (ECF No. 62). Electronic notice of the instant RAS Motion as well as the hearing on the RAS Motion, was given to the former Chapter 7 Trustee, the Debtors' former bankruptcy counsel, the UST, and counsel for Caliber. Additional notice by first class mail was provided to the Debtors at their current address. (ECF No. 64).

On October 31, 2018, opposition to the RAS Motion ("Opposition") was filed by U.S. Bank Trust, N.A., as Trustee for LSF8 Master Participation Trust ("US Bank"). (ECF No. 66).

On November 7, 2018, a reply ("Reply") in support of the RAS Motion was filed by KE Aloha, along with affidavits attesting to service on each of the Debtors. (ECF Nos. 68, 69, 70).

DISCUSSION

The pertinent facts and law are not in dispute. After the Debtors filed their Petition on June 5, 2013, Sandstone filed a proof of claim in the Debtors' bankruptcy case on June 15, 2013, and then proceeded to complete a foreclosure sale of the Residence on or about December 20, 2013. KE Aloha was the successful bidder at the foreclosure sale, and a foreclosure deed in its favor was recorded on December 23, 2013. Shortly thereafter, KE Aloha commenced a quiet title action ("Quiet Title Action") in the Eighth Judicial District Court, Clark County, Nevada ("State Court"), denominated Case No. A-14-694370-C.4 That action was commenced on January 13, 2014, and the parties include US Bank, Sandstone, the Debtors and others that might assert an interest in the Residence. On June 19, 2018, the State Court entered an order denying various motions for summary judgment brought by the parties in anticipation that "clarification" would be sought from this bankruptcy court prior to a trial of the Quiet Title Action. KE Aloha now seeks a clarification from this bankruptcy court in the form the instant RAS Motion.

Under Nevada law, certain portions of HOA assessment liens have priority over residential mortgages. See NRS 116.3116(2)(b). When the homeowner does not satisfy the priority lien, the HOA can foreclose on the residence. The Nevada Supreme Court has concluded that a valid HOA foreclosure sale of residential property extinguishes the lower priority mortgage held by the residential lender. See SFR Inv. Pool 1, LLC v. U.S. Bank, 334 P.3d 408, 419 (Nev. 2014). Even though the Debtors had scheduled the value of their Residence at $105,000 in their Schedule "A," KE Aloha purchased the real property at the HOA foreclosure sale for $20,000.

In a bankruptcy context, the consequence to the residential lender is extreme: the individual debtor's personal liability for the loan is discharged by the bankruptcy, see 11 U.S.C. § 727(b), and the lender's security interest against the residence is extinguished by the foreclosure. See also Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mort., 388 P.3d 970, 973 (Nev. 2017). The residential lender ends up with no enforceable obligation against the borrower because of the discharge injunction, see 11 U.S.C. § 524(a)(1 and 2), and the purchaser at the HOA foreclosure sale ends up with title to the residence unencumbered by the prior mortgage.

Unfortunately, Sandstone did not seek or obtain an order from this bankruptcy court granting relief from the automatic stay that arose under Section 362(a) when the Debtors filed their Petition. Sandstone clearly knew of the bankruptcy proceeding because it filed its proof of claim in the case. KE Aloha was not a party in interest, if at all, until the Debtors amended their unsecured creditor schedule on April 14, 2014, well after the foreclosure sale was completed. Thus, it appears that Sandstone willfully violated that automatic stay under Section 362(a)(4) because it had actual knowledge of the bankruptcy case and proceeded with its foreclosure. It also appears that KE Aloha violated the automatic stay under Section 362(a)(3) by obtaining possession and control of the Residence while it was still property of the estate. Absent notice or knowledge of the Debtors' bankruptcy, however, KE Aloha's violation of the automatic stay does not appear to have been willful under Section 362(k).

The parties do not dispute that an act taken in violation of the automatic stay is void ab initio in this judicial circuit. See Schwartz v. U. S. (In re Schwartz), 954 F.2d 569, 571 (9th Cir. 1992). Thus, a party who purchases an asset owned by a bankruptcy estate in violation of the automatic stay does not obtain valid legal title. See, e.g., 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 in violation of automatic stay was without effect). The party who violated the stay, however, may seek an order from the bankruptcy court to annul the automatic stay for cause under Section 362(d)(1). See Schwartz, 954 F.2d at 572-73.5 Annulment of the automatic stay "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 (B.A.P. 9th Cir. 2005). See, e.g., Ceralde v. The Bank of N.Y. Mellon (In re Ceralde), 2013 WL 4007861 (B.A.P. 9th Cir. Aug. 6, 2013) (annulment motion granted in involuntary Chapter 7 case in favor of lender that foreclosed without prior knowledge of involuntary proceeding). See also, Sundquist v. Bank of Am., N.A. (In re Sundquist), 566 B.R. 563, 685 (Bankr. E.D. Cal. 2017).

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 (B.A.P. 9th Cir. 2003). The following factors should be considered:

Id. at 25.6

Five of these factors (1, 2, 4, 6, and 11) focus solely on the debtor ("debtor factors"); three of these factors (3, 5 and 10) focus solely on non-debtors ("non-debtor factors"); three of these factors (7, 8 and 9) focus on both the debtor and non-debtor parties ("common factors"); and one factor (12) looks to judicial interests ("neutral factor"). All twelve factors ("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. See Nat'l Envtl. Waste Corp. v. City of Riverside (In re Nat'l Envtl. Waste Corp.), 129 F.3d 1052, 1055 (9th Cir. 1997).

In this instance, the previously categorized debtor factors favor retroactive relief from stay. Debtors do not have a history of repeat bankruptcy filings that might suggest a malign intent to delay or hinder creditors. They obtained their Chapter 7 discharge by complying with the applicable requirements of bankruptcy law, and no party in interest has questioned their good faith. More important, rather than causing irreparable injury to the Debtors, it appears that retroactive relief from stay will prevent the Debtors from losing the benefit of their bankruptcy discharge. If the Sandstone foreclosure sale was void and title did not pass to KE Aloha, then title remains in the Debtors. When they filed their Petition on June 5, 2013, Debtors attested that they intended to surrender the Residence. When Caliber filed its motion for relief from stay and for abandonment on March 24, 2014, it alleged without dispute that the Debtors were in arrears in the amount of $90,022.80. Because the Debtors apparently have not made any loan payments for more than five years, they would be subject to a renewed foreclosure of the Residence occurring well after they received their Chapter 7 discharge. The post-discharge damage to the Debtors' new credit history is likely to be significant and certainly detrimental to their fresh start through Chapter 7.

The non-debtor factors also favor retroactive relief. There is no suggestion in the record that KE Aloha had notice or actual knowledge of the Debtors' bankruptcy or knew that the Sandstone foreclosure sale was in violation of the automatic stay. In fact, the record demonstrates that KE Aloha was never listed in the Debtors' bankruptcy proceeding until nearly four months after the foreclosure sale was completed. Thus, the evidence in the record infers that KE Aloha did not know of the automatic stay, did not take steps to continually violate the stay, and promptly sought retroactive relief from stay after summary judgment on the issue was denied in the Quiet Title Action. Because KE Aloha apparently was a bona fide purchaser of the Residence, its prejudice was greater than that of a lender who would have had an opportunity to satisfy any delinquent HOA assessments to prevent a foreclosure sale. See SFR Inv. Pool 1, LLC v. U.S. Bank, 334 P.3d 408, 414 (Nev. 2014) ("But as a junior lienholder, U.S. Bank could have paid off the SHHOA lien to avert loss of its security . . . The inequity U.S. Bank decries is thus of its own making . . .").7 While the non-debtor factors do not favor Sandstone, they do support retroactive relief in favor of KE Aloha.

The common factors also support retroactive relief from stay. As already discussed, if the foreclosure sale is void, legal title to the Residence never left the Debtors. Restoration of the "status quo ante," however, means not only that legal title to the Residence returns to the Debtors, but that Sandstone would have an unpaid priority assessment lien, the Debtors would be in substantial default on their residential loan, and the lender's deed of trust against the Residence would be restored. Additionally, KE Aloha would have no legal interest in the Residence but should have the $20,000 it paid at the foreclosure sale.8 Even if the $20,000 paid by KE Aloha is ignored, there will be difficulty restoring the real property records to reflect the state of title to the Residence that existed prior to the November 20, 2013 foreclosure. The other common factors are immaterial.

The remaining "neutral factor" also favors retroactive relief. This is a Chapter 7 case reopened for the limited purpose of considering the instant RAS Motion. There are no other proceedings in this bankruptcy court involving the parties to this RAS Motion and no other proceedings in federal court that have been brought to this court's attention. The Debtors have been given notice of the relief requested by KE Aloha and do not oppose retroactive relief, perhaps because they are parties named in the Quiet Title Action and are aware of the consequences of the legal position taken by US Bank. Moreover, notice of the relief requested by KE Aloha also has been given to the UST which also does not oppose, nor has it taken steps to appoint another Chapter 7 trustee to respond to the RAS Motion. On the other hand, the Quiet Title Action remains before the State Court where other controversies may be litigated between KE Aloha and US Bank, including any remaining issues as to the validity of the Nevada HOA foreclosure statute. See Opposition at 5:18 to 7:25. Judicial economy supports allowing the parties to return to State Court with resolve to those issues.

Based on the foregoing, the court finds that the Fjeldsted factors taken as a whole — the debtor, non-debtor, creditor, and neutral factors — favor retroactive relief from stay for cause under Section 362(d)(1). Therefore, the court concludes that the automatic stay in the Debtors' bankruptcy case that arose on June 5, 2013, should be annulled to include all steps necessary after the Petition date to complete the Sandstone foreclosure sale of the Residence.

IT IS THEREFORE ORDERED that the Motion for Retroactive Relief from Stay brought by KE Aloha Holdings, LLC Series VI and KE Aloha Holdings, LLC, Docket No. 62, be, and the same hereby is, GRANTED.

IT IS FURTHER ORDERED that the automatic stay in the above-captioned proceeding is hereby ANNULLED to include all steps taken in connection with the foreclosure sale of the property identified as APN # 178-18-716-005, located at 86 Magical Mystery Lane in Henderson, Nevada 89074, that is reflected in the Foreclosure Deed recorded as Instrument No. 201312230000978 in Clark County, Nevada.