2 FILED & ENTERED 3 NOV 01 2019 4 5 CLERK U.S. BANKRUPTCY COURT Central District of California 6 BY g a s p a r i a DEPUTY CLERK 7 8 UNITED STATES BANKRUPTCY COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 SAN FERNANDO VALLEY DIVISION 11 In re: Case No.: 1:19-bk-11718-MB 12 BADAX, LLC, Chapter 11 13
14 Debtor. MEMORANDUM OF DECISION GRANTING MOTIONS FOR RELIEF 15 FROM THE AUTOMATIC STAY [Case Dkt. #12 and #41] 16
17 18 19 20 21 22 23 24 25 26 27 1 I. Introduction 2 Creditor ULRS, Inc. ("ULRS") has filed a motion for relief from the automatic stay under 3 Bankruptcy Code section 362(a) (the "Motion"). Case Dkt. 12. As modified and supplemented 4 over the course of several hearings, the Motion seeks (A) annulment of the automatic stay, as of the 5 petition date, with respect to (i) entry of certain orders by the Superior Court of California, County 6 of Los Angeles ("Superior Court") directing the sale of residential real property located at 22437 La 7 Quilla, Chatsworth, CA (the "Property"), free and clear of certain liens allegedly arising from 8 certain UCC filings (the "UCC Liens"), and issuing an Order to Show Cause setting a hearing to 9 determine the validity of those liens, and (ii) the closing of the sale of the Property to certain third- 10 party purchasers, and the recordation of a grant deed and other documentation effectuating that 11 sale; and/or (B) to the extent necessary, relief from the automatic stay to permit ULRS, the 12 Superior Court, and third-party purchasers to proceed anew with all of the foregoing. 13 The third-party purchasers of the Property, Afaf Rashid Makar and Fayez Fami Kalil, 14 Trustees of the Saint Mary Living Trust dated March 15, 2018 (the "Purchasers"), filed their own 15 motion (the "Purchasers' Motion") requesting annulment of the automatic stay, effectively 16 validating their purchase of and title to the Property. Case Dkt. 41. The debtor in possession, 17 Badax, LLC (the "Debtor"), opposes both the Motion and Purchaser's Motion (collectively, the 18 "Motions"). 19 After multiple rounds of briefing and several hearings, the Court has determined to grant 20 the following relief: (i) annulment of the automatic stay as of the petition date, effectively 21 validating entry of the above-referenced orders of the Superior Court, the sale of the Property to the 22 Purchasers (including recordation of a grant deed effectuating that sale), and (ii) relief from the 23 automatic stay to permit the Superior Court to determine the validity, extent and priority of the 24 UCC Liens asserted in the sale proceeds of the Property owing to the Debtor, and distribute the sale 25 proceeds on account of such liens in accordance with its ruling thereon; provided, however, that 26 that relief from stay will not be granted to permit the collection of any debt other than may be 27 represented by the UCC Liens or against any property of the Debtor or its estate other than the sale 1 II. Factual and Procedural Background 2 ULRS is the assignee of Delta Aliraq, Inc. ("Delta"). On March 18, 2015, Delta obtained a 3 judgment in the Superior Court in excess of $6.5 million against an individual named David 4 Weisman, his wife Barbara Anne Klein, and two limited liability corporations, Davro, LLC and 5 Delta Alpha Xray, LLC. On January 27, 2016, ULRS filed a complaint against the foregoing 6 judgment debtors, the Debtor (whose sole managing member and owner is Klein), and other related 7 entities, seeking avoidance and recovery of fraudulent transfers under California Civil Code section 8 3439.04(a) and a creditor's suit to execute on property of the judgment debtors held by a third party 9 pursuant to California Code of Civil Procedure section 708.210. 10 Among other things, the complaint alleged the judgment debtors transferred funds to 11 purchase the Property in the name of the Debtor, with the actual intent to hinder, delay or defraud 12 creditors. Following a trial, the Superior Court agreed in its Statement of Decision dated 13 September 14, 2018, concluding the Property had been fraudulently transferred to the Debtor. Dkt. 14 12, Ex. 2 ("Statement of Decision") at 11-13. However, the Superior Court found that Klein and 15 the Debtor contributed reasonably equivalent value to the extent of $717,952 (the net sales 16 proceeds of an Oscar statue discussed at length in the court's decision) toward the purchase of the 17 Property. Id. at 14-16. 18 The Superior Court also granted judgment on the creditors' suit. The Superior Court held 19 that "[t]itle to [the Property] is nominally held in the name of Badax, but Plaintiff has established 20 by clear and convincing evidence that the record title does not represent the true beneficial title." 21 Statement of Decision at 18. As the court explained, Badax held only a partial beneficial interest in 22 the property: 23 Based on comparative contributions, Badax's interest in [the Property] is no more 24 than the fraction, the numerator of which is $717,952 (the net sales proceeds from 25 the Oscar statue) and the denominator of which is the sum of $1,752,775.03 (the 26 gross amount of the cost of the house, see Ex. 4-1), $300,000 (the estimated 27 amounts paid by Weisman for improvements to the house ) and $58,920.80 (the 1 Hence, Badax's interest in the house is 34% ($717,952/$2,111.695.83). Plaintiff 2 may enforce its judgment against Weisman against the 66% interest Weisman and 3 his companies own. 4 Id. at 18-19. Thus, the Superior Court not only held that Plaintiff was entitled to judgment on the 5 fraudulent transfer claim but effectively implemented that judgment by declaring the relative 6 ownership interests in the Property: 7 Plaintiff is entitled to judgment on its voidable transaction cause of action 8 against Klein and Badax and against them on the creditor's suit for all but their 34% 9 interest in [the Property]. 10 The Court received written and heard oral arguments by the parties 11 concerning the form of the Judgment. The decision concerning how the Court's 12 finding should be implemented is largely a matter of equity. Based on the various 13 equities the Court declares that Badax and DAX/Davro own the property as tenants 14 in common. Since there are no other creditors with a more senior interest than 15 Plaintiff, Plaintiff shall be substituted in place of DAX/Davro and serve a partial 16 satisfaction of judgment for the amount it receives from the sale of the property. 17 Id. at 19. 18 Based on its conclusion that ULRS and the Debtor were tenants in common in the Property, 19 the Superior Court granted the remedy of partition, directing Klein (i.e., Badax) to sell the Property, 20 charging repayment of a $500,000 loan taken out by Klein against Klein's (i.e., the Debtor's) share 21 of the sale proceeds, and, if the Property was not sold within 90 days, indicating it would appoint a 22 receiver to sell the Property. Id. at 19-20. On October 15, 2018, the Superior Court filed its 23 Judgment in Favor of ULRS, implementing its Statement of Decision. Case Dkt. 12 at Ex. 3 (the 24 "State Court Judgment"). 25 On or about December 17, 2019, the Debtor and Klein, its managing member, filed a notice 26 of appeal from the State Court Judgment. See Case Dkt. 33, Ex. C. ULRS thereafter filed a cross- 27 appeal. See Id., Ex. D. 1 On June 3, 2019, the Superior Court held a hearing on an application by ULRS to enforce 2 the State Court Judgment and order the sale of the Property, and on June 19, 2019, the Superior 3 Court entered its order granting that application (the "Enforcement Order"). See Case Dkt. 51, Ex. 4 11. The Enforcement Order directs sale of the Property to the Purchasers on specified terms and 5 conditions. The Enforcement Order notes that while preparation of the Enforcement Order was 6 pending, the parties reached a settlement agreement, on June 7, 2019, giving effect to the terms 7 reflected in the order. Id., Exs. 11 and 12. Based on that settlement agreement, the Superior Court 8 indicated it would not appoint a receiver to sell the Property. Id., Ex. 11 at 52. 9 On June 10, 2019, in accordance with the settlement agreement and Enforcement Order, the 10 Debtor and the Purchasers entered into a California Residential Purchase Agreement and Joint 11 Escrow Instructions for the sale of the Property, for the purchase price of $2,375,000. Case Dkt. 12 33, Ex. I (the "Sale Agreement."). The Sale Agreement contemplated that escrow would close 30 13 days after acceptance, i.e., July 10, 2019. Id. at 1. 14 On or about June 14, 2019, an entity called Arcturus International, LLC ("Arcturus") 15 recorded a UCC financing statement naming the Debtor as a debtor and asserting an interest in the 16 Property. Case Dkt. 12 at 124. Several days later, Arcturus recorded a second, similar UCC 17 financing statement. Id. Arcturus asserts that it holds a debt secured by a lien against fixtures at 18 the Property. Case Dkt. 28, Ex. 7. 19 On or about July 8, 2019, ULRS filed in the Superior Court its Ex Parte Application for 20 Order Determining the UCC Financing Statement of Arcturus International, LLC Is Unenforceable 21 or in the Alternative, Ordering the Sale of the House at 22437 La Quilla and Placing Badax, LLC's 22 Proceeds Into Escrow Until a Determination on Arcturus International, LLC's UCC Financing 23 Statement Can Be Made (the "Ex Parte Application"). Case Dkt. 12, Ex. 4. Among other things, 24 the Ex Parte Application asserts that Arcturus is under the control of the judgment debtors, that the 25 UCC financing statements do not represent enforceable liens, and that they are part of a continued 26 effort of the judgment debtors to frustrate the enforcement of the State Court Judgment. Id. 27 On July 10, 2019, the Superior Court held a hearing on the Ex Parte Application. The court 1 the net proceeds of the sale, pending a determination of the validity of those liens. Case Dkt. 51, 2 Ex. 9 (Superior Court Minutes). 3 On July 11, 2019, at 3:06 p.m. Pacific Daylight Time (the "Petition Date"), the Debtor filed 4 its voluntary petition for relief under chapter 11 of the Bankruptcy Code. Case Dkt. 1. 5 On the same date—but at a time that the evidentiary record before this Court does not 6 establish—the Superior Court entered its order granting in part and denying in part the Ex Parte 7 Application (the "Ex Parte Order"). Case Dkt. 12, Ex. 5. The Ex Parte Order provided that the 8 validity and enforceability of the UCC financing statements would be determined at a hearing to 9 held on August 2, 2019. In the meantime, the Ex Parte Order "expunged" the UCC financing 10 statements from the property records but "preserved" them "as to the proceeds from the sale of the 11 property." The Ex Parte Order further provided that the proceeds of sale that otherwise would be 12 distributed to the Debtor and ULRS would be held in escrow pending a determination of the UCC 13 Liens, except for $15,000 to be distributed to the Debtor, for the benefit of Klein, at the time of the 14 close of escrow. The Court also entered a separate order to show cause setting a hearing on the 15 UCC Liens (the "OSC," and together with the Ex Parte Order, the "Ex Parte Orders.") 16 On July 11, 2019, at 4:53 p.m., the Debtor's state court counsel, Edward Kim sent an email 17 advising that the Debtor had filed its chapter 11 petition to ULRS' state court counsel, Michael 18 Murray, Arcturus' counsel, Bruce Ahearn, and escrow officers, Eloisa Morales, Julie Gardner and 19 Kathi Jesse. Case Dkt. 33 at Ex. J. An hour later, at 5:52 p.m., Kim sent an email to the same 20 recipients advising that a Notice of Stay of Proceedings had been filed in the Superior Court. Id. 21 At 7:28 p.m., Kim forwarded that email to Stephen Kaseno, who is identified on the Sale 22 Agreement as one of the real estate brokers for the Purchasers. Id. 23 At 5:12 p.m. that day, Murray sent an email to escrow officers Morales and Gardner, as 24 well as a representative of the title company, stating "I know you have seen the bankruptcy filing 25 by Badax that puts everything on hold. However, I did want you to know I finally received the 26 signed orders from the judge and am forwarding them so you have them [and] can clear the last 27 issue on title while we deal with the bankruptcy." Case Dkt. 51, Ex. 14. 1 At 11:20 p.m. that evening, the Purchasers sent their own email to Morales advising the 2 escrow company of the bankruptcy filing, demanding the immediate return of the purchase price 3 (which had been remitted to escrow the day prior), less the original earnest money deposit, and 4 advising of their belief that the escrow would not close as scheduled. Case Dkt. 53, Ex. D. The 5 following morning, the Purchasers sent another email to Morales, purporting to memorialize a 6 telephone conversation in which Morales allegedly stated that she had been advised to proceed with 7 the closing notwithstanding the Debtor's bankruptcy filing. Id.1 8 On July 12, 2019, well after the Petition Date, the escrow company appears to have closed 9 the transaction and caused a grant deed to be recorded, transferring title in the Property to the 10 Purchasers. See Case Dkt. 33, Ex. K; Case Dkt. 53, Ex. A at ¶13. The Purchasers believe that the 11 closing costs they remitted to escrow have been disbursed but that the purchase price they paid into 12 escrow has not. Case Dkt. 53, Ex. A. at ¶13. 13 III. Issues Presented 14 ULRS and the Purchasers request that the Court annul the automatic stay effective as of the 15 Petition Date, so that the entry of the Ex Parte Orders (which may have been entered after the 16 Petition Date) and the sale and transfer of the Property to the Purchasers (which clearly occurred 17 after the Petition Date) are validated. If not validated retroactively, ULRS requests relief from stay 18 prospectively to permit the Superior Court to re-enter its Ex Parte Orders and the sale of the 19 Property re-implemented. In either event, ULRS requests relief from stay to permit the Superior 20 Court to adjudicate the validity of the UCC Liens and allow the distribution of Property sales 21 proceeds in accordance with that determination. The Debtor opposes any relief that would validate 22 or permit the sale of the Property as anathema to its effort to reorganize. If the Property is not sold, 23 the Debtor contemplates that it can reorganize its financial affairs by renting out the property for 24 movie shoots or by liquidating the property. 25
26 1 The Court notes that the escrow company, Catalyst Escrow, did not file either of the 27 Motions and has neither appeared, participated or provided testimony in connection with the Motions. 1 IV. Analysis 2 A. Applicable Law 3 Pursuant to Bankruptcy Code section 362, the filing of the Debtor's chapter 11 case 4 operated as a stay of "the continuation . . . of a judicial . . . proceeding against the debtor that was . . 5 . commenced before the commencement of the [the chapter 11 case] and to recover a claim against 6 the debtor that arose before the commencement of [the chapter 11 case]," "the enforcement, against 7 the debtor or against property of the estate, of a judgment obtained before the commencement of 8 [the chapter 11 case]," and "[an] act to obtain possession of property of the estate." 11 U.S.C. 9 § 362(a)(1), (2) & (3). 10 Here, the closing of the sale transaction and transfer of title to the Property to the 11 Purchasers after the Petition Date clearly violated the automatic stay. Further, depending on the 12 time the Ex Parte Orders were entered by the Superior Court, the entry of those orders also may 13 have violated the automatic stay. Actions taken in violation of the stay are void. Schwartz v. 14 United States (In re Schwartz), 954 F.2d 569, 572 (9th Cir. 1992). 15 Bankruptcy Code section 362(d) provides "on request of a party in interest and after notice 16 and a hearing, the court shall grant relief from the stay provided under subsection (a) of this 17 section, such as by terminating, annulling, modifying or conditioning such stay for – cause [.]" 11 18 U.S.C. § 362(d)(1). 19 The Ninth Circuit Court of Appeals has held that this statute "gives the bankruptcy court 20 wide latitude in crafting relief from the automatic stay, including the power to grant retroactive 21 relief from the stay." Id. (emphasis added). Retroactive relief validates acts that violate the 22 automatic stay and otherwise would be void. Id. at 573; Lone Star Sec. & Video, Inc. v. Gurrola 23 (In re Gurrola), 328 B.R. 158. 172 (9th Cir. B.A.P. 2005). 24 In deciding whether to annul the stay retroactively, a bankruptcy court ordinarily should 25 examine the circumstances of the specific case and balance the equities of the parties' respective 26 positions. See In re Nat'l Envtl. Waste Corp., 129 F.3d 1052, 1055 (9th Cir. 1997); Fjeldsted v. 27 Lien (In re Fjeldsted), 293 B.R. 12, 24 (9th Cir. BAP 2003). Under this approach, a bankruptcy 1 debtor engaged in unreasonable or inequitable conduct, or prejudice would result to the creditor." 2 In re Nat'l Envtl. Waste Corp., 129 F.3d at 1055. A bankruptcy court also should consider twelve 3 additional factors that may be relevant to deciding whether retroactive annulment of the stay is 4 justified: 5 1. Number of [bankruptcy] filings;
6 2. Whether, in a repeat filing case, the circumstances indicate an intention to delay and hinder creditors; 7 3. A weighing of the extent of prejudice to creditors or third parties if the stay relief is not 8 made retroactive, including whether harm exists to a bona fide purchaser;
9 4. The debtor's overall good faith (totality of the circumstances test);
10 5. Whether creditors knew of stay but nonetheless took action, thus compounding the problem; 11 6. Whether the debtor has complied, and is otherwise complying, with the [Bankruptcy] 12 Code and the [Bankruptcy] Rules;
13 7. The relative ease of restoring parties to the status quo ante;
14 8. The costs of annulment to debtors and creditors;
15 9. How quickly creditors moved for annulment, or how quickly debtors moved to set aside the sale or violative conduct; 16 10. Whether, after learning of the bankruptcy, creditors proceeded to take steps in continued 17 violation of the stay, or whether they moved expeditiously to gain relief;
18 11. Whether annulment of the stay will cause irreparable injury to the debtor; and
19 12. Whether stay relief will promote judicial economy or other efficiencies. 20 See In re Fjeldsted, 293 B.R at 25; see also Gasprom, Inc. v. Fateh (In re Gasprom, Inc.), 500 B.R. 21 598 (9th Cir. B.A.P 2013). 22 These factors, however, "are merely a framework for analysis and not a scorecard," and thus 23 "[i]n any given case, one factor may so outweigh the others as to be dispositive." In re Fjeldsted, 24 293 B.R at 25. The debtor bears the ultimate burden of proving that the request for retroactive 25 relief from the stay should be denied. Souang v. Fularon (In re Fularon), 2011 WL 4485202, *5 26 (9th Cir. B.A.P. July 11, 2011) (citing In re Nat'l Envtl. Waste Corp., 191 B.R. 832, 836 (Bankr. 27 C.D. Cal. 1996) (debtor has the burden of proof under section 362(g)(2) to demonstrate that cause 1 Separate and apart from the issue of retroactive relief, Bankruptcy Code section 362(d)(1) 2 also operates prospectively to lift the automatic stay upon a showing of "cause." The term "cause" 3 is not defined in the statute but is to be construed by bankruptcy courts on a case-by-case basis. In 4 re Tucson Estates, Inc., 912 F.2d 1162, 1166 (9th Cir. 1990). 5 In determining whether "cause" exists to permit litigation outside the bankruptcy court to 6 proceed, courts have identified a series of factors that are potentially relevant to the inquiry. 7 Truebro, Inc. v. Plumberex Specialty Prods., Inc. (In re Plumberex Specialty Prods., Inc.), 311 8 B.R. 551, 558 (Bankr. C.D. Cal. 2004) (citing In re Curtis, 40 B.R. 795, 799-800 (Bankr. D. Utah 9 1984) and other authorities). These factors, which have come to be known as the "Curtis factors," 10 are as follows: 11 1. Whether the relief will result in a partial or complete resolution of the issues;
12 2. The lack of any connection with or interference with the bankruptcy case;
13 3. Whether the foreign proceeding involves the debtor as a fiduciary;
14 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; 15 5. Whether the debtor's insurance carrier has assumed full financial responsibility for 16 defending the litigation;
17 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; 18 7. Whether the litigation in another forum would prejudice the interests of other creditors, 19 the creditor's committee and other interested parties;
20 8. Whether the judgment claim arising from the foreign action is subject to equitable subordination; 21 9. Whether movant's success in the foreign proceeding would result in a judicial lien 22 avoidable by the debtor under Section 522(f);
23 10. The interests of judicial economy and the expeditious and economical determination of litigation for the parties; 24 11. Whether the foreign proceedings have progressed to the point where the parties are 25 prepared for trial, and
26 12. The impact of the stay and the "balance of hurt." 27 1 Id. 2 The Ninth Circuit Bankruptcy Appellate Panel has recognized that "the Curtis factors are 3 appropriate, nonexclusive, factors to consider in deciding whether to grant relief from the automatic 4 stay to allow pending litigation to continue in another forum." In re Kronemyer, 405 B.R. 915, 921 5 (9th Cir. B.A.P 2009). While the Curtis factors are widely used to determine the existence of 6 "cause," not all of the factors are relevant in every case, nor is a court required to give each factor 7 equal weight. Plumberex, 311 B.R. at 560.
8 B. Stay Annulment With Respect to the Ex Parte Orders, Sale Closing and Transfer of Title to the Property. 9 10 The Court below considers each of the factors relevant to stay annulment under In re Nat'l 11 Envtl. Waste Corp. and In re Fjeldsted in order to determine whether annulment is appropriate. 12 1. Creditor Awareness of the Bankruptcy Case. The record is clear that creditor ULRS and 13 the Purchasers were aware of the Debtor's bankruptcy case at the time the sale of the Property was 14 closed. In most cases, the creditors' awareness of the bankruptcy (and by implication the automatic 15 stay) weighs against annulment because it is the creditor who has violated the stay and who seeks 16 annulment. But here, the creditor and the third-party purchaser who are seeking annulment are not 17 the ones who violated the stay. 18 Although it appears that the escrow company violated the stay when it closed the sale and 19 recorded the grant deed, there is nothing in the record to suggest that ULRS or the Purchasers did 20 anything after learning of the bankruptcy to cause this result. Indeed, the Purchasers expressed to 21 the escrow company their belief the sale should not proceed. Under these circumstances, the 22 knowledge that URLS and the Purchaser had of the bankruptcy does not weigh against annulment. 23 Nor does the knowledge of the escrow company—even though this conclusion may appear 24 counterintuitive. The escrow company clearly knew of the bankruptcy case and violated the 25 automatic stay, but is not one of the parties seeking relief, and is not one of the parties with a real 26 economic interest in the sale. 27 To be sure, the escrow company will benefit if the sale is validated. Validation of the sale 1 company's exposure for stay violation damages. But these interests pale in comparison to those of 2 (i) ULRS, which is seeking to realize a recovery on its 66% tenant in common interest in the 3 Property, and (ii) the Purchasers who are seeking delivery of the Property, for which they have 4 parted with $2,375,000. As an equitable matter, the knowledge and conduct of the escrow 5 company do not weigh against the relief sought by ULRS and the Purchasers.2 6 2. The Debtor's Unreasonable or Inequitable Conduct; Prejudice to the Creditor. ULRS 7 argues that the Debtor acted unreasonably and inequitably by filing this bankruptcy case, by doing 8 so shortly after the hearing on the Ex Parte Application, and by attempting to stall entry of the Ex 9 Parte Order. The Court agrees. Based on the totality of the circumstances, the Court finds that the 10 filing of the bankruptcy case lacks a legitimate reorganizational objective and therefore lacks good 11 faith. 12 In seeking to determine whether a petition is filed in good faith, the debtor's "subjective 13 intent" is not determinative. Marsch v. Marsch (In re Marsch), 36 F.3d 825, 827-28 (9th Cir. 14 1994). Rather, the good faith inquiry focuses on the manifest purpose of the petition filing and 15 whether the debtor is seeking to achieve thereby "objectives outside the legitimate scope of the 16 bankruptcy laws." Id. Put another way, the good faith standard requires the bankruptcy court to 17 ascertain "whether [the] debtor is attempting to unreasonably deter and harass creditors or 18 attempting to effect a speedy, efficient reorganization on a feasible basis." Id. (citing In re Arnold, 19 806 F.2d 937, 939 (9th Cir. 1986). 20 The Debtor contends that it filed chapter 11 to reorganize and that the Property is essential 21 to that reorganization. But there is little in the record to suggest that the Debtor—a corporate 22 entity—has any business to reorganize. The Statement of Financial Affairs reveals that in the two 23 years preceding the bankruptcy filing the Debtor had no income whatsoever. Case Dkt. 24 at 1. 24 The Debtor's only assets are the residential Property, an "office buildout," a "communications 25
26 2 There is no evidence to suggest that the Superior Court had knowledge of the bankruptcy case at 27 the time it entered the Ex Parte Orders. Even if it did have such knowledge, it would not make any sense to penalize ULRS or the Purchasers on account of that knowledge. 1 platform," some office furniture, some vacant land and a 1964 Chevrolet valued at $4,000. Case 2 Dkt. 18 at 4-6. 3 The Debtor does not really argue that it has established business operations to reorganize. 4 The Debtor simply contends that the "Chatsworth Property is a necessary component of Debtor's 5 plan, as rents collected at the Property will be used to partially fund Debtor's plan or Debtor will 6 sell the property and use sale proceeds to pay creditors." Case Dkt. 61 at 3. 7 The evidence offered by the Debtor is even less compelling. The sum total of the testimony 8 offered in support of the Debtor's good faith is the following generic statement by Klein: "This case 9 was not filed in bad faith to thwart URLS in its efforts to sell the Property. This case was filed so 10 that the Debtor can seek to restructure and/or liquidate assets in an orderly manner to maximize 11 value and payments to creditors of this bankruptcy estate." There is no evidence to establish the 12 nature and extent of the Debtor's business activities, the nature and extent of the income the Debtor 13 may be generating, or how that income might be adequate to confirm a feasible plan.3 14 More importantly, the Debtor's contention that a feasible reorganization is possible here is 15 premised on a fallacy. The Debtor's argument assumes that the Debtor is entitled to retain and use 16 the Property, as if the Debtor is a 100% owner. It is not. According to the Statement of Decision, 17 as a result of a fraudulent transfer as to which the Debtor was transferee, the Debtor owns no more 18 than a 34% tenant in common interest in the Property. The Court is not aware—and the Debtor has 19 been unable to identify—any provision of the Bankruptcy Code or applicable bankruptcy law that 20 would permit the Debtor to use a chapter 11 plan to deprive or dispossess ULRS of its 66% interest 21 in the Property. 22 The Debtor hypothetically might be able to reorganize under chapter 11 if it succeeds in its 23 appeal of the Statement of Decision and State Court Judgment. But there is no evidence in the 24 record on which to assess the likelihood of reversal, or the likelihood of any appellate decision 25 3 ULRS notes that the Debtor has reported approximately $8,000 on its monthly operating report 26 for September of this year, but there is no testimony explaining the nature of the activity generating 27 that income. 1 being made in time to "effect a speedy, efficient reorganization on a feasible basis."4 Further, in 2 accordance with the Rooker Feldman doctrine, this Court lacks the authority to act as an appellate 3 tribunal and overrule the Superior Court's declaration regarding ownership of the Property.5 4 Based on the record before the Court, there is no basis to conclude that a speedy, efficient 5 and feasible reorganization is realistic here. It appears instead that the Debtor filed this case—at 6 the last conceivable moment—in desperation and in an effort to delay implementation of the 7 Statement of Decision and State Court Judgment. 8 Notwithstanding the foregoing, the Court notes that it is not persuaded by ULRS's argument 9 that the Debtor is improperly using chapter 11 as a substitute for a supersedeas bond. Relying on 10 In re Marsch, 36 F.3d 825, ULRS argues that the Debtor filed this case in an effort to obtain a stay 11 of the Statement of Decision and State Court Judgment without posting a supersedeas bond, as 12 required by California law. But the Ninth Circuit found the filing was made in bad faith there 13 because the Debtor could have afforded to post the bond and chose not to. Id. at 829. In Marshall 14 v. Marshall (In re Marshall), 721 F.3d 1032, 1048 (9th Cir. 2013), the Ninth Circuit reached the 15 contrary conclusion where it appeared that the debtor did not have the means to post a bond. 16 Here, it appears that the Debtor had approximately $1,800 in the bank on the Petition Date, 17 which is far less than the $850,000 bond set by the Superior Court. The Court therefore does not 18 base is conclusion of bad faith merely on the Debtor's failure to obtain a bond. The Court bases its 19 conclusion on the necessity of reversal to the success of any reorganization and the failure of the 20 Debtor to demonstrate that reversal realistically can be achieved in a "speedy, efficient" manner. 21
22 4 The Debtor submitted to this Court the appellate briefing schedule to which the parties have stipulated before the California Court of Appeal. These documents, however, demonstrate little 23 more than that briefing should be completed by the spring of 2020. Nothing about those 24 documents indicates when the California Court of Appeal will hear and decide the pending appeal and cross appeal. 25 5 See Gruntz v. Los Angeles (In re Gruntz), 202 F.3d 1074, 1078 (9th Cir. 2000) (en banc) ("At its 26 core, the Rooker-Feldman doctrine stands for the unremarkable proposition that federal district courts are courts of original, not appellate, jurisdiction. Thus, it follows that federal district courts 27 have 'no authority to review the final determinations of a state court in judicial proceedings.'") (internal citations omitted) 1 To the extent the Debtor's chapter 11 filing seeks to preserve its ability to sell the property 2 free and clear of the co-ownership interests of ULRS, the Court notes that a chapter 11 filing is 3 unnecessary. Bankruptcy Code section 363(h) provides that a debtor in possession (acting as 4 trustee for its estate) may sell both its interest and a co-owner's interest in property of the estate. 5 But the orders of the Superior Court already achieve this result. Under those orders (and the 6 settlement embodied in them), the Debtor is the party that marketed the Property and voluntarily 7 entered into the Sale Agreement. Annulling the stay will validate the sale that was implemented in 8 accordance with that agreement and permit the Debtor to realize a recovery on its 34% interest in 9 the Property (less the consensual lien encumbering that interest). This is effectively the same result 10 that would be achieved under Bankruptcy section 363(h), without the attendant delay and 11 uncertainty.6 12 Irrespective, the denial of annulment would prejudice the creditor, ULRS. As reflected in 13 the Statement of Decision, ULRS is assignee of a judgment and partial owner of the Property by 14 virtue of a fraudulent transfer, which the Superior Court found was effectuated with the actual 15 intent to hinder, delay and defraud creditors. The rights assigned ULRS were prejudiced 16 prepetition by that fraudulent transfer. They will be prejudiced further if the Court denies 17 annulment and grants the Debtor an open-ended delay—particularly where that delay is premised 18 on either (i) a prospective reorganization that the Debtor has failed to show is realistic, or (ii) a 19 liquidation of the property, which the Debtor already negotiated and, but for the stay, completely 20 implemented. 21 3. Number of Prior Bankruptcy Cases. This is the Debtor's first bankruptcy case. This 22 factor weighs against annulment. 23 24
25 6 Federal Rule of Bankruptcy Procedure 7001(3) requires that a sale free and clear of co-ownership 26 interests be implemented only through an adversary proceeding. Thus, in addition to the open- ended delay that would result if annulment of the sale were denied, any decision by the Debtor to 27 liquidate the Property would require a lengthier and more expensive process than the typical bankruptcy sale, which is determined by motion. 1 4. In a Repeat Filing, the Intent to Delay or Hinder Creditors. Because this is the Debtor's 2 first bankruptcy case, this factor does not apply. 3 5. Extent of Prejudice to Creditors or Third Parties, Including a Bona Fide Purchaser. In 4 addition to the prejudice that creditor ULRS will suffer (discussed above), the denial of annulment 5 and the attendant delay will prejudice the Purchasers, who at this point have neither their money 6 nor the Property. The Debtor does not explain or demonstrate how, when and at what cost the 7 rights of the Purchaser will be addressed in this case. If the sale is not validated, the Purchasers 8 undoubtedly will incur legal fees, risk and further delay in an effort to recover the closing costs that 9 the escrow company already has disbursed to third parties, as well as the purchase price that 10 remains on deposit. Likewise, the Purchasers may have a claim against the Debtor's estate for 11 breach of the Sale Agreement—a claim it is not clear that the Debtor has the wherewithal to satisfy. 12 If the Court grants annulment and validates the sale, the Purchasers should receive clean title to the 13 Property and avoid these problems. 14 6. Debtor's overall good faith (totality of the circumstances test). The Debtor's overall 15 good faith is addressed in section B.2 above. As explained there, the Debtor's filing of this case 16 was not in good faith. 17 7. Whether creditors knew of stay but nonetheless took action, thus compounding the 18 problem. As discussed in section B.1 above, neither of the parties seeking relief in the Motions 19 took action to compound the problems created by the Debtor's bankruptcy filing. If anything, 20 ULRS and the Purchasers sought to advise the escrow company of the bankruptcy and advise 21 against its closing of the sale in violation of the stay. 22 8. Whether the debtor has complied, and is otherwise complying, with the Bankruptcy Code 23 and the Bankruptcy Rules. As a general matter, it appears that the Debtor is complying with its 24 obligations as a debtor in possession. ULRS argues that the Debtor is not in compliance with its 25 obligations under the Bankruptcy Code, but the Court does not find that these allegations are 26 substantiated by the evidentiary record. There appear to be potential issues surrounding the 27 Debtor's use of the Property (which may or may not be outside the ordinary course of business) and 1 the Court is not (yet) persuaded that the Debtor has violated its legal obligations with respect to 2 these matters. 3 9. The relative ease of restoring parties to the status quo ante. The Debtor has failed to 4 demonstrate that the parties can easily be restored to the status quo. As noted above, the Debtor 5 does not explain or demonstrate how, when and at what cost the rights of the Purchasers can be 6 restored to the status quo ante. It seems more likely than not that the Purchasers will have to incur 7 additional costs, risks and delay in order for their rights to be restored. 8 10. The costs of annulment to debtors and creditors. By validating the sale, annulment will 9 reduce the legal costs necessary to make ULRS and the Purchasers whole. It also will reduce 10 ULRS' legal costs in addressing those issues. It will, however, preclude the Debtor (if it is not 11 already precluded) from retaining the Property and using it as, part of a chapter 11 plan. 12 11. How quickly creditors moved for annulment, or how quickly debtors moved to set aside 13 the sale or violative conduct. The case was filed on July 11, 2019. ULRS filed the Motion on July 14 19, 2019. The Purchasers filed the Purchasers’ Motion, which is supplemental to the Motion—on 15 August 16, 2019. Based on the foregoing, the Court finds that the Motions seeking annulment 16 were promptly filed. 17 12. Whether, after learning of the bankruptcy, creditors proceeded to take steps in 18 continued violation of the stay, or whether they moved expeditiously to gain relief. As discussed 19 above in Section B.1, neither ULRS nor the Purchasers took steps in violation of the automatic stay 20 once they learned of the Debtor's case. If anything, their communications to the escrow company 21 sought to prevent the transaction from being closed. 22 13. Whether annulment of the stay will cause irreparable injury to the debtor. If the stay is 23 annulled and the sale validated, the Debtor will no longer hold an interest in the Property. This 24 result would be irreversible. But it would not be accurate to describe this result as irreparable 25 injury – at least not on the record before the Court. As discussed above, the Debtor has failed to 26 demonstrate that it can remain a co-tenant in the Property and nevertheless confirm a plan under 27 which it retains its interest in the Property. The reason partition and sale exists as a remedy under 1 tenable. That there is no provision of the Bankruptcy Code to deal with this situation other than 2 section 363(h), which authorizes sale of the property, underscores this problem. Further, the 3 Debtor has failed to demonstrate the likelihood of a prompt, successful reversal of the Statement of 4 Decision and State Court Judgment. It is therefore far from clear that validating the sale of the 5 Property would constitute an injury on the Debtor, rather than simply an implementation of the 6 Superior Court's decisions. 7 14. Whether stay relief will promote judicial economy or other efficiencies. The Court finds 8 that annulling the stay would promote judicial economy. Validation of the sale would simplify the 9 proceedings in this chapter 11 case, avoid litigation that otherwise would be required to restore the 10 Purchasers to the status quo ante, and/or avoid the necessity of additional or duplicate proceedings 11 in the Superior Court to redo actions necessary to implement the State Court Judgment. Annulment 12 will not obviate the need for some court to adjudicate the validity of the UCC Liens and determine 13 whether they must be satisfied from the proceeds of the Property. But annulment—which would 14 implement the Superior Court's unstayed orders—will substantially reduce the amount of collateral 15 litigation among the parties. 16 * * * 17 Based on the foregoing analysis, the Court concludes that the weight of the factors supports 18 annulment of the automatic stay with respect to entry of the Ex Parte Orders and closing of the sale 19 of the Property, including the recordation of a grant deed transferring title to the Purchasers. 20 C. Relief from Stay To Permit Adjudication of the UCC Liens and Distribution of the 21 Sales Proceeds 22 In light of the Court's conclusion that annulment of the automatic stay is appropriate with 23 respect to the Ex Parte Orders and the sale closing, the only remaining issue is whether it is 24 appropriate to let the Superior Court adjudicate the UCC Liens and permit distribution of the sale 25 proceeds in accordance with that ruling. The appropriate analysis of this issue requires that the 26 Court consider each of the Curtis factors. 27 1. Whether the relief will result in a partial or complete resolution of the issues. Permitting 1 complete resolution of the outstanding issues. At that point, the Debtor would receive the value of 2 its former interest in the Property. It might or might not elect to proceed with a chapter 11 3 reorganization, but the litigation over implementation of the Superior Court's partition and sale 4 order would be complete. 5 2. The lack of any connection with or interference with the bankruptcy case. Adjudication 6 of the UCC Liens has a connection to this bankruptcy case. It will determine how much of the 7 Debtor's 34% interest in the sales proceeds will be available to the Debtor. But the adjudication of 8 those liens by the Superior Court would not interfere with the administration of this case. Based on 9 the Superior Court's prior scheduling of a hearing on the UCC Liens—prior to commencement of 10 this case— it appears that the Superior Court is prepared to adjudicate the matter promptly and 11 without delay. 12 3. Whether the foreign proceeding involves the debtor as a fiduciary. The remaining 13 litigation before the Superior Court does not involve the debtor acting as a fiduciary. As such, this 14 factor does not apply. 15 4. Whether a specialized tribunal has been established to hear the particular cause of 16 action and whether that tribunal has the expertise to hear such cases. There is no special tribunal 17 established to adjudicate the issue of the UCC Liens. The Superior Court is a court of general 18 jurisdiction. This factor does not apply. 19 5. Whether the debtor's insurance carrier has assumed full financial responsibility for 20 defending the litigation. The question posed by the UCC Liens is whether they are valid and 21 entitled to a share of the sale proceeds. It does not involve any liability for which insurance may 22 exist. This factor is not applicable. 23 6. Whether the action essentially involves third parties, and the debtor functions only as a 24 bailee or conduit for the goods or proceeds in question. The question posed by the UCC Lien 25 litigation does not involve the Debtor merely serving as a bailee or conduit. This factor is not 26 applicable. 27 7. Whether the litigation in another forum would prejudice the interests of other creditors, 1 Court will not prejudice any creditors. The Superior Court is at least as well equipped as this Court 2 to determine the validity of liens. 3 8. Whether the judgment claim arising from the foreign action is subject to equitable 4 subordination. There is nothing in the record to suggest a basis on which the claims of the UCC 5 Lien Holders may be equitably subordinated. 6 9. The movant's success in the foreign proceeding would result in a judicial lien avoidable 7 by the debtor under Section 522(f). By its express terms, section 522(b judgment liens pursuant to 8 section 522 (f). Accordingly, this factor does not apply here, where the debtor is a corporate entity. 9 10. The interests of judicial economy and the expeditious and economical determination of 10 litigation for the parties. Judicial economy, as well as the expeditious and economical 11 determination of the UCC Liens will be served by allowing that determination to be made by the 12 Superior Court, which has years invested in the underlying litigation (including a trial), is familiar 13 with the parties and their affiliations, and has demonstrated a willingness to make the determination 14 promptly and without delay. Litigation of the UCC Liens in this Court would impose a substantial 15 learning curve on the Court, which otherwise can be avoided by allowing the matter to be 16 determined in the Superior Court. 17 11. Whether the foreign proceedings have progressed to the point where the parties are 18 prepared for trial. The parties already have had a trial on the underlying judgment, as well as the 19 subsequent fraudulent transfer action. This action is very mature. As for the UCC Liens, it appears 20 the Superior Court is willing to adjudicate the matter expeditiously, pursuant to an order to show 21 cause. It therefore appears that little must be done to prepare for a determination of this issue. 22 12. The impact of the stay and the "balance of hurt." Enforcement of the stay will leave 23 the proceeds of the Property (at least as to the Debtor) in limbo. If the validity of the UCC Liens is 24 not promptly litigated the Debtor will not know how much value is available to satisfy the claims 25 of its creditors, thereby delaying administration of its case and the realization of any amounts by 26 the Debtor's creditors on their claims. Notably, the relief to be granted would not extend to claims 27 other than those represented by the UCC Liens and would extend to the determination of any 1 | denial of stay relief here would be borne by creditors, rather than the Debtor, who does not appear 2 | to have any business operations or any business need for the proceeds of the sale of the Property. 3 kok OK 4 Based on the foregoing analysis, the Court concludes that the weight of the factors supports 5 | granting relief from of the automatic stay to let the Superior Court adjudicate the UCC Liens and 6 || permit distribution of the sale proceeds in accordance with that ruling. 7 V. Conclusion 8 Accordingly, the Court will enter a separate order granting: (i) annulment of the automatic 9 || stay as of the Petition Date, with respect to entry of the Ex Parte Orders and consummation of the 10 || sale of the Property to the Purchasers (including recordation of the grant deed transferring the 11 || Property to the Purchasers), and (11) relief from the automatic stay to permit the Superior Court to 12 | determine the validity, extent and priority of the UCC Liens asserted in the sale proceeds of the 13 || Property owing to the Debtor, and distribute the sale proceeds in accordance with its ruling thereon. 14 HHH 15 16 17 18 19 20 21 22 23 Must 2. Baset— Date: November 1, 2019 □ 24 Marit R Barash United States Bankruptcy Judge 25 26 27 28 21