Hoskins v. Profit Recovery Center LLC

• Court: United States Bankruptcy Court, N.D. California
• Decided: November 2, 2020
• Docket: 19-03012
• Status: Unknown

Opinion

EDWARD J. EMMONS, CLERK 13 □□ \o. U.S. BANKRUPTCY COURT □□ NORTHERN DISTRICT OF CALIFORNIA SL □□ ay a yy □□□ 1 . . Signed and Filed: November 2, 2020 □□□□ OL 2 Vani J 4 Vine 5 DENNIS MONTALI U.S. Bankruptcy Judge 6 7 UNITED STATES BANKRUPTCY COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 In re ) Bankruptcy Case No. 17-30326-DM 10 ) MAYACAMAS HOLDINGS LLC, ) Chapter 7 11 ) 12 ) Debtor. ) 13 ) E. LYNN SCHOENMANN, Chapter 7 ) Adversary Case No. 19-03012-DM 14 trustee, ) 15 . . Plaintiff, ) 16 ) Vv. ) 17 ) 18 CARMEL FINANCING, LLC, et al., ) ) 19 Defendants. ) ee) 20 at MEMORANDUM DECISION REGARDING CROSS-MOTIONS FOR SUMMARY JUDGMENT 22 23 I. INTRODUCTION 24 On April 10, 2014, debtor Mayacamas Holdings LLC (“Debtor”) 25 |lexecuted a promissory note in the principal amount of $2,000,000 26 ||(the “Note”) to the order of defendant Carmel Financing, LLC 27 \|(*Carmel”); it was secured by a first priority deed of trust 28 ||(the “DOT”) encumbering real property located in Sonoma County -1-

1 and commonly referred to as the “Ranch Parcel.” See In re 2 Mayacamas Holdings LLC, 608 B.R. 522, 528–29 (Bankr. N.D. Cal. 3 2019), leave to appeal denied sub nom. Schoenmann v. Carmel Fin. 4 LLC, No. 19-CV-06895-WHO, 2020 WL 95553 (N.D. Cal. Jan. 8, 2020) 5 (the “MTD Decision”). 6 On April 7, 2017, Debtor filed a chapter 11 petition and 7 listed the Ranch Parcel as its principal asset. Plaintiff 8 E. Lynn Schoenmann (“Trustee”) was appointed as the chapter 11 9 trustee on October 4, 2017. Four days later (on October 8, 10 2017), the Tubbs fire erupted and caused significant damage to 11 the Ranch Parcel. As a result, Trustee received more than 12 $2,000,000.00 from Debtor’s insurance carrier (the “Insurance 13 Proceeds”). Except for a court-approved expenditure of 14 $418,541.50 for post-fire clean-up required by law, Trustee 15 continues to hold the Insurance Proceeds, which equaled 16 $1,695,727.26 as of the commencement of this adversary 17 proceeding. 18 On April 7, 2019, Trustee filed a Complaint to Determine 19 Validity, Priority, and Extent of Liens; to Avoid Unperfected 20 Security Interests and Fraudulent and Preferential Transfers; 21 and to Object to Claims Relating to Sonoma County Assessor's 22 Parcel 120-190-033 (the “Complaint”) against 23 named 23 defendants, including Carmel. 24 In her Complaint, Trustee asserted that the chapter 7 25 estate, and not Carmel, is entitled to the Insurance Proceeds 26 because the insurance policy does not mention Carmel or identify 27 it as an additional loss payee. She also alleged that Carmel 28 did not, prior to the petition date, notify the insurer that it 1 should be added as a loss payee on the policy in accordance with 2 California law. See Cal. Comm. Code 9312(b)(4) (governing the 3 creation and perfection of security interests in insurance 4 policies)(hereafter, the “UCC”). In addition, she alleged that 5 certain terms of the Note and DOT imposing an 18% default 6 interest rate, monthly late charges of 4%, and a $75,000 “exit 7 fee” were unenforceable. 8 On April 22, 2019, Carmel filed a motion to dismiss 9 Trustee’s claims, which the court denied in part and granted in 10 part in its MTD Decision. Holding that Colorado law governed 11 the interpretation and enforcement of the Note and applying it 12 in its analysis, the court concluded that the terms of the Note 13 governing the default interest rate, the monthly late charges 14 and an “exit fee” were enforceable. The court therefore 15 dismissed Trustee’s claims that such terms were impermissible 16 under California law. See MTD Decision, 608 B.R. at 529. It 17 nonetheless rejected Carmel’s contention that Trustee failed to 18 state a cognizable claim as to the bankruptcy estate’s 19 entitlement to the Insurance Proceeds. 20 On August 17, 2020, both Carmel (dkt. 38) and Trustee 21 (dkt. 42) filed competing motions for summary judgment regarding 22 Carmel’s right to recover the fire insurance proceeds. On 23 September 11, 2020, the court held a hearing on the two motions. 24 For the reasons set forth below, the court will grant Trustee’s 25 motion for summary judgment and deny Carmel’s motion for summary 26 judgment. 27 // 28 // 1 II. STANDARDS GOVERNING MOTIONS FOR SUMMARY JUDGMENTS 2 On a motion for summary judgment, the court must determine 3 whether, viewing the evidence in the light most favorable to the 4 nonmoving party, there are any genuine issues of material fact. 5 Simo v. Union of Needletrades, Indus. & Textile Employees, 322 6 F.3d 602, 609-10 (9th Cir. 2003); Fed. R. Civ. P. 56. Summary 7 judgment against a party is appropriate when the pleadings, 8 depositions, answers to interrogatories, and admissions on file, 9 together with the affidavits, if any, show that there is no 10 genuine issue as to any material fact and that the moving party 11 is entitled to judgment as a matter of law. Fed. R. Civ. P. 56. 12 As discussed below, as a matter of law, Carmel has not produced 13 sufficient evidence or legal grounds to support its motion for 14 summary judgment or to defeat Trustee’s motion for summary 15 judgment. 16 III. DISCUSSION 17 In its motion, Carmel again contends that it holds a 18 perfected security interest in the Insurance Proceeds because 19 its recorded deed of trust granted Carmel a security interest in 20 all insurance proceeds affecting the Ranch Parcel, 21 notwithstanding this court’s contrary legal conclusions in the 22 MTD Decision.1 Carmel also asserts that it did provide written 23 notice of its purported security interest to the insurer as 24 required by California law. Finally, it seemingly contends that 25 26 1 The court will not revisit its legal conclusion in the MTD Decision, 608 B.R. at 529, that California law governs whether 27 Carmel is the holder of a perfected security interest in the 28 Insurance Proceeds. 1 a 2011 decision from a bankruptcy court in another district 2 holds more weight than a decision by the District Court for the 3 Northern District of California upon which this court relied in 4 the MTD Decision. The court is not persuaded by these arguments 5 for the reasons set forth below and in the MTD Decision. 6 First, the UCC defines a “security interest” as “an 7 interest in personal property or fixtures that secures payment 8 or performance of an obligation.” See Cal. Comm. Code § 1201(35) 9 (emphasis added). Carmel has not provided any evidence that, 10 prior to the petition date, it perfected a security interest in 11 any personal property or fixtures of Debtor, either by filing a 12 financing statement or taking possession of such property as 13 required by the UCC. See Cal. Comm. Code § 9310(a) and (b)(6). 14 See also Cal. Comm. Code § and 9315(c) (providing that a 15 security interest in proceeds is perfected only if the security 16 interest in the original collateral was perfected). 17 In addition, the UCC does not govern the “creation or 18 transfer of an interest in or lien on real property, including a 19 lease or rents thereunder”, with certain exceptions that are 20 inapplicable here. Cal. Comm. Code § 9109(c)(11). Real property 21 is not “collateral” that is governed by the UCC, as indicated in 22 Cal. Comm. Code § 9109(c)(11). See also In re Ehrle, 189 B.R. 23 771, 775 (9th Cir. BAP 1995) (“Under California’s [UCC}, 24 security interests in personal property extend to the cash 25 proceeds thereof. However, [the UCC] excepts the ‘transfer of 26 an interest in or lien on real estate[,]’ from coverage under 27 California’s Article 9.”). 28 1 That said, California’s UCC does allow a creditor to 2 acquire a security interest in an insurance policy procured by a 3 debtor for its own benefit if, and only if, written notification 4 is provided to the insurer. See Cal. Comm. Code § 9312. Section 5 9312(b)(4) provides that a “security interest in, or claim in or 6 under, any policy of insurance, including unearned premiums, may 7 be perfected only by giving written notice of the security 8 interest or claim to the insurer.” Cal. Comm. Code § 9312(a)(4) 9 (emphasis added). Absent that written notice, Carmel cannot 10 assert a security interest in the claim filed with and paid by 11 the insurer. Id.; see also Zaghi v. State Farm Gen. Ins. Co., 12 77 F.Supp.3d 974, 977 (N.D. Cal. 2015) (holding that under 13 California law, a recovery of insurance proceeds is limited to 14 named insureds on the policy).2 15 As a matter of undisputed fact, Carmel is not a named 16 insured on the policy at issue here. Nonetheless, Carmel 17 contends in its motion that Debtor directed its insurer to add 18 Carmel as a beneficiary to its insurance policy. As evidence of

19 2 In its motion for summary judgment and its opposition to the 20 Trustee’s motion for summary judgment, Carmel attempts to avoid the holding of Zaghi by citing a 2011 unpublished decision of a 21 bankruptcy court from another district. In In re Ireva 22 Holdings, LLC, 2011 WL 10656544 (Bankr. E.D. Cal. 2011), the court held that the inclusion of an insurance assignment clause 23 in a recorded deed of trust is sufficient notice to others that a lender has a security interest in any insurance proceeds 24 related to the property. The Ireva court relied on decisions 25 from other states (Georgia, North Carolina, and others). Four years later, however, the Zaghi court analyzed California law 26 and persuasively concluded that a recovery of insurance proceeds is limited to named insureds on the policy. Zaghi, 77 F.Supp.3d 27 at 977. The analysis of the Zaghi is more consistent with 28 California statutory law than that of Ireva. 1 such direction, Carmel submitted an email dated February 20, 2 2015, from Debtor’s insurance broker seeking a quote for a 3 renewal of its property insurance; that request for a quote 4 contains a handwritten notation reflecting Carmel as an 5 additional insured. Carmel, however, has not produced any 6 evidence that the email directed the insurer to add it to the 7 insurance policy or anything more than a request by Debtor’s 8 insurance broker for a quote. Consequently, the email does not 9 satisfy the notice requirements of Cal. Comm. Code § 9312(a)(4) 10 or Zaghi.3 11 Carmel’s contention that it would be entitled to an 12 equitable lien in the proceeds is likewise unavailing. In 13 Zaghi, the district court rejected a request by the secured 14 creditor who had not been added as an additional insured for an 15 equitable lien against the proceeds. Zaghi, 77 F.Supp.3d at 979. 16 In any event, Carmel has not demonstrated that a constructive 17 trust could be imposed under these circumstances. Under 18 California law, a constructive trust may be imposed on property 19 as a remedy for things “wrongfully detain[ed],” or “gain[ed] ... 20 by fraud, accident, mistake, undue influence, the violation of a 21 trust, or other wrongful act.” In re Advent Mgmt. Corp., 104 22 F.3d 293, 295 (9th Cir. 1997), citing Cal. Civ. Code §§ 2223 and 23 2224. Trustee did not gain the insurance proceeds wrongfully or 24 25 3 Even if the third party request for a quote had constituted notice to the insurer that Carmel had a security interest in any 26 insurance proceeds and a directive to add it as a beneficiary on the policy, the request for a quote was applicable to the 2015 27 policy. No evidence has been produced to show that Carmel was or requested to be a beneficiary of the 2017-2018 policy, which 28 is the policy that was operative when the Tubbs Fire occurred. 1 by fraud or other wrongful act. To the contrary, the estate 2 legally acquired the proceeds as Debtor was the only named 3 insured. Moreover, Carmel is not entitled to such equitable 4 relief when it took no steps to protect its rights in any 5 insurance policy prior to the Tubbs Fire. 6 IV. CONCLUSION 7 For the foregoing reasons, the court finds that as a matter 8 of undisputed fact and law that Carmel did not provide written 9 notification to Insurer that it should be added as a loss payee 10 to the policy. For that reason, Carmel’s assertion of a 11 perfected security interest in the Insurance Proceeds fails as a 12 matter of law. The court will therefore grant Trustee’s motion 13 for summary judgment and deny Carmel’s motion for summary 14 judgment. Counsel for Trustee should upload separate orders for 15 each motion and either obtain the signature of Carmel’s counsel 16 approving them as to form or file a separate proof of service 17 indicating compliance with B.L.R. 9021-1(c). 18 Within ten days after the court enters those orders, 19 counsel for Trustee should file a status conference statement 20 indicating what remains to be dealt with in this adversary 21 proceeding before a final judgment can be entered. 22 **END OF MEMORANDUM DECISION** 23 24 25 26 27 28 1 COURT SERVICE LIST ECF Recipients 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28