In re: John K. Reed

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: December 2, 2016
• Docket: CC-16-1028-DKiF
• Status: Unpublished

Opinion

FILED DEC 02 2016 1 NOT FOR PUBLICATION 2 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-16-1028-DKiF ) 6 JOHN K. REED, ) Bk. No. 15-12230-PC ) 7 Debtor. ) ______________________________) 8 ) JOHN K. REED, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M1 11 ) NEW YORK COMMUNITY BANK, ) 12 ) Appellee. ) 13 ______________________________) 14 Argued and Submitted on November 17, 2016 at Pasadena, California 15 Filed - December 2, 2016 16 Appeal from the United States Bankruptcy Court 17 for the Central District of California 18 Honorable Peter H. Carroll, Bankruptcy Judge, Presiding 19 Appearances: Appellant John K. Reed argued pro se; Megan E. 20 Lees of Pite Duncan, LLP argued for appellee. 21 Before: DUNN,2 KIRSCHER and FARIS, Bankruptcy Judges. 22 23 24 1 This disposition is not appropriate for publication. 25 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 26 See 9th Cir. BAP Rule 8024-1. 27 2 The Hon. Randall L. Dunn, United States Bankruptcy Judge 28 for the District of Oregon, sitting by designation. 1 Former chapter 133 debtor John K. Reed appeals from the 2 bankruptcy court's order granting relief from the automatic stay, 3 including in rem relief, to New York Community Bank. To the 4 extent we have jurisdiction over this appeal, we AFFIRM. 5 I. FACTUAL BACKGROUND 6 Reed purchased a home in Santa Barbara (the “Property”) in 7 2005. The purchase was financed through a loan from Ohio Savings 8 Bank in the original amount of $999,990, memorialized by a note 9 and secured by a deed of trust. After the failure of Ohio 10 Savings Bank, its assets were transferred to the appellant, New 11 York Community Bank (the “Bank”). Apparently, the assets 12 transferred included the note and deed of trust concerning the 13 Property.4 14 Eventually, Reed stopped making payments, and the Bank 15 commenced nonjudicial foreclosure proceedings against the 16 Property. In October 2010, Reed transferred his interest in the 17 Property as a gift to the JKR Olive Trust, an entity under Reed’s 18 control.5 Reed commenced a chapter 13 case in 2011, which was 19 dismissed within three months. He promptly filed a second 20 chapter 13 case, which was dismissed the following year for 21 22 3 Unless otherwise indicated, all chapter and section 23 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 24 All “Rule” references are to the Federal Rules of Bankruptcy Procedure. All “Civil Rule” references are to the Federal Rules 25 of Civil Procedure. 26 4 We use the word “apparently” because Reed disputes this 27 proposition. 5 28 Reed told the bankruptcy court, “I am JKR Olive Trust.”

2 1 failure to make plan payments. 2 Meanwhile, while the second chapter 13 case was pending, 3 Reed made additional transfers of ownership interests in the 4 Property. First, he caused the JKR Olive Trust to transfer its 5 interest to Karen Williams as trustee of the JKR Olive Trust,6 6 with Reed as its 100% beneficiary. Later, Reed amended the trust 7 documents to name an entity called Lawson-Currell Centre, LLC 8 (“Lawson-Currell”) as a 10% beneficiary. Lawson-Currell was, at 9 the time, a chapter 11 debtor in a case pending in the Northern 10 District of California. According to a stipulated order entered 11 in that case, Lawson-Currell had no knowledge that it held any 12 interest in the Property. 13 After dismissal of his second case, Reed executed another 14 amendment to the JKR Olive Trust, this time naming Bankers For 15 Real Estate, LLC as a 10% beneficiary. Bankers For Real Estate, 16 LLC filed a chapter 11 petition in the Southern District of 17 California shortly thereafter. That case was dismissed, after 18 which another chapter 11 case was commenced, this time by 19 “Bankers 4 Real Estate, LLC” (which listed “Bankers For Real 20 Estate, LLC” as its alias). After four months, this case was 21 dismissed as well. 22 In 2014, Reed tried unsuccessfully to modify his home loan 23 with the Bank. In 2015, he took a new approach. He wrote to the 24 Bank that he wanted to tender full payment of the amount owing, 25 and he wished to inspect the original note and deed of trust 26 27 6 The significance or purpose, if any, of this transfer from 28 the JKR Olive Trust to its own trustee is unclear.

3 1 before paying. The Bank agreed to permit the inspection of the 2 note and deed of trust in its possession (the “Loan Documents”). 3 At the agreed time, Reed appeared, accompanied by Dr. James 4 Kelley, an electrical and computer engineer who provides computer 5 forensic examination services. Dr. Kelley spent hours examining 6 the Loan Documents and taking extensive notes. He opined that 7 the documents were fabricated. Reed reported Dr. Kelley's 8 suspicions to various law enforcement authorities, but there is 9 no indication in the record that any official action was taken, 10 and Reed took no legal action of his own regarding the alleged 11 fabrication. 12 With foreclosure still looming, Reed filed the underlying 13 chapter 13 case (his third) on November 12, 2015. In his 14 schedules, Reed reported no debts and listed $0 in encumbrances 15 against the Property.7 He asserted he was self-employed as a 16 “facilitator & entertainer” with an average monthly income of 17 $1,550. 18 In his initial plan, he proposed to make monthly payments of 19 $1,000 (even though he purported to have no creditors) for 20 36 months “or until resolution of finding unknown creditor.” In 21 the provision regarding rejection of executory contracts, Reed 22 proposed to reject “New York Community Bank's claim to be a 23 beneficiary of mortgage.” He included a miscellaneous provision 24 7 25 In fact, Reed struck the word “Debtor” every time it appeared on the forms used for his petition, plan and schedules 26 and replaced it with “Petitioner.” As he explained in his plan, 27 “Since I have not been able to identify whether or not there is an actual beneficiary [of the trust deed], I have listed myself 28 as a ‘petitioner’ in this filing.”

4 1 stating his belief that the Bank was not a “legitimate” 2 beneficiary of the deed of trust and that the true beneficiary's 3 identity was unknown. In an amendment to his plan, Reed 4 decreased the proposed monthly payments to $100 but left the 5 other provisions substantively unchanged. 6 The Bank filed a motion for relief from the automatic stay, 7 seeking to proceed with foreclosure, and for an order granting 8 in rem relief against the Property. The Bank submitted with its 9 motion the declaration of one of its employees, setting forth the 10 history of Reed’s transfers of fractional ownership interests in 11 the Property. The Bank further stated that Reed had failed to 12 make his most recent payment on the deed of trust, which had come 13 due following the petition date. 14 Reed filed an opposition to the Bank’s motion, accompanied 15 by a declaration and a voluminous set of exhibits. In his 16 declaration, Reed denied that his current bankruptcy filing was 17 part of a scheme to hinder, delay or defraud creditors. He 18 admitted, however, that his filings were made to prevent 19 foreclosure, which he described as the attempted “theft” of the 20 Property. Included in the attachments to Reed’s declaration were 21 copies of an affidavit signed by Dr. Kelley and an accompanying 22 report, in which Dr. Kelley expressed his opinion that the Loan 23 Documents were not genuine. Reed also argued in his opposition 24 that he received insufficient notice of the upcoming hearing on 25 the relief from stay motion. 26 Nevertheless, Reed appeared at the hearing, and the 27 bankruptcy court rejected his insufficient notice argument, 28 noting that Reed obviously had time to file a detailed opposition

5 1 and was present in court. The court explained that stay relief 2 proceedings were summary, and relief could be granted upon the 3 Bank’s showing that it had a colorable claim to an interest in 4 the Property and that its interest was not adequately protected 5 due to missed payments. The Bank had done this by submitting a 6 declaration from its employee stating that the Bank possessed the 7 original Loan Documents, of which it was the proper beneficiary. 8 The court excluded the statements in Dr. Kelley’s report as 9 unauthenticated hearsay.8 In any event, the Bank was not 10 required to provide definitive proof of its status as 11 beneficiary, but merely to set forth a colorable claim. 12 As to the request for in rem relief, the bankruptcy court 13 noted that Reed effectively conceded the necessary facts when he 14 admitted making multiple transfers of the Property and filing 15 multiple cases for the purpose of preventing foreclosure. The 16 court thus found that Reed had filed the instant case in bad 17 faith for the purpose of hindering, delaying or defrauding the 18 Bank. The court entered an order granting relief from stay, 19 including in rem relief. Reed appealed. 20 The bankruptcy court later dismissed Reed's chapter 13 case. 21 Reed did not appeal the dismissal.9 22 23 8 The bankruptcy court noted that an affidavit was included 24 with Dr. Kelley’s report, but Dr. Kelley had not submitted an independent declaration to the bankruptcy court. 25 9 We exercise our discretion to take judicial notice of the 26 bankruptcy court’s electronic docket. See O’Rourke v. Seaboard 27 Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1988); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 28 (continued...)

6 1 II. JURISDICTION 2 The bankruptcy court had jurisdiction under 3 28 U.S.C. § 157(b)(2)(G). With the qualifications discussed 4 below, we have jurisdiction under 28 U.S.C. § 158. 5 III. ISSUES 6 1. Whether this appeal is moot. 7 2. Whether the bankruptcy court abused its discretion by 8 granting in rem relief. 9 3. Whether the bankruptcy court denied Reed's 10 constitutional rights by holding a hearing on insufficient 11 notice. 12 IV. STANDARDS OF REVIEW 13 We review our own jurisdiction de novo. Franklin High Yield 14 Tax-Free Income Fund v. City of Stockton, Cal. (In re City of 15 Stockton, Cal.), 542 B.R. 261, 272 (9th Cir. BAP 2015). An order 16 granting in rem relief under § 362(d)(4) is reviewed for abuse of 17 discretion. Ellis v. Yu (In re Ellis), 523 B.R. 673, 677 (9th 18 Cir. BAP 2014). A bankruptcy court abuses its discretion if it 19 applies the wrong legal standard, or if its application of the 20 correct legal standard is based on a view of the evidence that is 21 illogical, implausible or unsupported by the record. United 22 States v. Hinkson, 585 F.3d 1247, 1263 (9th Cir. 2009) (en banc). 23 V. DISCUSSION 24 A. Mootness 25 The Bank moved to dismiss this appeal for constitutional and 26 27 9 (...continued) 28 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

7 1 equitable mootness. A motions panel denied the motion to dismiss 2 but limited the scope of the appeal to the issue of in rem 3 relief. In its brief on appeal, the Bank renewed its argument 4 that the appeal should be dismissed. As explained more fully 5 below, we agree with the motions panel that dismissal is not 6 warranted, but the scope of the appeal must be limited to the 7 in rem issue. 8 Generally speaking, there are two varieties of mootness that 9 apply in bankruptcy appeals. First, an appeal is 10 constitutionally moot if circumstances have changed such that the 11 appellate tribunal is incapable of granting relief. Motor 12 Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe 13 Insulation Co.), 677 F.3d 869, 880 (9th Cir. 2012). Second, an 14 appeal is equitably moot if the order on appeal involves complex 15 transactions or the rights of non-parties such that, although 16 relief is possible, granting it would be inequitable. JPMCC 17 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props., Inc. 18 (In re Transwest Resort Props., Inc.), 801 F.3d 1161, 1167 (9th 19 Cir. 2015). 20 Because Reed’s underlying bankruptcy case has been 21 dismissed, the Bank argues that the appeal is constitutionally 22 moot. Under most circumstances, we would agree. Once the 23 underlying case was dismissed, the automatic stay terminated by 24 operation of law. The dismissal of the case is not on appeal, 25 and we are without jurisdiction to reinstate the bankruptcy case, 26 even if we believed it would be proper to do so. Reversing the 27 order granting stay relief would not reimpose the stay or prevent 28 the Bank from foreclosing.

8 1 The flaw in the Bank's argument, however, is the in rem 2 provision in the stay relief order. When a bankruptcy court 3 grants in rem relief under § 362(d)(4), and the order is recorded 4 in accordance with state law, it removes the subject property 5 from the protection of the automatic stay not only in the current 6 case, but in all subsequent bankruptcy cases, regardless of who 7 files them, for the following two years. See § 362(b)(20). 8 Therefore, as the Bank’s counsel acknowledged at oral argument, 9 the dismissal of Reed’s current bankruptcy case does not prevent 10 us from granting some effective relief in the event Reed prevails 11 on the merits of his appeal. It is entirely possible that Reed 12 or someone else claiming an interest in the Property will file 13 another bankruptcy case before the two-year period expires. 14 With respect to equitable mootness, the Ninth Circuit has 15 developed a four-factor test for determining whether an appeal 16 should be dismissed. We must consider: (1) whether a stay was 17 sought, and if so, whether it was obtained; (2) whether 18 substantial consummation has occurred; (3) the effect a remedy 19 would have on the interests of non-parties; and (4) whether any 20 remedy can be granted without creating an unmanageable situation 21 before the bankruptcy court on remand. In re Transwest Resort 22 Props., Inc., 801 F.3d at 1167-68 (citing In re Thorpe Insulation 23 Co., 677 F.3d at 881). 24 The Bank's equitable mootness argument appears to hinge 25 entirely on Reed's failure to seek a stay. The Bank concedes 26 that no non-parties appear to have any interest in the outcome of 27 this appeal, and we are at a loss to imagine how reversal of the 28 in rem order would present the bankruptcy court with an

9 1 unmanageable situation on remand. As to the second element, 2 “substantial consummation” is a concept that relates to the 3 confirmation of plans of reorganization. Because this appeal 4 relates to stay relief, rather than plan confirmation, the 5 appropriate consideration appears to be whether the Bank has 6 completed its foreclosure. The Bank’s counsel represented at 7 oral argument that no foreclosure sale has taken place. 8 It is true that failure to seek a stay pending appeal weighs 9 in favor of a finding of equitable mootness. In re Transwest 10 Resort Props., Inc., 801 F.3d at 1168. But such failure does not 11 always render an appeal moot. Equitable mootness is not a 12 punishment for choosing not to seek a stay. The Ninth Circuit 13 has consistently held that equitable mootness applies only where 14 the order on appeal relates to “complex” transactions that are 15 “difficult to unwind.” Id. at 1167, quoting Rev Op Grp. v. ML 16 Manager LLC (In re Mortgs. Ltd.), 771 F.3d 1211, 1215 n.2 (9th 17 Cir. 2014). The in rem order does not present such a situation. 18 For these reasons, we conclude that the appeal is neither 19 constitutionally nor equitably moot in its entirety, but its 20 scope remains limited to the in rem aspect of the order on 21 appeal. 22 B. The Stay Relief Order 23 1. Standing 24 Throughout his briefs, Reed questions the Bank’s “standing.” 25 Standing is a threshold jurisdictional issue. Veal v. American 26 Home Mtg. Servicing, Inc. (In re Veal), 450 B.R. 897, 906 (9th 27 Cir. BAP 2011). If we were to conclude the Bank lacked standing 28 before the bankruptcy court, it would follow that the court

10 1 lacked jurisdiction to grant in rem relief. Id. For the most 2 part, however, Reed’s “standing” arguments do not relate to this 3 jurisdictional issue. 4 Instead, by arguing the Bank lacks “standing,” Reed 5 primarily appears to mean that the Bank does not have the right 6 to foreclose, because the Loan Documents allegedly are invalid. 7 But the Bank’s standing to request stay relief did not depend on 8 any conclusive determinations regarding the validity of the Loan 9 Documents. As the Ninth Circuit has explained, “hearings on 10 relief from the automatic stay are . . . handled in a summary 11 fashion. . . . The validity of the claim or contract underlying 12 the claim [here, the Loan Documents] is not litigated during the 13 hearing.” Johnson v. Righetti (In re Johnson), 756 F.2d 738, 740 14 (9th Cir. 1985) (emphasis added, internal citation omitted). The 15 bankruptcy court did not make a final determination of the 16 validity of the Loan Documents or the Bank’s right to foreclose. 17 The court merely concluded that the Bank had a colorable claim 18 and removed one obstacle - the automatic stay - standing in the 19 way of foreclosure. 20 Because the Bank’s right to foreclose was not directly at 21 issue in the stay relief proceeding, the Bank was not required to 22 prove that right definitively in order to establish standing. 23 Indeed, the requirements for standing to seek stay relief are 24 “lenient.” In re Veal, 450 B.R. at 913. If a party has a 25 “colorable claim” to enforce a right against estate property, 26 that party has standing to seek stay relief. Id. at 914. More 27 generally, any creditor whose “interests would be harmed by 28 continuance of the stay” may seek relief. Kronemyer v. Am.

11 1 Contractors Indem. Co. (In re Kronemyer), 405 B.R. 915, 921 (9th 2 Cir. BAP 2009). 3 By submitting a declaration from its employee to 4 authenticate the attached Loan Documents, the Bank established a 5 colorable claim to its asserted right to foreclose and thus 6 established standing to seek stay relief. Because the stay 7 prevented the Bank from pursuing foreclosure proceedings, the 8 Bank’s interests were harmed by continuance of the stay. This is 9 true whether or not the Bank ultimately prevails in the 10 foreclosure proceedings, which - we stress again - is a separate 11 question that neither the bankruptcy court nor we must decide. 12 The Bank had standing to request stay relief. 13 2. In rem relief 14 Section 362(d)(4) was added to the Bankruptcy Code in 2005 15 “to address schemes using bankruptcy to thwart legitimate 16 foreclosure efforts through one or more transfers of interest in 17 real property.” First Yorkshire Holdings, Inc. v. Pacifica L 22, 18 LLC (In re First Yorkshire Holdings, Inc.), 470 B.R. 864, 870 19 (9th Cir. BAP 2012). Once in rem relief is granted, if the order 20 is recorded in accordance with applicable state law, the subject 21 property is excluded from the protection of the automatic stay in 22 any bankruptcy case filed within the following two years. This 23 prevents a debtor from circumventing a stay relief order by 24 simply filing another case or transferring the property to 25 another debtor. An in rem order grants “prospective protection 26 against not only the debtor, but also every non-debtor, co-owner, 27 and subsequent owner of the property.” Id. at 871. 28 Because this relief has serious implications, it is

12 1 available only when the bankruptcy court makes affirmative 2 findings that three elements are present: (1) the debtor filed 3 the current case as part of a scheme; (2) the object of the 4 scheme is to hinder, delay or defraud creditors; and (3) the 5 scheme involves either unauthorized transfers of the property or 6 multiple bankruptcy filings affecting the property. Id. at 7 870-71. 8 The bankruptcy court made the necessary findings to support 9 in rem relief. Specifically, it found that Reed caused multiple 10 transfers of the Property without the Bank’s authorization, that 11 he filed or caused to be filed multiple cases involving the 12 Property, and that he did these things for the purpose of 13 preventing, i.e., hindering, the Bank from foreclosing. Though 14 the court did not use the word “scheme” to describe Reed's 15 actions, the stated findings leave us in no doubt that the court 16 found this element to be present.10 17 The record supports all of these findings. Indeed, Reed 18 admitted the necessary facts in his own declaration: “I declare 19 that this filing and all previous filings have been done for the 20 sole purpose of trying to protect myself from the theft of my 21 property.” It is clear from the context that the “theft” to 22 which Reed referred was the Bank’s foreclosure. 23 10 The bankruptcy court found that the various transfers and 24 filings were “done for the sole purpose of trying to protect the 25 Debtor from [what he considered to be] the theft of his property.” Based on Reed's history of filings, the court further 26 found that he did not file the present case in good faith. The 27 finding of a persistent, purposeful effort to accomplish a goal that is pursued in bad faith satisfies the “scheme” element of 28 § 362(d)(4).

13 1 Reed obviously believes that the Bank has no right to 2 foreclose, that it has violated state law by attempting to do so, 3 and that he therefore is morally justified in trying to stop the 4 foreclosure. These beliefs, however earnestly held, do not 5 exempt him from the application of § 362(d)(4). If the Bank has 6 done anything to violate the law in relation to the Property, it 7 is incumbent upon Reed to raise that argument in a forum capable 8 of entertaining it.11 Repeatedly invoking the automatic stay, 9 without any apparent intention of restructuring debts or 10 obtaining a discharge, is not a legitimate alternative. 11 The bankruptcy court did not abuse its discretion by 12 granting in rem relief. 13 C. Due Process 14 Finally, we must address Reed’s arguments that the 15 procedures employed by the bankruptcy court violated his 16 constitutional right to due process of law.12 17 Reed argued before the bankruptcy court that he received 18 insufficient notice of the stay relief proceeding, because he 19 received the notice and motion less than 20 days before the 20 11 The parties represented at oral argument that Reed 21 recently commenced civil litigation against the Bank in relation 22 to the Loan Documents. 23 12 Reed refers to both due process and equal protection of the laws, but he does not raise any specific arguments relating 24 to equal protection. We address all of Reed’s constitutional 25 arguments under the rubric of due process. Reed also suggests in his opening brief that his due process 26 rights were violated in connection with the dismissal of his 27 bankruptcy case. This appeal pertains only to the order granting stay relief. The order dismissing the case was not appealed, and 28 we have no jurisdiction to review it.

14 1 hearing. We agree with the bankruptcy court, based on the Bank’s 2 certificate of service, that proper notice was provided. More 3 importantly, the fact that Reed was able to prepare a lengthy 4 opposition to the motion demonstrates that he had sufficient 5 notice of the proceeding. The Constitution requires “notice 6 reasonably calculated, under all the circumstances, to apprise 7 interested parties of the action and afford them an opportunity 8 to present their objection.” Mullane v. Cent. Hanover Bank & Tr. 9 Co., 339 U.S. 306, 314 (1950); Espinosa v. United Student Aid 10 Funds, Inc., 553 F.3d 1193, 1202 (9th Cir. 2008), aff’d sub nom 11 United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010). 12 When a party receives actual notice, this standard is satisfied. 13 Id. at 1203. Reed both responded to the motion and appeared at 14 the hearing. He does not identify anything more he would have 15 done if he had received notice earlier. 16 Next, Reed argues that the bankruptcy court violated his due 17 process rights by “ignoring” Dr. Kelley’s report, which Reed 18 attached to his declaration. In fact, the bankruptcy court did 19 not ignore the report but rather excluded it on grounds of 20 hearsay and lack of proper authentication. More importantly, as 21 discussed above, the bankruptcy court was not required to make 22 any conclusive findings as to the validity of the Loan Documents. 23 It therefore was not necessary for the bankruptcy court to 24 consider Dr. Kelley’s unauthenticated opinion on that subject.13 25 26 13 Prior to oral argument, Reed submitted an addendum to his 27 briefs on appeal, to which he attached a new declaration from Dr. Kelley. This declaration was not before the bankruptcy court 28 (continued...)

15 1 We do not perceive any due process violation in the decision to 2 exclude the report. 3 Otherwise, Reed argues that his “right to an unbiased 4 tribunal” somehow was violated. He does not articulate any basis 5 for concluding that the bankruptcy court was biased, apart from 6 the fact that it ruled against him and in favor of the Bank. 7 “[J]udicial rulings alone almost never constitute a valid basis” 8 for demonstrating bias. Liteky v. United States, 510 U.S. 540, 9 555 (1994). Our review of the record discloses no basis for 10 questioning the bankruptcy court’s impartiality. 11 VI. CONCLUSION 12 Based upon the foregoing, we conclude that the bankruptcy 13 court did not abuse its discretion or otherwise err in entering 14 the in rem order. We AFFIRM. 15 16 17 18 19 20 21 22 23 24 25 13 (...continued) 26 and is not part of the record on appeal. Accordingly, we do not 27 consider it. See Wilcox v. Parker (In re Parker), 477 B.R. 570, 577 n.10 (9th Cir. BAP 2012) (declining to consider documents not 28 presented to the bankruptcy court).