In re: MATHON FUND, LLC

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: October 9, 2012
• Docket: AZ-11-1633-JuHlD
• Status: Unpublished

Opinion

FILED OCT 09 2012 1 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. AZ-11-1633-JuHlD ) 6 MATHON FUND, LLC, et al., ) Bk. No. 2:05-bk-27993-GNB ) 7 Debtor. ) ______________________________) 8 ) GEORGE AND SUSAN TINDALL, ) 9 ) Appellants, ) 10 ) v. ) M E M O R A N D U M* 11 ) MATHON FUND, LLC, et al., ) 12 ) Appellee. ) 13 ______________________________) 14 Argued and Submitted on September 20, 2012 at Phoenix, Arizona 15 Filed - October 9, 2012 16 Appeal from the United States Bankruptcy Court 17 for the District of Arizona 18 Honorable George B. Nielsen, Jr., Bankruptcy Judge, Presiding _____________________________________ 19 Appearances: Sean Patrick O’Brien, Esq. of Gust Rosenfeld PLC 20 argued for appellants George and Susan Tindall; Neal H. Bookspan, Esq. of Jaburg & Wilk, P.C. 21 argued for appellee Mathon Fund, LLC. ____________________________________ 22 Before: JURY, HOULE**, and DUNN Bankruptcy Judges. 23 24 * 25 This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may 26 have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1. 27 ** Hon. Mark D. Houle, Bankruptcy Judge for the Central 28 District of California, sitting by designation.

-1- 1 George and Susan Tindall appeal from the bankruptcy court’s 2 order denying their Motion to Confirm that the Automatic Stay 3 Does Not Apply, or in the Alternative, to Allow for Nunc Pro 4 Tunc Relief From the Automatic Stay (the “Motion for Relief”). 5 We AFFIRM. 6 I. FACTS 7 On July 14, 2003, Aircraft Seal & Gasket Corporation 8 (“ASGC”), as maker, entered into a promissory note (the “Note”) 9 with Mathon Fund, LLC (“Mathon” or “Debtor”) in the principal 10 amount of $500,000. The repayment terms provided for payment of 11 $625,000 in four months. Herbert Menold (“Herbert”) and Wilbur 12 Hanley (“Wilbur”), principals of ASGC, personally guaranteed the 13 loan. The loan was secured with business assets of ASGC, and 14 Herbert’s guarantee was secured by real property owned by 15 Herbert. 16 In addition, Herbert’s wife, Rene Role Menold (“Rene”), 17 executed a Deed of Trust dated July 16, 2003 (the “Mathon Deed 18 of Trust”), pledging her sole and separate property located in 19 Corona del Mar, California (the “Property”) as collateral for 20 the Note. On August 12, 2003, the Mathon Deed of Trust was 21 filed as Instrument No. 2003-000970041 with the Recorder’s 22 Office for the County of Orange, California. 23 ASGC defaulted on the loan. Herbert and Wilbur executed an 24 extension agreement on March 26, 2004, increasing the repayment 25 amount to $771,250. 26 In February 2005, Rene contracted to sell the Property to 27 the Tindalls. In March 2005, Mathon received a letter from 28 Chicago Title Insurance Company advising that the Menolds were

-2- 1 selling the Property to the Tindalls and requesting that Mathon 2 release the Mathon Deed of Trust. Mathon declined the request 3 because the Note had not been paid off. 4 During this time frame, the Arizona Corporation Commission 5 commenced a state court action against Mathon. On April 5, 6 2005, James Sell (“Sell”) was appointed as the receiver for 7 Mathon in that action. 8 The California Action 9 On July 20, 2005, Rene filed suit against Mathon in the 10 United States District Court, Central District of California 11 (Case No. SACV05-698-AHS), alleging that Mathon’s lien against 12 the Property was invalid and requesting, among other things, an 13 order rescinding the lien (the “California Action”). 14 Rene applied for permission to serve Mathon pursuant to 15 Civil Rule 4(h)(1)1 which authorizes service of process on a 16 limited liability company under the law of the state in which 17 the federal district is located. Cal. Corp. Code § 17061(c)(1)2 18 1 19 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, 20 “Rule” references are to the Federal Rules of Bankruptcy Procedure, and “Civil Rule” references are to the Federal Rules 21 of Civil Procedure. 22 2 This section provides in relevant part: 23 If an agent for service of process has resigned and has 24 not been replaced or if the designated agent cannot with reasonable diligence be found at the address 25 designated for personal delivery of the process, and it 26 is shown by affidavit to the satisfaction of the court that process against a limited liability company or 27 foreign limited liability company cannot be served with reasonable diligence upon the designated agent by hand 28 (continued...)

-3- 1 authorizes service on a foreign limited liability company by and 2 through service on the California Secretary of State. The 3 district court entered an order granting Rene’s request. 4 Mathon failed to appear or respond to Rene’s complaint. 5 Accordingly, the clerk entered a default against it on 6 September 13, 2005. Rene subsequently moved the district court 7 to enter a default judgment against Mathon declaring its lien 8 against the Property invalid. The district court entered a 9 default judgment against Mathon on November 28, 2005. Rene 10 recorded the default judgment in the county records, which 11 cleared Mathon’s purported lien from the Property’s title 12 record. 13 The Sale of the Property to the Tindalls 14 The Tindalls, relying on a clear title report, proceeded to 15 purchase the Property for $1,750,000. In December 2005, Rene 16 transferred the Property to the Tindalls. 17 The Tindalls financed their purchase of the Property 18 through Provident Savings Bank (“Provident”), which recorded its 19 2 20 (...continued) in the manner provided in Section 415.10, subdivision 21 (a) of Section 415.20, or subdivision (a) of Section 415.30 of the Code of Civil Procedure, the 22 court may make an order that the service shall be made 23 upon a domestic limited liability company or upon a registered foreign limited liability company by 24 delivering by hand to the Secretary of State, or to any person employed in the Secretary of State’s office in 25 the capacity of assistant or deputy, one copy of the 26 process for each defendant to be served, together with a copy of the order authorizing the service. Service 27 in this manner shall be deemed complete on the 10th day after delivery of the process to the Secretary of 28 State.

-4- 1 Deed of Trust against the property on that same date. Provident 2 paid off the first deed of trust of Washington Mutual, but did 3 not pay off the Mathon Deed of Trust. In December 2005, 4 Provident sold the loan and deed of trust relating to the 5 Property to Countrywide Home Loans (“Countrywide”). 6 The Bankruptcy Filing 7 Unbeknownst to Rene, before the district court entered the 8 default judgment in the California Action, Mathon filed a 9 voluntary petition under chapter 11 on November 13, 2005. Sell, 10 who was acting as receiver, was appointed as conservator for 11 Mathon. 12 The Adversary Proceeding 13 On August 25, 2006, Countrywide filed an adversary 14 complaint against Mathon seeking a determination as to its legal 15 interest in the Property vis-a-vis Mathon. Mathon answered the 16 complaint on September 26, 2006. On that same date, Mathon 17 filed its third-party complaint against Ticor Title Insurance 18 Company of California, Ticor Title, and United Title Company 19 (collectively, the “Title Companies”), Herbert and Rene, and the 20 Tindalls, as well as a counterclaim against Countrywide. In its 21 counterclaim and third-party complaint, Mathon sought a 22 determination as to whether the Mathon Deed of Trust was valid 23 and remained a lien against the Property and whether the Mathon 24 Deed of Trust, which had been recorded prior in time to 25 Countrywide’s lien, had priority over Countrywide’s lien. 26 In Count Five, asserted only against Rene, Mathon alleged 27 that entry of the default judgment in the California Action 28 violated the automatic stay. In connection with Count Five,

-5- 1 Mathon requested a declaration that the judgment was void and 2 also sought damages for the stay violation. 3 Counsel representing both the Title Companies and the 4 Tindalls filed an answer to the third-party complaint on 5 October 20, 2006. Herbert and Rene answered on November 6, 6 2006. 7 On May 30, 2008, Mathon filed a motion for partial summary 8 judgment on Count Five of its third-party complaint. On 9 August 14, 2008, the Menolds responded by filing a stipulation 10 wherein Rene agreed that the judgment obtained in the California 11 Action was void. As part of the stipulation, Rene was dismissed 12 from the adversary proceeding without prejudice. 13 On August 15, 2008, the bankruptcy court entered an order 14 stating that the default judgment entered against Mathon on 15 November 28, 2005 by the district court was void. 16 The Tindalls’ Motion for Relief 17 Over three years later, on August 25, 2011, the Tindalls 18 filed the Motion for Relief. The Tindalls argued that the 19 prepetition entry of default against Mathon in the California 20 Action rendered Mathon’s claimed lien invalid under Ninth 21 Circuit law. The Tindalls reasoned that because a defaulting 22 party has no right to dispute the issue of liability after entry 23 of default, it followed that the mere entry of default 24 conclusively and irrevocably established that Mathon’s lien was 25 invalid. Alternatively, the Tindalls sought nunc pro tunc 26 relief from stay for entry of the default judgment based on 27 essentially the same reasoning. In their reply, the Tindalls 28 maintained that nunc pro tunc relief was appropriate under the

-6- 1 factors set forth in Fjeldsted v. Lien (In re Fjeldsted), 2 293 B.R. 12 (9th Cir. BAP 2003). 3 On October 25, 2011, the bankruptcy court held a hearing on 4 the Motion for Relief. Debtor argued that it was inequitable to 5 grant the relief requested because the motion was untimely. 6 Debtor maintained that the Tindalls had been parties to the 7 adversary proceeding since 2006 but waited more than three years 8 after the stipulation was entered into and more than five years 9 into the litigation to bring their motion. Debtor argued that 10 it would be “very prejudicial” to it and to the remaining 11 creditors when numerous out-of-state depositions had been taken, 12 the deadline for filing summary judgment motions had passed, and 13 the parties had engaged in extensive briefing on subrogation. 14 The bankruptcy court determined that it was not appropriate 15 to grant nunc pro tunc relief under the circumstances of the 16 case. The court found that the Tindalls, who were not parties 17 to the California Action, were in essence seeking to set aside 18 the stipulation entered into between Rene and Sells stating that 19 the default judgment was void. The court observed that the 20 Tindalls waited more than three years after the stipulation was 21 entered into and more than five years after the adversary 22 proceeding was filed to seek retroactive relief from the stay. 23 In addition, the court considered that the unwinding of the 24 stipulation at that late date would have a negative effect on 25 the creditors of the estate. In the end, the bankruptcy court 26 stated that “the relief requested here really is an end run 27 around the stipulation and that’s why I’m going to deny it.” 28 Hr’g Tr. at 16:23-24, Oct. 25, 2011.

-7- 1 The bankruptcy court entered the order denying the 2 Tindalls’ Motion for Relief on October 26, 2011. The Tindalls 3 timely appealed. 4 II. JURISDICTION 5 The bankruptcy court had jurisdiction over this proceeding 6 under 28 U.S.C. §§ 1334 and 157(b)(2)(G). We have jurisdiction 7 under 28 U.S.C. § 158. 8 III. ISSUE 9 Whether the bankruptcy court abused its discretion in 10 denying the Tindalls’ motion for the retroactive annulment of 11 the stay. 12 IV. STANDARD OF REVIEW 13 A bankruptcy court’s decision to deny retroactive relief 14 from the automatic stay is reviewed for an abuse of discretion. 15 Nat’l Envtl. Waste Corp. v. City of Riverside (In re Nat’l 16 Envtl. Waste Corp.), 129 F.3d 1052 (9th Cir. 1997). A 17 bankruptcy court abuses its discretion if it applied the wrong 18 legal standard or its findings were illogical, implausible or 19 without support in the record. TrafficSchool.com, Inc. v. 20 Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011). 21 V. DISCUSSION 22 When Mathon filed its bankruptcy petition the automatic 23 stay under § 362(a) went into effect. “The automatic stay is 24 self-executing” and “sweeps broadly, enjoining the commencement 25 or continuation of any judicial . . . proceedings against the 26 debtor. . . .” Gruntz v. Cnty. of L.A. (In re Gruntz), 202 F.3d 27 1074, 1081-82 (9th Cir. 2000) (en banc). Here, the district 28 court’s entry of the default judgment after Mathon had filed its

-8- 1 bankruptcy case was a continuation of a judicial proceeding in 2 violation of the stay. § 362(a)(1). Actions “taken in 3 violation of the automatic stay are void.” Id. at 1082 (citing 4 Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571 5 (9th Cir. 1992)). 6 However, under § 362(d)(1), the bankruptcy court has wide 7 discretion to declare a default judgment taken in violation of 8 the stay valid if “cause” exists for retroactive annulment of 9 the stay. In re Schwartz, 954 F.2d at 572. In analyzing 10 whether “cause” exists to annul the stay under § 362(d)(1), the 11 bankruptcy court is required to balance the equities of the 12 creditor’s position in comparison with that of the debtor. 13 In re Nat’l Envtl. Waste Corp., 129 F.3d at 1055. Under this 14 approach, the bankruptcy court considers (1) whether the 15 creditor was aware of the bankruptcy petition and automatic 16 stay; and (2) whether the debtor engaged in unreasonable or 17 inequitable conduct. Id. at 1055–56. 18 Additional factors for consideration include the number of 19 bankruptcy filings by the debtor; the extent of any prejudice, 20 including to a bona fide purchaser; the debtor’s overall good 21 faith; the debtor’s compliance with the Code; the relative ease 22 of restoring parties to the status quo ante; the costs of 23 annulment to debtors and creditors; how quickly the creditor 24 moved for annulment; whether annulment will cause irreparable 25 injury to the debtor; and whether stay relief will promote 26 judicial economy or other efficiencies. In re Fjeldsted, 27 293 B.R. at 25. “In any given case, one factor may so outweigh 28 the others as to be dispositive.” Id.; see also Williams v. Levi

-9- 1 (In re Williams), 323 B.R. 691 (9th Cir. BAP 2005). Balancing 2 the equities of the case requires the bankruptcy court to reach 3 an equitable conclusion rather than a factual or legal one. See 4 Graves v. Myrvang (In re Myrvang), 232 F.3d 1116, 1121 (9th Cir. 5 2000) (citing Bank of Honolulu v. Anderson (In re Anderson), 6 833 F.2d 834, 836 (9th Cir. 1987) (per curiam) (appellate courts 7 use the abuse of discretion standard to review bankruptcy 8 court’s equitable actions)). 9 On appeal, the Tindalls argue that the bankruptcy court 10 incorrectly determined that: (1) their Motion for Relief was an 11 attempt to overturn the stipulation; (2) the stipulation was 12 binding on the Tindalls; and (3) as a result, the Tindalls were 13 foreclosed from requesting nunc pro tunc relief. They also 14 maintain that the court erred by refusing to recognize the 15 effect of the prepetition entry of default which established 16 that Mathon’s lien was invalid and provided an additional ground 17 for granting nunc pro tunc relief. We disagree with these 18 contentions. 19 We first note that the Tindalls concede what the 20 stipulation says, i.e., that the default judgment against Mathon 21 was obtained in violation of the stay and is void. Hr’g Tr. at 22 3:4-6, Oct. 25, 2011. Therefore, it is not particularly 23 relevant whether the stipulation was binding on the Tindalls for 24 purposes of this appeal. 25 By the time the Tindalls’ annulment request was made, the 26 balance of equities had tipped heavily against the Tindalls 27 because of their delay in seeking relief. The record shows that 28 the Tindalls were parties to the third-party complaint and

-10- 1 counterclaim filed by Mathon since 2006. Yet, the Tindalls 2 waited until five years into the litigation and three years 3 after the court-approved stipulation to move for retroactive 4 annulment of the stay. Why the Tindalls failed to take any 5 action prior to when they did remains unexplained.3 6 The record shows that the bankruptcy court properly 7 balanced the Tindalls’ delay against the interests of Debtor and 8 the other parties to the litigation. Since the beginning of the 9 case, the parties expended fees and costs by taking out-of-state 10 depositions and by engaging in extensive briefing on subrogation 11 issues before the bankruptcy court. These actions were costly 12 to the bankruptcy estate. The progression of the litigation for 13 three years after the entry of the stipulation implicitly 14 demonstrates that the parties relied on its declaration that the 15 default judgment was void. Therefore, according to the 16 bankruptcy court, under these circumstances, it was simply too 17 late to allow the Tindalls to override the stipulation. We 18 cannot say that the court abused its discretion in this 19 analysis. 20 The bankruptcy court also balanced the impact of the 21 Tindalls’ relief request on the other creditors of the estate. 22 The Tindalls argued that they were bona-fide purchasers of the 23 Property and should not be “punished” to pay the other defrauded 24 3 At the hearing on this matter, the Tindalls’ attorney made 25 an offer of proof that the delay was based on a number of pending 26 motions that would obviate the need for their motion. As none of the relevant documents are in the record on appeal, we are unable 27 to determine whether the Tindalls’ delay was warranted, even assuming it was raised in the bankruptcy court and properly 28 before us.

-11- 1 creditors of the Ponzi scheme implemented by Debtor. The court 2 observed that in Ponzi scheme cases, the bankruptcy law sought 3 to treat all the victims approximately the same. The court 4 noted that this policy would be upset if it granted the Tindalls 5 retroactive relief. Again, we cannot say that the court abused 6 its discretion in this analysis. 7 Finally, the Tindalls sought retroactive annulment of the 8 stay on the ground that the clerk’s prepetition entry of default 9 established Debtor’s liability, and thus retroactive relief 10 would allow the Tindalls to go back to the district court to 11 seek reentry of the default judgment, which would be nothing 12 more than a mere formality and ministerial act.4 In considering 13 the Tindalls’ argument, the record shows that the bankruptcy 14 court balanced the prejudice to Debtor of allowing strangers to 15 the California Action to go back into the district court to seek 16 reentry of the default judgment. The court was also concerned 17 with whether the estate would have the ability to go before the 18 district court and ask for entry of the default to be withdrawn. 19 4 20 Although entry of default may establish liability, contrary to the Tindalls’ assertion, the entry of a default 21 judgment by the court is not simply a ministerial act. Under Civil Rule 55(b), a federal court may enter a default judgment 22 against a party who has failed to plead or otherwise defend. 23 Under the rule, “[t]he court may conduct hearings or make referrals . . . when, to effectuate judgment, it needs to: 24 (A) conduct an accounting; (B) determine the amount of damages; (C) establish the truth of any allegation by evidence; or 25 (D) investigate any other matter.” Civil Rule 55(b)(2). Thus, 26 entry of a default judgment is discretionary, Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980), and “may be refused where 27 the court determines no justifiable claim has been alleged or that a default judgment is inappropriate for other reasons.” 28 Doe v. Qi, 349 F.Supp.2d 1258, 1271 (N.D. Cal. 2004).

-12- 1 Accordingly, the bankruptcy court did not find retroactive 2 annulment of the stay was appropriate in light of the fact that 3 the Tindalls were not involved in the California Action and 4 Rene, the violator of the stay, agreed that the default judgment 5 was void through a stipulation signed three years prior to the 6 Tindalls’ Motion for Relief. 7 In sum, a bankruptcy court has “wide latitude” in granting 8 or denying a request for retroactive annulment of the stay. 9 In re Schwartz, 954 F.2d at 572; In re Fjeldsted, 293 B.R. at 10 21. The record shows that the bankruptcy court properly 11 balanced the equities in refusing to annul the stay 12 retroactively. Indeed, the court considered the Tindalls’ delay 13 in bringing their Motion for Relief to be an almost dispositive 14 factor. In reality, a consequence of overturning the bankruptcy 15 court’s decision would only perpetuate the delay in resolving 16 this proceeding. 17 VI. CONCLUSION 18 Accordingly, we conclude that the bankruptcy court did not 19 err in denying the Tindalls’ Motion for Relief and AFFIRM. 20 21 22 23 24 25 26 27 28

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