In re: Shaver Lakewoods Development Inc.

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: July 6, 2016
• Docket: EC-15-1312-TaJuD
• Status: Unpublished

Opinion

FILED JUL 06 2016 1 NOT FOR PUBLICATION 2 SUSAN M. SPRAUL, CLERK U.S. BKCY.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. EC-15-1312-TaJuD ) 6 SHAVER LAKEWOODS DEVELOPMENT ) Bk. No. 1:11-bk-62509 INC., ) 7 ) Adv. No. 1:14-ap-1076 Debtor. ) 8 ______________________________) ) 9 VERLYN GAINES, ) ) 10 Appellant, ) ) 11 v. ) MEMORANDUM* ) 12 RANDELL PARKER, Chapter 7 ) Trustee, ) 13 ) Appellee. ) 14 ______________________________) 15 Argued and Submitted on June 23, 2016 at Sacramento, California 16 Filed – July 6, 2016 17 Appeal from the United States Bankruptcy Court 18 for the Eastern District of California 19 Honorable Fredrick E. Clement, Bankruptcy Judge, Presiding 20 Appearances: Robert H. Brumfield, III of Brumfield & Hagan, 21 LLP argued for Appellant; Lisa Anne Holder of Klein Denatale Goldner Cooper Rosenlieb & 22 Kimball, LLP argued for Appellee. 23 Before: TAYLOR, JURY, and DUNN, Bankruptcy Judges. 24 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8024-1(c)(2). 1 INTRODUCTION 2 Appellant Verlyn Gaines appeals from a judgment determining 3 that he did not hold a secured lien against real property owned 4 by debtor Shaver Lakewoods Development, Inc. and subsequently 5 sold by the chapter 71 trustee. 6 We AFFIRM the bankruptcy court. 7 FACTS 8 Prepetition, Gaines provided lines of credit and other 9 financing to the Debtor in connection with the development of a 10 planned community in Shaver Lake, California. Although there 11 were no formal agreements in place, the parties generally agreed 12 that Gaines would be repaid from the proceeds of lots when 13 developed and sold. The Debtor subsequently sold or transferred 14 several of the lots clandestinely; Gaines received none of the 15 proceeds. 16 After Gaines’ discovery of these transfers, the parties 17 addressed his obvious concern through an “Assignment of 18 Proceeds,” followed by an amendment thereto (jointly, the 19 “Assignment”). Under the Assignment, the Debtor granted to 20 Gaines right, title, and interest in partial net sale proceeds 21 of 13 lots (collectively, the “Property”); specifically, Gaines 22 was to receive $35,000 from each of the first six lot sales and 23 $70,000 from each of the next seven lot sales, until Gaines 24 received payment in full of all amounts owed on account of the 25 loans and payment of a substantial finders fee. 26 27 1 Unless otherwise indicated, all chapter and section 28 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

2 1 The use of the Assignment, as opposed to a trust deed, to 2 collateralize the Debtor’s obligations to Gaines was a 3 considered choice. The Property was subject to an existing deed 4 of trust, and it contained a due on encumbrance acceleration 5 clause; the first position lender was entitled to require 6 immediate payment of the entire amount due on its note if the 7 Debtor allowed recordation of a junior lien on the Property. 8 And there was no question that the first position lender took 9 its acceleration rights seriously; it specifically warned the 10 parties that it would accelerate if Gaines recorded a trust 11 deed. 12 When executed, the Assignment included an attachment 13 describing the Property by legal description. After execution, 14 Gaines recorded the Assignment with the Fresno County recorder. 15 He failed, however, to perfect any personal property security 16 interest provided by the Assignment through a California 17 secretary of state filing. 18 The Debtor sold nine homes prepetition and paid Gaines as 19 provided by the Assignment.2 The Trustee sold the remaining 20 homes after the Debtor filed its chapter 7 case.3 Gaines 21 asserted a secured claim in the bankruptcy case in the amount of 22 $280,000, based on the Assignment, and claimed entitlement to 23 2 24 Indeed, Gaines signed partial releases with the title company to obtain the funds. 25 3 Instead of selling the remaining lots, the Debtor 26 transferred them to insiders and then filed for bankruptcy. 27 Once in bankruptcy, the Trustee recovered the transferred lots pursuant to § 550 and obtained authorization to sell the lots 28 free and clear of the insiders’ liens.

3 1 the postpetition lot sale proceeds. The Trustee thereafter 2 commenced an adversary proceeding against Gaines to determine 3 his entitlement, if any, to the proceeds of the postpetition 4 sales. 5 In his adversary complaint, the Trustee asserted that 6 Gaines did not have a lien against the sale proceeds enforceable 7 against the Trustee pursuant to §§ 544(a)(l)-(3) and 552 and 8 that the Assignment was not a lien against the Property; that 9 the Debtor’s obligations to Gaines were barred by the California 10 statute of limitations as of the petition date; that the finders 11 fee was barred as a matter of law under California law because 12 Gaines was not a licensed broker; and that any debt owed to 13 Gaines was not secured by the sale proceeds of the Property. 14 Gaines sought declaratory relief by counterclaim; he 15 claimed a security interest in all sale proceeds of the Property 16 pursuant to the Assignment and asserted clear title to the lots 17 could not pass until he was paid. Gaines based his assertion of 18 a secured claim exclusively on an alleged lien encumbering the 19 Property itself; he expressly disclaimed any lien on personal 20 property. And he took this position consistently throughout the 21 bankruptcy case and now on appeal. 22 The bankruptcy court bifurcated the trial and first 23 determined whether the Assignment created a lien against the 24 Property securing Gaines’ claim. After trial, it decided the 25 issue in favor of the Trustee. It found that the Assignment did 26 not describe the Property particularly as collateral or reflect 27 an intent to encumber it; instead, the Assignment provided a 28 security interest in the personal property proceeds from sale of

4 1 the Property. The bankruptcy court noted that Gaines expressly 2 disclaimed a lien against personal property. And the bankruptcy 3 court reached the obvious conclusion that Gaines failed to 4 perfect any personal property security interest, and, thus, any 5 personal property security interest was subject to set aside 6 under § 544. 7 Following entry of judgment in favor of the Trustee, Gaines 8 timely appealed. 9 JURISDICTION 10 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 11 §§ 1334 and 157(b)(2)(A) and (K). We have jurisdiction under 12 28 U.S.C. § 158. 13 ISSUES 14 Whether the bankruptcy court erred in determining that the 15 Assignment did not create a lien against the Property and, thus, 16 that Gaines’ claim was not secured by the Property. 17 STANDARDS OF REVIEW 18 We review the bankruptcy court’s legal conclusions de novo. 19 See Los Angeles Cnty. Treasurer & Tax Collector v. Mainline 20 Equip., Inc. (In re Mainline Equip., Inc.), 539 B.R. 165, 167 21 (9th Cir. BAP 2015). Interpretation of the Assignment is 22 governed by California law. Under California law, we review 23 issues of contract interpretation de novo. See Speirs v. 24 Bluefire Ethanol Fuels, Inc., 243 Cal. App. 4th 969, 984 (2015). 25 We may affirm the decision of the bankruptcy court on any 26 basis supported by the record. See Hooks v. Kitsap Tenant 27 Support Servs., Inc., 816 F.3d 550, 554 (9th Cir. 2016). 28 ///

5 1 DISCUSSION 2 Gaines concisely advances three arguments on appeal: first, 3 that the Assignment gave rise to a mortgage under California law 4 and, thus, created a lien in his favor against the Property. 5 Second, that, in the alternative, an equitable mortgage existed 6 under California law, resulting in a lien against the Property. 7 And, third, that the Trustee was not a bona fide purchaser 8 because the Assignment was recorded. 9 The bankruptcy court determined that the Assignment did not 10 give rise to a mortgage against the Property. We agree. 11 In California, a mortgage is “a contract by which specific 12 property . . . is hypothecated for the performance of an act, 13 without the necessity of a change of possession.” Cal. Civ. 14 Code § 2920(a). Here, a plain reading of the Assignment fails 15 to establish that the debt owed to Gaines would be secured by 16 the Property. Save for one immaterial reference,4 there is 17 absolutely no reference to security, collateral, pledge, lien, 18 or hypothecation of the Property itself. 19 This is not surprising; Gaines acknowledged that the 20 parties deliberately refrained from executing a traditional deed 21 of trust because of the first position lender’s warning that a 22 junior trust deed would trigger the acceleration clause in the 23 senior trust deed. While a particular form is not required to 24 create a mortgage, it is axiomatic that the real property 25 hypothecated in the document must be clearly identified as 26 4 27 Section 6 provides that “[t]he title to the Assigned Proceeds has in no way been previously transferred in whole or 28 in part for the purpose of sale or security.” (Emphasis added).

6 1 providing security for the subject debt. 2 Gaines argues that the Assignment clearly describes the 3 Property through the attachment containing a legal description 4 of the Property. But the Assignment’s only reference to this 5 attachment is the following: “[The Debtor] owns and is 6 developing that certain real property known as Shaver Lake Woods 7 Development, (the ‘Development’). The remaining unsold lots are 8 legally described in Exhibit ‘A’ attached hereto and 9 incorporated herein by reference as if fully set forth at 10 length[.]” This description may describe the Property, but it 11 does not delineate the collateral provided by the Assignment, 12 and, in isolation or in concert with the Assignment’s clear 13 language, it falls short of a hypothecation of the Property 14 itself. 15 Instead, the Assignment reflects that Gaines obtained only 16 a security interest in the sale proceeds of the Property. This 17 is an interest in personal property, but Gaines expressly 18 disclaimed any such security interest both before the bankruptcy 19 court and on appeal. As a result, we need not and do not 20 consider his rights, if any, to a personal property secured 21 claim. 22 Gaines next argues, in the alternative, that the Assignment 23 created an equitable mortgage against the Property. In 24 California: 25 [E]very express executory agreement in writing, whereby the contracting party sufficiently indicates 26 an intention to make . . . property . . . a security for a debt or other obligation . . . creates an 27 equitable lien upon the property so indicated, which is enforceable against the property in the hands not 28 only of the original contractor, but of his . . .

7 1 purchasers or encumbrancers with notice. 2 Clayton Dev. Co. v. Falvey, 206 Cal. App. 3d 438, 443 (1988).5 3 “[A] promise to give a mortgage or a trust deed on 4 . . . property as security for a debt will be specifically 5 enforced by granting an equitable mortgage.” Id. at 443. In 6 other words, “[a]n agreement that . . . property is security for 7 a debt also gives rise to an equitable mortgage even though it 8 does not constitute a legal mortgage.” Id. at 443-44. And, 9 importantly, “[s]pecific mention of a security interest is 10 unnecessary if it otherwise appears that the parties intended to 11 create such an interest.” Id. 12 Here, the parties were aware of the first position lender’s 13 intent to invoke the acceleration clause if a junior lien was 14 recorded against the Property. They crafted the Assignment to 15 circumvent this problem and by its plain language agreed not to 16 create a mortgage or a security interest in real property. This 17 was not an instance of mistake or defect. A litigant that seeks 18 equity must do equity. Gaines cannot now seek an equitable 19 mortgage, when the Assignment is inconsistent with his claim of 20 a lien on real property and when the mortgage he now seeks would 21 have constituted a knowing impingement on the contractual rights 22 of a third party. 23 24 5 See also 5 Miller and Starr, Cal. Real Est. § 13:31 (4th 25 ed.) (“An ‘equitable mortgage’ is one that is created by a court of equity rather than by the formal act of the parties. Under 26 certain circumstances, the court determines that equity, 27 fairness, and justice warrant enforcement of a security interest between the parties despite the fact that no formal mortgage was 28 created or that an attempted creation was defective.”).

8 1 Given that the Assignment did not supply Gaines with a lien 2 against the Property and Gaines’ affirmative abandonment of any 3 personal property secured claim, the bankruptcy court correctly 4 concluded that Gaines’ claim was unsecured. Thus, we need not 5 and do not examine the issue of whether the Trustee was a bona 6 fide purchaser for the purposes of lien avoidance. 7 CONCLUSION 8 Based on the foregoing, we AFFIRM. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28