40235 Washington St. Corp. v. W.C. Lusardi

• Decision Date: 10 October 2001
• Docket Number: Civ. No. 90-1472-R.
• Citation: 177 F.Supp.2d 1090
• Court: U.S. District Court — Southern District of California
• Parties: 40235 WASHINGTON STREET CORP., Plaintiff, v. W.C. LUSARDI, Defendant.

177 F.Supp.2d 1090

40235 WASHINGTON STREET CORP., Plaintiff, v. W.C. LUSARDI, Defendant.

Civ. No. 90-1472-R.

United States District Court, S.D. California.

October 10, 2001.

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James W. Huston, Gray Cary Ware and Freidenrich, San Diego, CA, for plaintiff.

James A. Testa, Testa and Associates, Vista, CA, L. Scott Keehn, Robins and Keehn, San Diego, CA, for defendant.

CORRECTED ORDER GRANTING WASHINGTON STREET'S MOTION FOR DECLARATORY RELIEF AND TO QUIET TITLE; AND DENYING LUSARDI'S MOTION FOR REIMBURSEMENT UNDER CALIFORNIA REVENUE & TAXATION CODE § 3728

RHOADES, District Judge.

I. Overview

Since 1990, Washington Street and Lusardi have litigated title to an apartment complex in Riverside County, California. They are before the Court on two motions: (1) Washington Street's motion to dismiss, as a matter of law, Lusardi's claim to be a good faith purchaser under 11 U.S.C. § 549(c); (2) Lusardi's motion for reimbursement under California Revenue and Taxation Code § 3728. For the reasons stated below, the Court grants Washington Street's motion to dismiss and denies Lusardi's motion for reimbursement.

II. Background¹

Washington Street was created on February 20, 1990. Eight days later, it purchased an apartment complex (the Sun Dunnes) located on tax-defaulted property. At that time, the Sun Dunnes had two liens on it: a $447,000 tax lien along with a $277,000 first mortgage. The following day, Washington Street filed a Chapter 11 bankruptcy petition. Despite receiving a faxed copy of the bankruptcy petition, a week later, the Riverside County tax collector sold the Sun Dunnes at a tax foreclosure sale to Lusardi for $269,500. Lusardi was unaware of the petition.

After tax sale, the bankruptcy court, hearing Washington Street's Chapter 11 petition, dismissed it as being filed in bad faith. Specifically, the bankruptcy court found that Washington Street had no viable reorganization plan.

To date, Washington Street has not relinquished possession of the Sun Dunnes, and Riverside County has not returned Lusardi's money.

From these simple facts, eleven years of legal wrangling ensued. In total, this case has seen one bankruptcy filing; two state court lawsuits; one state court appeal; one federal lawsuit; and two federal appeals.

In 1991, Washington Street sued Lusardi in this Court, arguing that the sale to Lusardi was void because it had occurred in violation of the automatic stay. See 11 U.S.C. § 362(a) (providing an automatic stay of attempts to gain possession of property if the owner has declared bankruptcy).

Lusardi moved to dismiss this case, arguing that the tax sale was only voidable, not void. In the alternative, Lusardi moved to stay the federal proceedings pending the outcome of the case he had filed in state court.

This Court agreed with Lusardi. Relying on the Ninth Circuit Bankruptcy Appellate Panel's decision in In re Schwartz, 119 B.R. 207 (9th Cir. BAP 1990), the Court held that the sale had not been voided. Accordingly, the Court dismissed Washington Street's case. In the alternative, the Court stayed the federal case while Lusardi's suit against Washington Street proceeded in state court.

Washington Street appealed the Court's rulings. While the appeal was pending, the Ninth Circuit overruled the Bankruptcy Appellate Panel's Schwartz decision, holding that violations of the automatic stay are void, not voidable. See In re Schwartz, 954 F.2d 569, 574 (9th Cir.1992). Thus, this Court's dismissal of Washington Street's case was wrong. When the Ninth Circuit decided Washington Street's appeal, it vacated the dismissal order but affirmed the stay. See 40235 Wash. St. Corp. v. Lusardi, 976 F.2d 587 (9th Cir. 1992). The federal case then lay dormant for five years.

In 1996, the California Court of Appeals heard Lusardi's suit against Washington Street. The court, relying on the Ninth Circuit's Schwartz opinion, held that Lusardi's tax deed was void, not voidable.

In 1997, Lusardi returned to this Court, filing an answer and counterclaim to Washington Street's dormant federal case. In the counterclaim, Lusardi alleges that his purchase of the Sun Dunnes fell within 11 U.S.C. § 549(c), an exception to the automatic stay allowing certain good faith purchasers giving "present fair equivalent value" to keep real property purchased in violation of the automatic stay. In the alternative, Lusardi claims, under California Revenue and Taxation Code § 3728, that Washington Street must reimburse him money spent buying and then pursuing title to the Sun Dunnes. The Court granted Lusardi's motion to lift the stay, allowing the case to proceed.

III. Discussion

The case raises two issues: one, whether Lusardi qualifies as a good faith purchaser under § 549(c); two, whether he is entitled to reimbursement under California Revenue and Taxation § 3728. On March 1, 2001, trial was scheduled to begin. Based on recent discovery, it became apparent that Lusardi would be unable, as a matter of law, to show that he paid "present fair equivalent value" as required by § 549(c). Accordingly, the Court orally granted Washington Street's Rule 50(a) motion to dismiss Lusardi's counterclaim.

After losing on § 549(c), Lusardi, echoing an earlier ruling by the Court (see 1/19/99 Order at 5-7), claimed that Washington Street must reimburse him the purchase price of the property as required by § 3728. Otherwise, he continued, his tax deed could not be declared void for violating the automatic stay. Washington Street argued the opposite, that § 3728 did not apply. At a hearing held on April 23, 2001, the Court affirmed its earlier ruling — that § 3728 applied — and asked the parties to submit a cost accounting. After reconsidering the question, the Court decides that § 3728 is preempted by federal bankruptcy law and, therefore, inapplicable.

A. Good Faith Purchaser Exception: 11 U.S.C. § 549(c)

Determining the holder of title to the Sun Dunnes depends on a two-step analysis. The first step is determining whether § 549(c) creates an exception to the automatic stay's void rule when the voided transfer was initiated by someone other than the debtor (in this case Riverside County). See Schwartz, 954 F.2d at 574 (holding that violations of the automatic stay are void). The second step is determining whether Lusardi meets the substantive requirements of § 549(c). If the answer to both questions is yes, then Lusardi's purchase of the Sun Dunnes is valid despite the automatic stay violation. Because, in a previous order, the Court held that § 549(c) is an exception to § 362(a) (see 1/19/99 Order at 9-12), an issue here is whether Lusardi satisfies § 549(c).

Title 11 United States Code, § 549(c), provides in pertinent part:

The trustee may not avoid ... a transfer of real property to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value unless a copy or notice of the petition was filed, where a transfer of such real property may be recorded to perfect such transfer, before such transfer is so perfected that a bona fide purchaser of such property, against whom applicable law permits such transfer to be perfected, could not acquire an interest that is superior to the interest of such good faith purchaser.

11 U.S.C. § 549(c). Essentially, § 549(c) creates a three-part test: (1) was Lusardi a "good faith purchaser without knowledge of the commencement of the case;" (2) did he pay "present fair equivalent value;" (3) did he perfect his tax deed before Washington Street recorded a copy or notice of the bankruptcy petition in Riverside County.² Lusardi carries the burden of proving all three conditions. See Fed.R.Bankr.P. 6001.

Determining "present fair equivalent value" requires a comparison between the price actually paid at the tax sale for the Sun Dunnes, $269,500, and its worth or "benchmark" value, $615,000 (the value set by Lusardi's expert, see Hess, 10/25/00 Appraisal Report, at 2, 4). See BFP v. Resolution Trust Co., 511 U.S. 531, 540, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994); In re Shaw, 157 B.R. 151, 154 (9th Cir. BAP 1993). If the price paid is the "present fair equivalent" of the Sun Dunnes' benchmark value, then § 549(c)'s value condition is satisfied.

Here, there are two competing benchmarks: close-to-fair-market value; or the winning bid at a tax foreclosure sale properly conducted according to state foreclosure law. For two reasons, the Court finds that the proper benchmark value for § 549(c), in the context of a state conducted tax foreclosure sale, is something close to market value. First, close-to-fair-market value is consistent with the language of § 549(c) and the fundamental policies guiding interpretation of the Bankruptcy Code (the "Code"). Second, close-to-fair-market value is not inconsistent with the Supreme Court's holding and analysis in BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994).

1. Text of 11 U.S.C. § 549(c) and Bankruptcy Policy

To determine the appropriate benchmark, the Court looks first to the statute. See BFP, 511 U.S. at 537, 114 S.Ct. 1757 (1994). Section 549(c) gives no definition of "present fair equivalent value." See In re Shaw, 157 B.R. at 153. Thus, as other courts have done, the Court will parse the three key terms in § 549(c): "present," "fair equivalent," and "value" to determine the appropriate benchmark. See, e.g., In re T.F. Stone Co., Inc., 72 F.3d 466 (5th Cir.1995).

Looking first at "value," it sheds little light on determining the proper benchmark. Unlike other Code sections, see, e.g., 11 U.S.C. § 548(d)(2)(A), § 549 contains no definition of value. Although appearing throughout the Code, "value" has no single meaning. See BFP, 511 U.S. at 551 n. 1, 114 S.Ct. 1757 (5-4 decision) (Souter, J, dissenting). In 11 U.S.C. § 522, it means "fair market value." See 11...