40235 Washington Street Corp. v. Lusardi

• Decision Date: 23 May 2003
• Docket Number: No. 01-56644.,No. 01-56801.,01-56644.,01-56801.
• Citation: 329 F.3d 1076
• Parties: 40235 WASHINGTON STREET CORPORATION, a California corporation, Plaintiff-Appellee, v. W.C. LUSARDI, an individual, Defendant-Appellant. 40235 Washington Street, Corporation, a California corporation, Plaintiff-Appellant, v. W.C. Lusardi, an individual, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

329 F.3d 1076

40235 WASHINGTON STREET CORPORATION, a California corporation, Plaintiff-Appellee, v. W.C. LUSARDI, an individual, Defendant-Appellant.

40235 Washington Street, Corporation, a California corporation, Plaintiff-Appellant, v. W.C. Lusardi, an individual, Defendant-Appellee.

No. 01-56644.

No. 01-56801.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 4, 2003.

Filed May 23, 2003.

COPYRIGHT MATERIAL OMITTED

David A. Niddrie, Niddrie & Hegemier, LLP, for W.C. Lusardi.

Duane S. Horning, Mary A. Lehman, and James W. Huston, Gray Cary Ware & Friedenrich, LLP, for 40235 Washington Street Corporation.

Appeal from the United States District Court for the Southern District of California; John S. Rhoades, District Judge, Presiding. D.C. No. CV-90-01472-JSR.

Before PREGERSON, REINHARDT, and ARCHER^* Circuit Judges.

REINHARDT, Circuit Judge.

W.C. Lusardi purchased an apartment complex at a Riverside County tax foreclosure auction in 1990. Unbeknownst to Lusardi, the owner of the property, 40235 Washington Street Corporation ("WSC" or "the corporation") had recently filed a federal bankruptcy petition, creating an automatic stay preventing the sale. The sale was therefore void, and, although the bankruptcy petition was later dismissed, Lusardi never acquired possession or any benefit of ownership. Neither has his money been returned to him by Riverside County. The parties have been litigating for more than a dozen years, in both state and federal court. This appeal arises from the district court's order quieting title and granting declaratory relief in favor of WSC and denying relief to Lusardi. We affirm, although not on the same ground as that relied on by the district court.

I. Background

WSC was incorporated on February 20, 1990. Eight days later it purchased an apartment complex in Palm Desert, California, located on a property that was in tax default and was scheduled to be sold at a Riverside County tax auction. The next day it filed a Chapter 11 bankruptcy petition, thereby creating, under section 362(a) of the federal Bankruptcy Code, an automatic stay on sales of properties it owned. 11 U.S.C. § 362(a). Although WSC informed the tax collector of its bankruptcy filing, Riverside County proceeded with the sale in violation of the stay. Lusardi, unaware of the bankruptcy petition, purchased the property at the foreclosure sale for $269,500. The foreclosure sale included competitive bidding and complied with state law. After the tax sale, the bankruptcy court dismissed WSC's bankruptcy petition, finding that it was filed in bad faith. In re 40235 Washington St. Corp., No. 90-01612-LM11 (Bankr.S.D.Cal. filed May 15, 1990). WSC retained, and continues to retain, possession of the property and Riverside County has never returned Lusardi's money.

The litigation that followed, in both state and federal court, is described in the most recent decision of the district court, see 40235 Washington St. Corp. v. Lusardi, 177 F.Supp.2d 1090, 1095-96 (S.D.Cal. 2001) and, in greater detail, in a 1998 order of the district court, see 40235 Washington St. Corp. v. Lusardi, No. 90-1472-R, unpublished order at 1-6 (S.D.Cal. filed August 19, 1998). A brief description of the federal litigation is all that is required here.¹

The federal proceedings were initiated by WSC, which sought to quiet title and to obtain declaratory relief. It contended that because of the automatic stay Lusardi never acquired any title to the property. The proceedings in federal court were stayed pending the outcome of the state court litigation. See 40235 Washington St. Corp. v. Lusardi, 976 F.2d 587 (9th Cir. 1992). In 1998, the district court granted a motion by Lusardi to lift the stay on the federal litigation, and allowed Lusardi to bring counterclaims under federal and state law. Lusardi asked the court to quiet title in his favor on the ground that section 549(c) of the federal Bankruptcy Code, 11 U.S.C. § 549(c), provides an exception to the automatic stay provision and is applicable to him as a good faith purchaser without knowledge of the bankruptcy petition. Alternatively, he demanded compensation from WSC for his lost investment and associated costs, under section 3728 of the California Revenue and Taxation Code. Lusardi, 177 F.Supp.2d at 1096.

Ultimately, the district court granted WSC's motion for declaratory relief and to quiet title and denied all relief to Lusardi. Id. at 1090. It agreed with Lusardi that section 549(c) of the Bankruptcy Code creates an exception to the automatic stay provision, 40235 Washington St. Corp. v. Lusardi, No. 90-1472-R, unpublished order at 9-12 (S.D.Cal. filed Jan. 19, 1999), but held that Lusardi's purchase did not meet the requirements for invoking the exception. Lusardi, 177 F.Supp.2d at 1096-102. The district court further held that the state tax law provisions under which Lusardi seeks compensation are preempted by the federal Bankruptcy Code. Id. at 1102-05. Lusardi appeals the district court's grant of relief to WSC, including its quiet title order, while WSC argues that there is no federal jurisdiction. Although we hold, contrary to the district court, that section 549(c) of the Bankruptcy Code does not create an exception to the automatic stay provision, we affirm its grant of relief to WSC for the reasons set forth below.

II. Discussion

A. Jurisdiction

Federal courts have jurisdiction over matters in which a federal question is presented on the face of the well-pleaded complaint. Abada v. Charles Schwab & Co., Inc., 300 F.3d 1112, 1118 (9th Cir. 2002). "Where the plaintiff seeks coercive relief under state law, as in a quiet title action, a well pleaded complaint presents a federal question if the plaintiff's right to such relief `necessarily turn[s] on some construction of federal law.'" Yokeno v. Mafnas, 973 F.2d 803, 807 (9th Cir.1992) (quoting Franchise Tax Bd. v. Const. Laborers Vacation Trust, 463 U.S. 1, 9, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983)). In the case before us, it would be impossible to quiet title in favor of either party without addressing the federal Bankruptcy Code issue discussed below. Furthermore, the Bankruptcy Code issue is not raised as a defense or merely in anticipation of avoiding a defense. See Yokeno, 973 F.2d at 807. Rather, the automatic stay provision, which was raised by WSC in its complaint, is the only basis on which WSC's claim to title could be superior to that of Lusardi. Therefore, there is federal jurisdiction.

B. Stay Exception

Section 362(a) of the Bankruptcy Code provides that the filing of a bankruptcy petition creates an automatic "stay, applicable to all entities, of," inter alia, "any act to create, perfect, or enforce any lien against property of the estate." 11 U.S.C. § 362(a). Transfers in violation of the automatic stay are void. Schwartz v. United States (In re Schwartz), 954 F.2d 569, 575 (9th Cir.1992). When WSC filed its bankruptcy petition, the automatic stay took effect, with the result that the Riverside County tax sale, conducted to enforce the tax lien on the property, was void. Unless an exception to section 362(a) applies, therefore, Lusardi's purchase of the property at the tax sale was without effect.

Eighteen exceptions to section 362(a) are listed in section 362(b). 11 U.S.C. § 362(b) (listing circumstances in which "the filing of a petition ... does not operate as a stay"). The text of section 362(a) makes reference to the exceptions listed in section 362(b), 11 U.S.C. § 362(a) (providing that the stay applies "[e]xcept as provided in subsection (b) of this section"), but not to any other exceptions. The language of section 362, thus, suggests that the 18 listed exceptions are the only exceptions to the automatic stay.

Lusardi does not argue that any of the 18 exceptions of section 362(b) applies to his purchase. Rather, he asserts that section 549(c) of the Code provides a further exception to the automatic stay provision. This assertion is plausible primarily because a number of courts, including ours on some occasions, have assumed it to be correct, as we discuss below. The district court in the present case relied on such assumptions and held that section 549(c) does create an exception to the automatic stay provision. Lusardi, No. 90-1472-R, unpublished order at 9-12 (S.D.Cal. filed Jan. 19, 1999). However, we have never before addressed the question directly. Recently the Bankruptcy Appellate Panel of the Ninth Circuit did so and concluded in an opinion we find persuasive that section 549(c) does not create an exception to section 362(a). Value T Sales, Inc. v. Mitchell (In re Mitchell), 279 B.R. 839, 841-44 (9th Cir.BAP 2002). We reach the same conclusion as the Bankruptcy Appellate Panel.²

Section 549 concerns the ability of a bankruptcy trustee to avoid postpetition transfers of the property of the estate, and subsection (c) protects bona fide purchasers who did not know of the petition and who meet certain other requirements. Section 549 provides in full as follows:

§ 549. Postpetition transaction

(a) Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate —

(1) that occurs after the commencement of the case; and (2) (A) that is authorized only under section 303(f) or 542(c) or that is authorized only under section 303(f) or 542(c) of this title; or

(B) that is not authorized under this title or by the court.

(b) In an involuntary case, the trustee may not avoid under subsection (a) of this section a transfer made after the commencement of such case but before the order for relief to the extent any value, including services, but not including satisfaction or securing of a debt that arose before the commencement of the case, is given after the commencement of the case in exchange for such transfer, notwithstanding any notice or knowledge of the case that the transferee has.

(c) The trustee may...