Mellor, In re

Decision Date12 June 1984
Docket NumberNo. 83-6153,83-6153
Citation734 F.2d 1396,10 C.B.C.2d 1353
Parties10 Collier Bankr.Cas.2d 1353, 12 Bankr.Ct.Dec. 147, Bankr. L. Rep. P 69,899 In re Eli Kenneth MELLOR and Lisa Mellor, Debtors. Raymond G. PISTOLE and Raymond R. Bragg, Plaintiffs-Appellees, v. Eli Kenneth MELLOR and Lisa Mellor, Defendants-Appellants.
CourtU.S. Court of Appeals — Ninth Circuit

Jeffrey Krause, Stutman, Treister & Glatt, Los Angeles, Cal., for defendants-appellants.

Lee Grant, Sherman Oak, Cal., for plaintiffs-appellees.

Appeal from the Bankruptcy Appellate Panels of the Ninth Circuit.

Before GOODWIN, SNEED, and ALARCON, Circuit Judges.

ALARCON, Circuit Judge:

Eli Kenneth Mellor and Lisa Mellor (the Mellors) seek reversal of the decision of the Bankruptcy Appellate Panel which upheld the bankruptcy court's annulment of the automatic stay.

The bankruptcy court held that relief from the automatic stay of any creditor action against the debtor's estate was proper in this matter because the facts showed that the interest of Raymond G. Pistole and Raymond L. Bragg (the sellers) in the debtor's residence (the Upland residence) was inadequately protected. We must decide whether the bankruptcy court may consider junior encumbrances in determining whether a debtor's estate provides adequate protection for a senior lien. It is our view that the bankruptcy court erred in considering the amount of the junior encumbrances

in granting relief from the automatic stay. Accordingly, we must reverse the judgment of the Bankruptcy Appellate Panel.

PERTINENT FACTS

Raymond G. Pistole (Pistole) purchased the Upland residence in June 1977. Part of the purchase price was paid out of the proceeds of a loan from the Weyerhauser Mortgage Corporation (Weyerhauser). The mortgage was in the amount of $68,450. Weyerhauser received a trust deed as security for the mortgage.

Two months later on August 1, 1977, Pistole entered into a contract to sell the Upland residence to Lisa Williams (now known as Lisa Mellor) for $75,000. Under the terms of this land sale contract, Lisa Mellor was required to assume the mortgage payments owing to Weyerhauser (approximately $68,450) and to pay Pistole $1,000 as a down payment and an additional $5,500 in installments of at least $1,000 every six months, with the entire balance due in three years. She agreed to pay Pistole $703.05 a month which was to be forwarded to Weyerhauser. Pistole recorded the land sale agreement on December 8, 1977.

On December 9, 1977, Pistole assigned his rights to the Upland residence under the land sale contract to Raymond G. Bragg (Bragg). Bragg received a grant deed to the Upland residence from Pistole, which was recorded on the same date.

Weyerhauser did not receive the monthly payment due on the mortgage on November 1, 1977. The Mellors accused Pistole of failing to forward the money they had paid to him for this payment. Pistole denied receiving the money for the November 1977 installment payment.

As the result of this dispute, the Mellors did not send any money to Pistole to make the installment payments to Weyerhauser due December 1, 1977 and January 1, 1978.

In January, 1978, Bragg filed an action in the Superior Court for the County of San Bernardino to cancel the land sale contract, to obtain possession of the Upland residence, and to quiet title.

In March, 1978, the Mellors made a lump sum payment directly to Weyerhauser of the entire amount due on the delinquent monthly installments. Thereafter, until January, 1980, the Mellors paid the monthly installments directly to Weyerhauser. The Mellors did not make any of the installment payments owing to Pistole under the land sale contract.

On April 11, 1980, a second trust deed was recorded against the Upland residence by AKOP, Inc., to secure a debt of $123,278. This debt arose out of monies owed to a partnership between Eli Mellor and AKOP, Inc. The partnership was dissolved on March 20, 1980. Mellor assigned his fifty percent interest in the partnership and any equity he had in the Upland property to AKOP, Inc.

On June 23, 1980, Weyerhauser declared a default on the mortgage because no payments were made after January, 1980.

Between January 15, 1980 and September 3, 1980, five judgment liens totalling $11,494.18 were filed against the Upland residence.

The Mellors filed a petition under Chapter 13 of the Bankruptcy Code on September 23, 1980. This matter was later converted by the Mellors to a joint Chapter 11 petition and a trustee for the debtors' estate was appointed.

On October 27, 1980, Weyerhauser instituted an adversary proceeding, pursuant to Sec. 362(d), seeking termination of the automatic stay which went into effect upon the filing of the bankruptcy petition. The automatic stay arises by operation of law upon the filing of a petition for bankruptcy, and prevents creditors of the bankrupt from seeking to enforce any lien on the property of the estate. Weintraub and Resnick, Bankruptcy Law Manual, Sec. 1.09 (1980). The bankruptcy court terminated the stay as requested by Weyerhauser on December 8, 1980. Neither Bragg nor Pistole joined in Weyerhauser's petition. The Mellors did not attend the On March 25, 1981, Bragg filed a motion for summary judgment in the state quiet title action. The Mellors opposed this motion solely on the ground that the state court lacked jurisdiction to proceed in an action concerning the Upland residence because it was still protected by the automatic stay. A hearing on the motion for a summary judgment was held on April 3, 1981. The state trial judge concluded that he had jurisdiction to proceed based on the December 8, 1980 order of the bankruptcy court which terminated the stay at Weyerhauser's request. The state judge announced that he construed the Weyerhauser order as terminating "all restraining and stay orders issued with reference to this particular parcel and property." The motion for summary judgment to quiet title against the Mellors was granted. 1

December 8, 1980 proceedings. In granting Weyerhauser's petition, the bankruptcy court ordered that "all restraining orders and stay orders issued herein are terminated."

Weyerhauser gave notice that the Upland residence would be sold at a trustee's sale on April 13, 1981. Prior to that date, Pistole cured the default by paying Weyerhauser $12,460.06.

On April 27, 1981, Pistole and Bragg filed a request to be relieved from the automatic stay. On June 1, 1981, the bankruptcy court issued an order purporting to annul the stay back to December 8, 1980. The bankruptcy judge expressly concluded that:

[t]he purposes of the automatic stay, 11 U.S.C. Section 362(a) would not be served by allowing it to continue in effect beyond December 8, 1980 and by allowing it to have any effect on the Superior Court Judgment [in the quiet title action] ...

The bankruptcy court found that the encumbrances of record against the Upland residence, at the time the Mellors filed their original petition in the bankruptcy court, totalled $199,801.05. The court included in this computation $125,278.00 owed to AKOP, Inc., and judgment liens totalling $9,823.35.

The present value of the Upland residence was set at $105,000. Finally, the bankruptcy court found that "[n]either the Debtors nor the Estate have any realizable equity in their claimed interest in the real property..."

Based on these findings, the bankruptcy court concluded that "[p]laintiffs' interest in and to the subject real property lacks equity protection." The bankruptcy court then ordered that the automatic stay "should be annulled to December 8, 1980".

The Bankruptcy Appellate Panel of the Ninth Circuit (the Appellate Panel) affirmed the annulment of the automatic stay.

The Appellate Panel noted that the Mellors contended that "the appellees [Pistole and Bragg] should not be permitted to rely upon junior encumbrancers' claims" in alleging a lack of "equity" cushion to protect the amount owing them. In re Mellor, 31 B.R. 151 at 153 (Bkrtcy.App.1983). The Appellate Panel, however, failed to address this issue. The Appellate Panel held that the annulment of the automatic stay was proper under Sec. 362(d).

DISCUSSION

Because this court is in as good a position as the Bankruptcy Appellate Panels to review the findings of a bankruptcy judge, in considering appeals from the Bankruptcy Appellate Panels In re Bialac, 712 F.2d 426, 429 (9th Cir.1983), we apply the clearly erroneous standard to the bankruptcy court's findings of fact. In re Visiting Home Services, Inc., 643 F.2d 1356, 1359 (9th Cir.1981). Conclusions of law are subject to de novo review. Id.

The automatic stay is designed to afford a debtor a "breathing spell," free from action by creditors against the petitioner's The Bankruptcy Code also provides a procedure by which a creditor can seek relief from the continuation of the stay against his claim under 11 U.S.C. Sec. 362(d).

                estate.    La Jolla Mortgage Fund v. Rancho El Cajon Associates, 18 B.R. 283, 286 (B.Ct.S.D.Cal.1982)
                

Section 362(d) provides as follows:

On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay--

(1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or

(2) with respect to a stay of an act against property, if--

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effective reorganization.

The bankruptcy court annulled the automatic stay solely on the basis that the sellers' "interest in and to the subject real estate lacks adequate protection."

The bankruptcy court failed to explain the legal or factual basis for this conclusion. It is true that the bankruptcy court found that the debtors and the estate did not have any "realizable...

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