In re Castle Serv., LLC, Bankruptcy Number: 16–26302

• Decision Date: 09 November 2016
• Docket Number: Bankruptcy Number: 16–26302
• Citation: 560 B.R. 587
• Parties: In re: Castle Service, LLC, Debtor.
• Court: U.S. Bankruptcy Court — District of Utah

560 B.R. 587

In re: Castle Service, LLC, Debtor.

Bankruptcy Number: 16–26302

United States Bankruptcy Court, D. Utah.

Signed November 9, 2016

Andres Diaz, Red Rock Legal Services P.L.L.C., St. George, UT, for Debtor.

MEMORANDUM DECISION

KEVIN R. ANDERSON, U.S. Bankruptcy Judge

For more than fifteen years, the Debtor, Castle Service, LLC, has operated an automobile service business on real property titled in the name of two of its owners and managers, Michael and Judy Hurdsman (the "Hurdsmans"). ZB, N.A. d/b/a Zions Bank ("Zions") holds a trust deed on real property located in Huntington, Utah to secure a 2001 construction loan in the present amount of approximately $331,000. Zions has filed a motion for relief from stay asserting that because the real property is not titled in the Debtor's name, it is not property of the bankruptcy estate. In the alternative, Zions argues that it is entitled to relief from the stay for cause. As explained below, the Court finds that the real property is an asset of the estate under 11 U.S.C. § 541,¹ and thus is subject to the automatic stay of § 362. The Court further finds that Zions has not established sufficient cause at this point in the case to grant relief from the automatic stay. Therefore, the motion is denied.

I. JURISDICTION AND VENUE

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157 and 1334. The matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (b)(2)(G). Venue is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409.

II. FACTS

In 2000, the Hurdsmans acquired real property at 65 South Main, Huntington, Utah 84528 (the "Castle Service Property").² At all relevant times, the Castle Service Property has been titled in the individual names of Michael and Judy Hurdsman as joint tenants.³ On November 1, 2000, Michael Hurdsman executed a note in favor of Zions in the principal amount of $500,000 (the "Note").⁴ The Note lists the borrower as "Michael Hurdsman dba: Castle Services 65 South Main Huntington, UT 84528."⁵ A few days thereafter, the Hurdsmans signed and recorded a "Construction Deed of Trust" on the Castle Service Property to secure the Note.⁶ Ostensibly, the loan proceeds were used to construct the buildings and improvements on the Castle Service Property relating to the Debtor's automobile service business.⁷

The Debtor, Castle Service, LLC, was formed in March of 2001 with Michael and Judy Hurdsman jointly owning a 50% interest and Darrin and Ethan Hurdsman each owning a 25% interest.⁸ Since its formation, the Debtor has operated an automobile service business on the Castle Service Property that includes maintenance and repair, tires, towing, car wash bays, etc.⁹ The Castle Service Property is the Debtor's sole business location.¹⁰

On May 30, 2001, Castle Service, LLC executed a replacement note with the Small Business Administration in the amount of $515,000 with Zions listed as the lender (the "SBA Note").¹¹ The SBA Note was signed by the Hurdsmans as managers of Castle Service, LLC.¹² On this same date, the Hurdsmans, in their individual capacity, also executed a "Modification of Deed of Trust" that increased the principal balance of the secured loan from $500,000 to $515,000 (the "SBA Trust Deed").¹³ Also on this same date, Michael and Judy Hurdsman, in their individual capacity, signed a guarantee of the SBA Note (the "Personal Guarantee").¹⁴

While the Debtor has continually possessed and operated its business activities out of the Castle Service Property, there has never been a written lease between the Hurdsmans and the Debtor, and there is no evidence that the Debtor has ever paid the Hurdsmans for its use of the Castle Service Property.¹⁵ However, it was not contested at the hearing that all payments on the SBA Note were made by the Debtor and not the Hurdsmans.¹⁶

On July 19, 2016, Castle Service, LLC filed for Chapter 11 bankruptcy.¹⁷ Zions is now seeking relief from stay to conduct a trustee's sale of the Castle Service Property under the SBA Note and SBA Trust Deed. Zions argues that it is entitled to relief from stay because the Castle Service Property is not titled in the Debtor's name and thus is not property of the estate under § 541. In the alternative, Zions seeks relief from stay for cause under § 362(d)(1). In response, the Debtor asserts that because it holds both a possessory and/or equitable interest in the Castle Service Property, it is property of the bankruptcy estate. The Debtor further asserts that Zions is adequately protected and that the Castle Service Property is essential to its plan of reorganization.

Zions has not filed a proof of claim in this case, but Debtor's Schedule D lists the trust deed debt at $331,422.96 with the Castle Service Property having a value of $470,000.¹⁸ Schedule D also lists a tax lien against the Castle Service Property in the amount of $10,214.07.¹⁹ Based on the absence of other evidence, the Court will use the amounts on Schedule D and find for purposes of this motion that there is an equity cushion of approximately $128,000 to cover the SBA Trust Deed.

III. DISCUSSION

The issues are relatively straightforward. First, is the Castle Service Property an asset of the Debtor's bankruptcy estate under § 541 such that it is protected by the automatic stay of § 362? Second, if the Castle Service Property is subject to the automatic stay, has Zions established sufficient cause for the Court to grant to grant relief from stay under § 362(d)?

A. The Castle Service Property is Subject to the Automatic Stay.

Simply stated, Zions argues that the automatic stay does not protect the Castle Service Property because it is not titled in the Debtor's name. While this fact has relevance to the question, it is not dispositive as to whether the Castle Service Property is an asset of the estate. This is because property of the estate is an exceptionally broad concept that, when coupled with § 362, is intended to protect all property interests of a debtor in order to facilitate an orderly reorganization or liquidation in bankruptcy. Section 541 states that a bankruptcy estate consists of "all legal or equitable interests of the debtor in property as of the commencement of the case."²⁰ Thus, "every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541."²¹

The weight of bankruptcy authority also holds that a "mere possessory interest in real property, without any accompanying legal interest, is sufficient to trigger the protection of the automatic stay."²²

The full extent of Debtor's interest in the Castle Service Property is established by the following facts:

1. The Note was signed by "Michael Hurdsman dba: Castle Service" and the SBA Note was signed by the Debtor, through its managers, for the purpose of constructing a commercial building and making other improvements on the Castle Service Property relating to the Debtor's automobile service business.

2. Since March of 2001, a period of more than fifteen years, the Debtor has continually possessed and operated its automotive service business out of the Castle Service Property.

3. Payments to Zions on the SBA Note have been made by the Debtor and not by the Hurdsmans individually.

4. At all relevant times, the Debtor's possession and use of the Castle Service Property has been with the full knowledge and express or implied consent of the Hurdsmans and Zions.

5. While the Hurdsmans are the titled owners of the Castle Service Property, they have only ever used it as the Debtor's business location, e.g., they have not used it as a residence or a rental property.

These facts regarding the Debtor's fifteen-year possession and use of the Castle Service Property, with the consent of the Hurdsmans and with the knowledge and implied consent of Zions, is adequate evidence for the Court to find that the Debtor holds a valid and permitted possessory interest in the Castle Service Property sufficient to include it as an asset of the estate under § 541.

This is not to say that in all instances a mere presence on real property is enough to implicate or maintain the protections of the automatic stay. For example, if a party possesses real property without the consent of the titled owner or without some other legally cognizable claim thereto, it is likely the automatic stay would not apply. Further, if a party has taken title to or possession of real property in proximity to the bankruptcy filing as part of a scheme to hinder, delay or defraud a secured creditor, the Court would likely grant swift relief from the automatic stay.²³ As articulated below:

[M]ere possession alone would not necessarily give rise to a property interest cognizable under § 541 of the Bankruptcy Code. In explaining the scope of § 541(a)(1)'s definition of property, Congress used the term "possessory interest," not "possession". See S.Rep. No. 989, 95th Cong., 2d Sess. 82 (1978), 1978 U.S.C.C.A.N. 5787, 5868. A possessory interest is a "[r]ight to possess property by virtue of an interest created in the property though it need not be accompanied by title...." Black's Law Dictionary 607 (5th ed.1983). When read against the backdrop of § 541(a)(1), which refers to equitable interests, this court concludes that a possessory interest refers to cases in which the debtor has some right to possess the property, for example, by virtue of the title holder's consent or permission.²⁴

Zions also argues that the automatic stay of § 362(a)(6) does not preclude it from filing a collection action against the Hurdsmans and their assets, including the Castle Service Property, based on the Hurdsmans' Personal Guarantee of the SBA Note. There is no disagreement that Zions can pursue the non-debtor Hurdsmans on the Personal Guarantee; however, its argument fails insofar as it seeks to include in its collection action a trust deed sale of the Debtor's business location.²⁵ This is so because, as stated above, the Castle Service...