In re Grooms

• Court: U.S. Bankruptcy Court — Western District of Oklahoma
• Writing for the Court: Janice D. Loyd, U.S. Bankruptcy Judge
• Citation: In re Grooms, 599 B.R. 155 (Bankr. W.D. Okla. 2019)
• Decision Date: 28 February 2019
• Docket Number: Case No. 18-14284-JDL
• Parties: IN RE: Juanita L. GROOMS, Debtor.

599 B.R. 155

IN RE: Juanita L. GROOMS, Debtor.

Case No. 18-14284-JDL

United States Bankruptcy Court, W.D. Oklahoma.

Signed February 28, 2019

Deborah L. Brooks, Deborah Brooks & Associates PC, Oklahoma City, OK, for Debtor.

L. Ruschenberg, Oklahoma City, OK, for Trustee.

ORDER REGARDING AUTOMATIC STAY AND RESETTING HEARING

Janice D. Loyd, U.S. Bankruptcy Judge

I. Introduction

The issue before the Court is one of first impression: Is a 162 acre tract of real property to which record title has always been held by a limited liability company whose articles of organization have been canceled by the Oklahoma Secretary of State constitute "property of the estate" of the Chapter 13 debtor who is the sole member of the limited liability company? First State Bank of Duncan (the "Bank") which holds a first mortgage on the property, and who obtained a state court judgment in foreclosure, has moved to lift the automatic stay pursuant to 11 U.S.C. § 362(d)¹ in order to complete the foreclosure proceedings by confirmation of the Sheriff's Sale of the property. The Bank is supported in the Motion by Dustin Hilliary ("Buyer") who purchased the subject property at Sheriff's Sale. Debtor opposes the Motion contending that the cancellation or extinction of the LLC makes the property part of her bankruptcy estate, and there is equity in the property above the Bank's mortgage which would inure to the benefit of her creditors.

Before the Court for consideration are: (1) the Bank's Motion for Relief From the Automatic Stay, For Abandonment of Property (the "Motion") [Doc. 30]; (2) the Objection of Chapter 13 Trustee to Motion for Relief From Automatic Stay and For Abandonment [Doc. 34]; (3) the Debtor's Objection to Motion for Relief From the Automatic Stay and Order For Abandonment of Property [Doc. 41]; (4) the Buyer's Reply in Support of Motion for Relief From the Automatic Stay, For Abandonment of Property [Doc. 59]; (5) the Debtor's Response to Dustin Hilliary's Reply in Support of Motion For Relief [Doc. 60]; (6) the Buyer's Additional Briefing in Support of Motion for Relief From The Automatic Stay, For Abandonment of Property [Doc. 70]; (7) the Bank's Brief in Support of Motion to Lift Stay [Doc. 71]; and Debtor's Supplemental Brief [Doc. 72]. Additionally for consideration by the Court is the record of the January 15, 2019, evidentiary hearing at which time the Debtor and a representative of the Bank testified, the parties introduced evidence and counsel presented oral argument. The below constitutes the Courts Findings of Fact and Conclusions of Law pursuant to Fed.R.Bankr.P. 7052 and 9014.²

II. Jurisdiction

This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Order of Reference contained in Local Rule LCvR 81.4 for the United States District Court for the Western District of Oklahoma. This is a "core proceeding" under 28 U.S.C. § 157(b)(2)(G) (a motion to terminate, annul, or modify the automatic stay) over which the Court has authority to issue a final order or judgment.

III. Background

1. The I Am LLC (hereinafter the "LLC") filed its Articles of Organization of an Oklahoma Limited Liability Company with the Oklahoma Secretary of State on October 18, 2004. [Hilliary Ex. 4, pg. 2]³ . The Secretary of State "terminated" the LLC's Articles on March 14, 2006, and "canceled" its right to do business on July 1, 2010. [Hilliary Ex. 4, pg. 1]. A Certificate of the Office of the Secretary of State of Oklahoma executed on January 7, 2019, reflects that "I Further Certify that THE I AM LLC, filed Cancelled in the Office of the Secretary of State on the 1st day of July, 2010, and is no longer an existing Domestic Limited Liability Company, according to our records to the date of this certificate. " [Debtor Ex.1]. The LLC had been canceled as of the time of the filing of Debtor's bankruptcy and has not been reinstated since.

2. On February 13, 2006, the LLC executed a Promissory Note in the amount of $ 300,000 in favor of the Bank. [Bank Ex. 3]. The Debtor (in her maiden name) signed the Promissory Note in her capacity as Manager of the LLC. At the same time, the Debtor executed a written personal Guaranty Agreement of the Promissory Note. [Bank Ex. 8].

3. The Promissory Note was secured by a Real Estate Mortgage With Power of Sale executed on February 13, 2006, which was filed of record in the Office of the County Clerk of Comanche County on February 22, 2006, in Book 4935 at Page 156-157. [Bank Ex. 3]. The Promissory Note, Mortgage and Guaranty Agreement were extended several times, with the last Promissory Note executed on March 13, 2015, in the principal amount of $ 238,792.85 with a maturity date of March 18, 2018. [Bank Ex. 2].

4. The property was conveyed by Warranty Deed to the LLC on February 15, 2006, and was filed in the Office of the County Clerk of Comanche County on February 22, 2006, in book 4935 at page 155. [Bank Ex.1].

5. The LLC defaulted on the Promissory Note and Mortgage, and the Bank commenced foreclosure proceedings against the LLC and the Debtor as Guarantor. On July 10, 2018, the District Court of Comanche County, Oklahoma, entered its Partial Journal Entry of Judgment, entering an in personam and an in rem judgment against the defendant LLC only, in the amount of $ 228,948.08, with interest and costs accruing thereon. The Judgment further provided for the foreclosure of the Bank's mortgage on the property. [Bank Ex. 10; Hilliary Ex. 2].

6. In the foreclosure proceeding, the Sheriff had the property appraised at $ 243,000.00. [Hilliary Ex. 2, pg. 4]. The Buyer purchased the property at Sheriff's Sale on September 5, 2018, for $ 265,000.00 as a credit on the judgment entered in favor of the Bank. [Hilliary Ex. 2, pg. 5; Bank Ex. 11]. Before the State Court could hear the Bank's Motion to Confirm Sale, on October 12, 2018, the Debtor filed her Chapter 13 voluntary petition for relief. [Doc.1].

7. The Debtor's Schedules listed the value of the property at "Unknown", although she indicates a realtor has recommended listing the property at $ 550,000.00. [Doc.14, pg. 6, ¶ 1.4]. The Debtor testified at the evidentiary hearing that she had a real estate sales contract for the property for the purchase price of $ 405,000.00. [Debtor's Exhibit 5].⁴ Debtor's Amended Chapter 13 Plan proposes the sale of the property with the proceeds to pay the Bank in full at closing, with the remaining proceeds to be turned over to the Chapter 13 Trustee. [Doc. 62].

IV. The Issues Before the Court

The Motion for Relief from Stay encompasses the normal issues for such a motion, i.e. the Movant establishing the absence of equity in the property, and the Debtor establishing that the property is necessary for successful reorganization. That, however, is not the unique and initial question which has to be reached by the Court. That issue is whether the subject real property is "property of the estate" under § 541(a) so that the automatic stay attaches to it. That issue, in turn, is dependent upon whether the property is deemed owned by the LLC, whose certificate to do business was canceled by the Oklahoma Secretary of State in 2010, or whether such cancellation results in the property being owned by the LLC's sole member, Debtor Grooms.

The Debtor argues that the "cancellation" of the LLC's Articles terminated the existence of the LLC so that the subject property reverted to the Debtor and therefore constitutes "property of the estate" subject to the automatic stay. Conversely, the Bank and Hilliary argue that the "cancellation" of the LLC's Articles of Organization only bars the LLC from the capacity to sue or be sued, that the only "property of the estate" is the Debtor's membership interest in the LLC, and that the property does not become an asset of the estate merely because of the action of the Secretary of State.

V. Discussion

A. The Automatic Stay and Whether the Property is Property Of the Estate

Section 362(a)(3) provides with certain exceptions, that the filing of a bankruptcy petition operates as a stay of "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate". Section 541(a)(1) defines "property of the estate" as "all legal and equitable interest of the debtor in property as of the commencement of the case." (Emphasis added). It is clear that the automatic stay does not stay actions against property that is not property of the estate. In re Moore , 410 B.R. 439, 441 (Bankr. E.D. Va. 2009). It appears equally clear that the automatic stay protects the debtor, the debtor's property and property of the estate, but it does not protect non-debtor parties, including non-debtor insiders or their property. See Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC , 491 B.R. 27, 35-36 (S.D. N.Y. 2013).

It is well established that defining "property of the [bankruptcy] estate" under § 541(a) is a question of federal law, but the nature and extent of the debtor's interest in property as of the petition date, is determined by applicable state law. Butner v. United States , 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) ; Bailey v. Big Sky Motors, Ltd. (In re Ogden) , 314 F.3d 1190, 1197 (10th Cir. 2002) ("For purposes of most bankruptcy proceedings, property interests are created and defined by state law."). Therefore we must determine the nature of Debtor's interest in the LLC under Oklahoma law as of the date of the filing of the bankruptcy.

The Oklahoma Limited Liability Company Act (the "LLC Act") 18 O.S. § 2000 et seq. , governs the formation, operation, dissolution, and cancellation of Oklahoma limited liability companies. In re Midpoint Development, L.L.C. , 466 F.3d 1201, 1204 (10th Cir. 2006) ; In re White , 556 B.R. 489, 494 (Bankr. N.D. Okla. 2016) ; Vista Exploration Co. v. Mewbourne Oil Co. , 2010 WL 1980196 (W.D. Okla. 2010). As a general rule, a limited liability company is...