In re Janis, Bankruptcy No. B-88-7013-YUM-SSC

Decision Date04 January 1991
Docket NumberAdv. No. 89-346.,Bankruptcy No. B-88-7013-YUM-SSC
PartiesIn re Lynn B. JANIS and Marilyn J. Janis, husband and wife, Debtors. Victoria DRUMMOND, Trustee, Plaintiff, v. Lynn B. JANIS and Marilyn J. Janis, husband and wife; First Hawaiian Bank, a banking association; William F. Callejo, Trustee; Association of Apartment Owners of Keauhou Akahi, Defendants.
CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Arizona

Victoria C. Drummond, Phoenix, Ariz., Trustee.

Jim D. Smith, Yuma, Ariz., for trustee.

Elizabeth C. Amorosi, Myers & Barnes, P.C., Phoenix, Ariz., for Callejo.

MEMORANDUM DECISION AND ORDER

PRELIMINARY STATEMENT

SARAH SHARER CURLEY, Bankruptcy Judge.

This matter comes before the Court on a Motion for Summary Judgment filed by Defendant William F. Callejo ("Callejo") on March 5, 1990.

A Response was filed on April 5, 1990 by the Trustee in Bankruptcy of Lynn B. Janis and Marilyn J. Janis, the Debtors. On April 23, 1990, Callejo filed a Reply. Oral argument on the Motion for Summary Judgment was held on July 23, 1990. At the time of the Hearing, the Court discussed the case law preliminarily. Counsel for Callejo requested that she be able to file a supplemental memorandum on the conflicts of law issue. The Court set August 24, 1990 as the date certain for the filing of simultaneous supplemental memoranda by Callejo and the Trustee. Both parties timely complied.

On September 17, 1990, this Court rendered its decision on the record on the Callejo Motion for Summary Judgment. This Memorandum Decision and Order expands upon, and changes in part, this Court's Decision on the Record. Therefore, this Memorandum Decision shall constitute this Court's Findings of Fact and Conclusions of Law pursuant to Bankruptcy Rule 7052. To the extent that there are any inconsistencies between this Memorandum Decision and this Court's prior oral ruling, this Memorandum Decision shall control. This is a "core" proceeding over which this Court has jurisdiction. 28 U.S.C. §§ 1334 and 157.

FACTUAL STATEMENT

On October 1, 1979, Morwest Real Estate and Development Ltd. ("Morwest") obtained a loan in the amount of $1,400,000 and executed a Real Estate Lien Note ("Wrap Note") in favor of Callejo and William Dana Graue ("Graue"). The Wrap Note included payments to Callejo and Graue, as well as payments on the underlying promissory notes that were in existence prior to the transaction between Morwest and Callejo and Graue. Therefore, the Wrap Note "wrapped" or included the underlying indebtedness. The Wrap Note was secured by a Deed of Trust on real property in Texas.1

On July 30, 1980, Lynn B. Janis ("Debtor" or "Mr. Janis") executed a personal guaranty ("Guaranty") concerning the Wrap Note. As indicated, each payment on the Wrap Note also included payments on the underlying promissory notes included in the Wrap Note. Therefore, a portion of the payment on the Wrap Note also was paid to the owner and holder of the Wrap Note. Mr. Janis guaranteed only payment of the equity portion of the Wrap Note. The equity portion was computed by taking the present balance of the Wrap Note (the sum of $1,388,565.09) minus the unpaid balance on the underlying promissory notes. The equity balance or equity portion was the amount of $487,940.35.2 Marilyn Janis, his wife and the other Debtor herein ("Debtor" or "Ms. Janis"), did not execute the Guaranty. Moreover, the Guaranty did not designate the law of any jurisdiction to be followed in the interpretation or enforcement of any provision therein.

On May 27, 1986, Morwest decided to sell the Texas real property. Therefore, the parties entered into a Tri-Party Agreement ("Agreement").3 The Agreement refers to the Guaranty executed only by Mr. Janis and a R.C. Breakell. The Agreement modifies the Guaranty. For instance, Mr. Janis agrees that his Guaranty shall not be released even though the Texas real property is being sold. The Agreement provides that to secure Callejo's indebtedness, Mr. Janis shall grant Callejo a second mortgage lien on the Hawaiian condominium. The Agreement further provides that the Second Mortgage is in effect only during the period of the rehabilitation of the Texas real property. The Agreement contemplated that the second mortgage lien, after rehabilitation of the Texas real property, would be released. This Agreement stated that it was to be interpreted according to the laws of the State of Texas. Mr. Janis signed the Agreement as Guarantor. Ms. Janis was not a signatory to the Agreement.

On May 24, 1986, a Mortgage was executed by Mr. Janis and Ms. Janis ("Mortgage") concerning the Hawaiian condominium.4 To fulfill the terms of the Agreement, which only referred to the debt created by the Guarantor Mr. Janis, the Mortgage was executed. The Mortgage was to be construed in accordance with the laws of the State of Hawaii; it was executed in Maricopa County, Arizona; and it was recorded on November 16, 1986 in Hawaii. The Mortgage, when recorded, created a second mortgage lien on the Hawaiian condominium.

On October 12, 1987, a default occurred under the Wrap Note.

On July 5, 1988, the Texas real property was sold, which resulted in a deficiency judgment and a demand on Mr. Janis, the Guarantor, for payment of the deficiency judgment.

On September 8, 1988 a Chapter 7 bankruptcy petition was filed by the Janises in Arizona, and a Trustee in Bankruptcy was appointed. The Hawaiian condominium was part of the bankruptcy estate.

On September 13, 1988 a default judgment was entered against the Janises in Texas on the Guaranty. The judgment sought, inter alia, to foreclose the lien on the property in Hawaii.

On May 15, 1989 the Trustee filed a complaint in the United States Bankruptcy Court, District of Arizona, seeking authority to sell the Hawaiian property. The Complaint also disputed the validity of Callejo's lien on the Hawaiian property. This Court granted the Trustee's request to sell the Hawaiian property, with the liens to attach to the proceeds.

On August 31, 1989, the sale closed. Founder's Title Co. is still holding $25,302.82 in escrow until this Court can determine the validity of the Callejo lien. The first lien holder on the Hawaiian property was paid in full.

On September 18, 1989, the Hawaiian Court entered a default judgment in favor of Callejo. The Hawaiian Court included in the default judgment a finding that the second mortgage lien of Callejo created by the Mortgage on the Hawaiian condominium could be foreclosed.

LEGAL ISSUES

I. Whether the judgments obtained in the State Courts of Texas and Hawaii are void.

II. Whether the Guaranty executed by Mr. Lynn Janis is valid and enforceable. An analysis of conflicts of law principles is necessary to determine this issue.

III. If the Guaranty is not valid as to the Janises and their marital community, whether the Mortgage of Callejo is nevertheless valid and enforceable and creates a second mortgage lien on the Hawaiian condominium.

DISCUSSION

The Court may grant a Motion for Summary Judgment if there are no genuine issues of material fact, and the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, at 2512, 91 L.Ed.2d 202 (1986).

The Court is empowered to enter judgment for a nonmoving party if the record so dictates. Brandon v. Board of Education of Guilderland Central School District, 487 F.Supp. 1219 (N.D.N.Y.1980), aff'd, 635 F.2d 971 (2d Cir.1980), cert. denied, 454 U.S. 1123, 102 S.Ct. 970, 71 L.Ed.2d 109 (1981), reh'g denied, 455 U.S. 983, 102 S.Ct. 1493, 71 L.Ed.2d 694 (1982); State Farm Mutual Automobile Ins. Co. v. Clark, 397 F.Supp. 745 (D. Alaska 1975) (where relief in favor of nonmoving party is indicated, it is appropriate to grant summary judgment in favor of the party opposing a summary judgment motion without the necessity for a normal cross motion).

I.

In the Ninth Circuit, actions taken in violation of the automatic stay are not void ab initio only voidable. Matter of Roach, 660 F.2d 1316 (9th Cir.1981); In re Brooks, 79 B.R. 479 (Bankr. 9th Cir.1987); In re Schwartz, 119 B.R. 207 (Bankr. 9th Cir.1990).

In In re Sambo's Restaurants, Inc., 754 F.2d 811 (9th Cir.1985), the Ninth Circuit applied a flexible approach to determine whether certain actions were voidable. In Sambo's a party had commenced a wrongful death action without knowledge that a bankruptcy petition had been filed. The party then attempted to file a proof of claim in the bankruptcy proceeding, which the Bankruptcy Court refused to permit. The Ninth Circuit determined that although the filing of the complaint was in violation of the automatic stay, the complaint could nevertheless serve as an informal proof of claim in the bankruptcy proceedings.

The Ninth Circuit, however, has recently taken a strong position in vitiating actions taken in violation of the automatic stay which may have an impact on the bankruptcy estate.

In In re Minoco Group of Companies, Ltd., 799 F.2d 517 (9th Cir.1986), the Ninth Circuit determined that the excess officers and directors liability policies were property of the Debtor's estate pursuant to 11 U.S.C. § 541(a).5 As such this property interest was protected by the automatic stay from actions of creditors, specifically by 11 U.S.C. § 362(a)(3).6 Therefore, the insurance companies providing this coverage to the debtor's officers and directors could not cancel these policies without first seeking a determination that the automatic stay was terminated. The decision of the Bankruptcy Court declaring the cancellation of the policies as being within the parameters of Section 362(a) and enjoining the insurance companies from effecting a cancellation was upheld. The Ninth Circuit stated:

The insurance companies contend that debtor never demonstrated irreparable harm from cancellation. This point is meritless. The automatic stay comes into play upon the filing of a bankruptcy petition whether
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