In re Richter

• Decision Date: 20 January 2015
• Docket Number: No. 6:14–BK–10231–SY.,6:14–BK–10231–SY.
• Parties: In re Michael Lynn RICHTER, Debtor.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California

525 B.R. 735

In re Michael Lynn RICHTER, Debtor.

No. 6:14–BK–10231–SY.

United States Bankruptcy Court, C.D. California, Riverside Division.

Signed Jan. 20, 2015.

Jenny L. Doling, Law Offices of Jenny L. Doling APLC, Palm Desert, CA, for Debtor.

Ian S. Landsberg, Esq., Casey Z. Donoyan, Esq., Landsberg & Associates, Woodland Hills, CA, for Rustling Oaks, LLC.

MEMORANDUM DECISION ON RUSTLING OAKS, LLC'S MOTION FOR RELIEF FROM THE AUTOMATIC STAY (UNLAWFUL DETAINER)

SCOTT H. YUN, Bankruptcy Judge.

Before the Court is a motion by Rustling Oaks, LLC (“Rustling Oaks”) for relief from the automatic stay to commence an unlawful detainer proceeding against the debtor Michael Lynn Richter (“Debtor”) and evict Debtor from his residence, which Rustling Oaks purchased at a prepetition foreclosure sale. The sale, however, was subject to Debtor's postsale right of redemption under California law, which is available to the prior owners of real property sold in a nonjudicial foreclosure by a homeowners' association on its lien for delinquent assessments. Debtor confirmed a Chapter 13¹ plan without objection that he characterizes as exercising this right. The broad issue here is whether relief from the automatic stay is warranted in light of Debtor's purported redemption through his plan.

For the reasons set forth below, the Court will regrettably grant Rustling Oaks' motion. The automatic stay as to the property will be annulled retroactively to validate certain actions taken by the foreclosure trustee, and Rustling Oaks will be entitled to begin its unlawful detainer proceeding to gain possession of the property.

1. FACTUAL BACKGROUND.

In 2000, Debtor purchased a condominium unit within a country club in Palm Desert, California (the “Residence”). As part of a common interest development, the Residence is subject to a set of covenants, conditions, and restrictions (the “CC & Rs”) enforced by the development's homeowners' association, Marrakesh Community Association (“MCA”); one of those CC & Rs requires the condo owner to pay various assessments to MCA. If assessments are not paid, the CC & Rs allow a trustee designated by MCA to initiate a nonjudicial foreclosure of the Residence.

Debtor became delinquent on his assessments. The delinquencies prompted MCA to execute and record a Notice of Assessment Lien in February 2013, indicating that it had a lien in the amount of $7,206.08 for unpaid assessments, interest, and related fees. In the Notice, MCA designated the law firm Wayne S. Guralnick, APLC (“Guralnick”) to act as the foreclosure trustee.

The delinquencies continued, so Guralnick, on behalf of MCA, began the nonjudicial foreclosure process by recording in May 2013 a Notice of Default and Election to Sell Pursuant to Assessment Lien and the Provisions of the Declaration of Restrictions. Guralnick then recorded a Notice of Trustee's Sale in September 2013, which stated that the Residence would be sold at public auction on October 10, 2013.

The auction took place as scheduled. By this date, the total unpaid debt to MCA reached $18,836. At the auction, Rustling Oaks, a third party unrelated to MCA, became the highest bidder, purchasing the Residence for $36,000. After Rustling Oaks paid the purchase price,² Guralnick recorded the Certificate of Foreclosure Sale Subject to Redemption on October 17, 2013. The Certificate informed Debtor that he had 90 days from the sale date to redeem the Residence.

On January 8, 2014, the final day of the redemption period, Debtor filed his Chapter 13 petition. Formal notice of the bankruptcy filing was provided to MCA and Guralnick, but not to Rustling Oaks. These three entities did not file a proof of claim or otherwise participate in Debtor's bankruptcy case.

Using this district's mandatory form, Debtor then proposed a Chapter 13 plan that he believed was sufficient to redeem the Residence from the foreclosure sale (the “Plan”). Debtor listed MCA in Class 2 of the Plan, which is intended for the “cure and maintenance” of claims secured by a debtor's principal residence. In this class, Debtor proposed to directly pay MCA the ongoing postconfirmation assessments (the maintenance) outside of the Plan and to pay MCA through the Plan a total of $18,836 over 60 months (the cure).³

Although Debtor's intention was to exercise his right of redemption through the Plan, nothing on the face of the Plan (other than possibly the mere inclusion of MCA's name in Class 2) signaled this intention. The Plan's miscellaneous provisions, where a debtor is permitted to add his own custom language, did not mention Rustling Oaks, the prepetition foreclosure sale, or Debtor's right of redemption.⁴

Rather, the Plan's treatment of MCA's claim in Class 2 resembled what is commonly proposed for the cure and maintenance of home mortgages in default. Like with the petition, MCA and Guralnick, but not Rustling Oaks, received notice of the Plan, but neither of them filed an objection. The Plan was then confirmed on March 24, 2014.

MCA began receiving payments from the Chapter 13 trustee and Debtor. But Guralnick, on MCA's behalf, returned the checks in May 2014 and informed the trustee and Debtor that MCA could not accept payments for delinquent or ongoing assessments because MCA had been paid in full from the sale proceeds and Rustling Oaks was the new owner of the Residence. Up until then, the trustee was apparently unaware that the Residence had been sold in a prepetition foreclosure sale.

Debtor's counsel then exchanged emails with Guralnick, in which she insisted that her client had successfully redeemed the Residence through the Plan and that she would initiate an adversary proceeding to redress the alleged violations of the automatic stay if this situation between Debtor, Guralnick, MCA, and Rustling Oaks could not be resolved. In response to counsel, Guralnick explained its position, that “the Chapter 13 plan providing [for] the HOA prepetition payments [made] no sense” and that “[i]f [Debtor] wanted to redeem the property, he would need to pay [Rustling Oaks] in full at the time of redemption so that [Rustling Oaks] receives all [of] its funds back.” Although nothing was resolved between the parties, Debtor never filed an adversary proceeding.

Two months later, in July, Guralnick sent letters to Debtor's counsel and the trustee informing them of its intention to record the Trustee's Deed. Receiving no response, Guralnick executed the Trustee's Deed on July 28, 2014, and then recorded it on August 1, 2014, perfecting Rustling Oaks' legal title in the Residence.

On October 7, over six months after confirmation, Rustling Oaks filed its motion for relief from the automatic stay, which Debtor vehemently opposed. An initial hearing on the motion was held on October 29, where the Court heard oral argument and allowed the parties to submit supplemental briefs. Following the submission of those briefs, the Court entertained final oral argument at the continued hearing on December 17.

2. JURISDICTION.

This memorandum decision contains the Court's findings of fact and conclusions of law required by Federal Rule of Civil Procedure 52(a), made applicable to this contested matter by Bankruptcy Rules 7052 and 9014(c). The Court has jurisdiction under 28 U.S.C. § 1334 and 11 U.S.C. § 362, and this is a core proceeding under 28 U.S.C. § 157(b)(2)(G).

3. DISCUSSION.

3.1. Introduction.

An entity seeking to evict a debtor from and gain possession of real property must first obtain relief from the automatic stay under § 362(d) because the stay protects the debtor's physical occupation of real property, a possessory interest under California law. See Eden Place, LLC v. Perl (In re Perl), 513 B.R. 566, 576 (9th Cir. BAP 2014). Here, wishing to initiate an unlawful detainer proceeding against Debtor after a prepetition foreclosure sale and the expiration of the redemption period, Rustling Oaks argues that cause exists under § 362(d)(1) to grant stay relief.⁵

Debtor contends that stay relief is not warranted for a number of reasons. His opposition and supplemental brief can be boiled down to essentially three major arguments: (1) That the Bankruptcy Code allows Debtor to redeem the Residence through the Plan; (2) that the Plan's res judicata effect precludes Rustling Oaks from moving for stay relief; and (3) that Rustling Oaks' title is premised on a void Trustee's Deed recorded postpetition, making stay relief for an unlawful detainer proceeding premature at this time. The Court considers each argument below.

3.2. The Unexpired Statutory Right of Redemption in a Chapter 13 Case.

3.2.1. The Right of Redemption under California Law.

In California, an owner facing foreclosure of his real property is entitled to redeem it. There are, however, two separate rights of redemption available to him.

Before the property is sold in the foreclosure sale, the owner has an equitable right of redemption (or equity of redemption), which allows him to pay the entire debt owed to the foreclosing lienholder “at any time prior to the sale to avoid loss of the property.” Knapp v. Doherty, 123 Cal.App.4th 76, 87, 20 Cal.Rptr.3d 1 (2004) (citing Cal. Civ.Code §§ 2903, 2905 ). This redemption has the effect of satisfying the debt, extinguishing the lien, and terminating the power of sale. See Nguyen v. Calhoun, 105 Cal.App.4th 428, 440, 129 Cal.Rptr.2d 436 (2003). But the foreclosure sale extinguishes the owner's right to equitably redeem the property. See Moeller v. Lien, 25 Cal.App.4th 822, 831, 30 Cal.Rptr.2d 777 (1994).

Following the foreclosure sale, a statutory right of redemption (or statutory redemption) may be available under certain circumstances, which gives the now-former owner “an opportunity to regain ownership of the property by paying the foreclosure sale price [to the purchaser], for a period of time after foreclosure.” Alliance Mortg. Co. v. Rothwell, 10 Cal.4th 1226, 1236, 44 Cal.Rptr.2d 352, 900 P.2d 601 (1995). An effective redemption terminates the effect of the...