In re Torrez
| Decision Date | 12 June 1991 |
| Docket Number | Bankruptcy No. 189-02478-A-7F. |
| Citation | 132 BR 924 |
| Parties | In re John TORREZ, Jr., and Jessie Torrez, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of California |
COPYRIGHT MATERIAL OMITTED
Stephen J. Tully, Garrett & Tully, Pasadena, Cal., for Northwestern Mutual Life Ins.
Michael Terry Hertz, Lang, Richert & Patch, Fresno, Cal., for Tractor.
Hilton A. Ryder, McCormick, Barstow, Sheppard, Wayte & Carruth, Fresno, Cal., for debtors.
Gary Dyer, Office of the U.S. Trustee, Fresno, Cal Michael W. Stelzer, Fresno, Cal., for Rachael Torrez Tristao.
This opinion determines several matters. First, does this Court have jurisdiction to decide this controversy as a contested matter or should it have been brought by way of adversary proceeding? Secondly, if properly before the Court as a contested matter, does the moving party have standing under 11 U.S.C. § 1109(b) to appear and be heard and is permissive intervention under Bankruptcy Rule 2018(a) appropriate? Lastly, if determined to be a contested matter and if the moving party has standing and is permitted to intervene, was the automatic stay under 11 U.S.C. § 362(a) violated by Northwestern Mutual Life Insurance Company's, the moving party herein, foreclosure on real property in which the Debtors claim an interest as property of the estate?
On October 21, 1975, Northwestern Mutual Life Insurance Company ("Northwestern") loaned John Torrez, Jr. and Jessie Torrez ("Debtors") $420,000.00. Debtors executed a promissory note on the same date calling for bi-annual payments in the amount of $21,000.00.1 The loan was secured by a deed of trust recorded October 31, 1975, encompassing eight parcels of real property legally described in Exhibit "A" attached hereto and incorporated herein by reference.
Between October 31, 1975 and 1978 (the exact date can not be found in the record), Debtors conveyed five of the eight parcels (Parcels 1, 2, 3, 5, and 8, as described in Exhibit "A" hereto) to their children, Rachel Torrez Tristao, Pete Torrez, and Joseph Torrez. These parcels are the subject of this motion.
In 1978, and after Debtors' conveyance of the five parcels, Debtors borrowed an additional $250,000.00 from Northwestern.2 An amendment to the deed of trust was concurrently executed by Debtors and their children on April 20, 1978, reflecting the new loan balance. The Amendment of Deed of Trust3 was recorded May 4, 1978.
Debtors and their children defaulted on the property tax payments beginning in 1980. Northwestern paid all taxes due between 1980 and 1989 to protect its security. Beginning in 1983, Debtors and their children also defaulted on their irrigation assessments. Between 1983 and 1989, Northwestern paid all irrigation assessments to protect their security.
The unrefuted evidence is that the debtors ceased making payments on the amended note on March 1, 1985. (see Arneson and Keyes declarations attached to Exhibit 9 of Northwestern's motion) Northwestern deferred foreclosure proceedings for three years and three months. On June 7, 1988, Northwestern served and recorded a Notice of Default. The foreclosure sale reference all eight parcels as described in Exhibit "A" hereto was originally set for October 1988; however, at the request of the debtors and their children, it was postponed twice, finally being set for June 1, 1989. On October 18, 1988, Fullerton, Lang, Richert and Patch moved this Court for an order authorizing their withdrawal as counsel for the creditors' committee in the Joseph and Mary Torrez bankruptcy, case # XXX-XXXXXA-11F, so they could represent and bid for Lawrence Tractor, Inc. ("Lawrence") at the foreclosure sale. This request was granted October 24, 1988. Northwestern asserts that both the Debtors and Lawrence were well aware of the foreclosure proceedings.
On June 1, 1989, and immediately prior to the foreclosure sale, Debtors and their children filed individual bankruptcies thereby stopping the foreclosures. Debtors are farmers and sought relief under Chapter 11 of the Code4. Their children sought protection under Chapter 12 of the Code. Within two weeks after the filing of the petitions, Rachel Torrez Tristao and Pete Torrez voluntarily dismissed their bankruptcies.
Debtors filed their statement of executory contracts and unexpired leases on June 30, 1989, listing a sole leasehold of 120 acres of open ground from Mercedes Velasco for the annual payment of $20,000.00.
Northwestern moved for relief from the automatic stay (MC# JDC-1) on July 24, 1989, seeking authority to foreclose upon Debtors' three parcels (parcels 4, 6, & 7 in Exhibit "A" hereto) of real property. Alternatively, Northwestern sought dismissal of the Debtors' case on the grounds that it was filed in bad faith. Debtors filed their response and declaration of John Torrez, Jr., opposing Northwestern's motion for relief on August 8, 1989. This matter was heard on August 21, 1989, at which time Northwestern's motion was denied without prejudice.
Debtors moved to dismiss their case on July 25, 1989, asserting they no longer needed bankruptcy protection to prevent the foreclosure on the real property by Northwestern and FmHA. FmHA has a scheduled indebtedness of $1.8 million and held a second deed of trust on 250 acres of Debtors' real property. As additional security for the $1.8 million indebtedness, Debtors assigned four promissory notes each in the amount of $65,000.00 owed by their children to FmHA.5 They asserted their confidence that negotiations with these two creditors could be successful without Chapter 11 protection.
The U.S. Trustee objected to Debtors' motion to dismiss on July 31, 1989, contending it was not in the best interests of all creditors to dismiss because of the myriad of problems and debt confronting the estate. On the same date, Lawrence, Debtors' largest trade creditor, filed its opposition claiming that Debtors' motion to dismiss was procedurally defective. Creditor, J.D. Heiskell Co., filed its motion supporting Lawrence's opposition on August 4, 1989. Debtors withdrew their motion to dismiss at the hearing on August 15, 1989.
Respecting the children's property, Northwestern deferred foreclosure efforts until four months after Debtors' petition was filed. Thereafter, on October 10, 1989, a trustee's sale of the children's property (parcels 1, 2, 3, 5, & 8 of Exhibit "A" hereto) was held. Debtors' three parcels securing Northwestern's position were not sold at the trustee sale. Northwestern obtained title to the children's real property at the foreclosure sale by credit bidding the sum of $760,709.90 for the five parcels.
Thereafter, Rachel Torrez Tristao and Pete Torrez filed an action in the Tulare County Superior Court for the State of California to set aside the foreclosure sale, for quiet title and an accounting. That matter was removed to the Federal District Court for the Eastern District of California, case number CV-F-89-772 REC. On May 21, 1990, Northwestern filed its Motion for Summary Judgment in the District Court case. On July 17, 1990, the District Court entered judgment granting Northwestern's motion, holding that the foreclosure sale was proper under state law and that Northwestern was the legal owner of the property.6
Debtors filed their first Disclosure Statement and Plan in this case on September 11, 1989. In light of the objections raised by the United States Trustee's office, Lawrence, and Northwestern, Debtors filed an Amended Disclosure Statement and Plan on November 3, 1989. Further objections were lodged causing Debtors to file a Second Amended Disclosure Statement and Plan on December 1, 1989. Debtors' Second Amended Disclosure Statement was approved on December 1, 1989. Lawrence filed a Creditor's Disclosure Statement and Plan on November 8, 1989. The Disclosure Statement was approved as amended on December 8, 1989. Confirmation reference both proposed Plans of Reorganization was heard on January 3, 1990. Neither Debtors' nor Lawrence's plans were confirmed. Pursuant to Debtors' motion, the case was converted to Chapter 7 on March 13, 1990. Paul Guymon was appointed as trustee on March 20, 1990.
Debtors amended their schedules April 19, 1990. Respecting business leases as set out in ¶ 17 of Debtors' Statement of Affairs, Debtors deleted the lease of 120 acres of open ground from Mercedes Velasco as a business lease and did not include it anywhere else in the schedules as amended. There is no reference to, or addition of, any other leaseholds in this amendment nor in Debtors' original Statement of Affairs.
Debtors' original and amended A-2 schedule shows Northwestern's claim in the amount of $700,000.00.7 Both the original and amended A-2 schedule reflect that Northwestern's claim was secured by a first deed of trust on a 250 acre ranch. The 250 acre ranch is scheduled as having a market value of $425,000.00 in both the original and amended A-2 schedules. While the original A-2 schedule also indicates that Northwestern's claim was additionally secured by a first deed of trust on Debtors' residence and 388 acres having a market value of $833,000.00, the amended A-2 schedule deletes reference to this as security.8 The amended A-2 schedule also shows that FmHA holds a second deed of trust against the same 250 acres and other assets pledged as security, including four promissory notes from the children payable to the Debtors assigned to FmHA, equipment, a lien on 1989 crop proceeds, and first deeds of trust on two parcels of property unrelated to the instant proceedings. The amount of FmHA's claim without deduction of the value the security is $1.8 million.
Debtors moved to reconvert their case to Chapter 11 on January 8, 1991. In Debtors' motion to convert, they asserted that Northwestern violated the automatic stay by foreclosing on 520 acres of property owned by their children in which they...
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