Maria Vista Estates v. Mi Nipomo, LLC (In re Maria Vista Estates), BAP No. CC-16-1111-TaLN

• Decision Date: 21 February 2017
• Docket Number: Adv. No. 15-01096-PC,BAP No. CC-16-1111-TaLN
• Citation: Maria Vista Estates v. Mi Nipomo, LLC (In re Maria Vista Estates), Adv. No. 15-01096-PC, BAP No. CC-16-1111-TaLN (B.A.P. 9th Cir. Feb 21, 2017)
• Parties: In re: MARIA VISTA ESTATES, Debtor. MARIA VISTA ESTATES, Appellant, v. MI NIPOMO, LLC; COSTA PACIFICA ESTATES HOMEOWNERS ASSOCIATION, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

In re: MARIA VISTA ESTATES, Debtor.

MARIA VISTA ESTATES, Appellant, v. MI NIPOMO, LLC; COSTA PACIFICA

ESTATES HOMEOWNERS ASSOCIATION, Appellees.

BAP No. CC-16-1111-TaLN

Adv. No. 15-01096-PC

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

Argued and Submitted: January 19, 2017

February 21, 2017

NOT FOR PUBLICATION

Bk. No. 07-10362-PC

MEMORANDUM^*

Argued and Submitted on January 19, 2017 at Pasadena, California

Appeal from the United States Bankruptcy Court for the Central District of California

Honorable Peter H. Carroll, Bankruptcy Judge, Presiding

Appearances: Roy E. Ogden of Ogden & Fricks LLP argued for appellant; Penelope Parmes of Troutman Sanders LLP argued for appellee Mi Nipomo, LLC; Patricia H. Lyon of French Lyon Tang argued for appellee Costa Pacifica Estates Homeowners Association.

Before: TAYLOR, LAFFERTY, and NOVACK,^** Bankruptcy Judges.

INTRODUCTION

This appeal centers around the efforts of chapter 7¹ debtor Maria Vista Estates ("MVE") and Erik Benham, one of MVE's principals, to salvage some return from a real estate development. MVE and Benham have asserted throughout two bankruptcy cases that a lender fraudulently altered the legal description in a deed of trust securing a development loan. Both filed chapter 11 bankruptcy petitions; both cases were converted to chapter 7; and both chapter 7 trustees administered the alleged fraud claim. MVE contends, notwithstanding determinations and events in both bankruptcies, that it acquired the right to pursue the fraud claim when its chapter 7 trustee abandoned real property. It also argues that the fraud claim survived a bankruptcy-court-approved settlement and related releases. The MVE bankruptcy court concluded otherwise; we agree with its determinations. We AFFIRM.

FACTS²

The underlying dispute has meandered through the state and federal court system over the past decade. Some facts, however, are not in dispute:

Prepetion, MVE owned a multi-lot residential subdivision in Nipomo, California (the "Property"). It intended to develop the Property in three phases.

In 2004, MVE acquired financing for phase one of the development from Security Pacific Bank ("Bank"). It secured repayment of this loan through a deed of trust (the "First Trust Deed") which attached a legal description corresponding to the portion of the Property being developed in phase one.

A few months later, however, Bank re-recorded the First Trust Deed (the "Amended First Trust Deed") and changed the attached legal description. The legal description now identified the entirety of the Property as the collateral. The Amended First Trust Deed bore a notarized second acknowledgment of the signatures of Benham, as Managing Member of general partner, BenIng Company, L.L.C., and Mark Pender, as President of general partner, Pender Properties Incorporated. An employee of Fidelity National Title Company ("Fidelity") notarized these signatures.

Thereafter, MVE obtained a second loan from Bank in connection with phase two of the development. It again securedrepayment through a trust deed (the "Second Trust Deed"). The Second Trust Deed attached a legal description which described only the portion of the Property being developed in phase two.

The present appeal. What MVE and Benham have doggedly disputed for years is the genuineness of the signatures on the Amended First Trust Deed. They assert that neither Benham nor Pender signed the amended document and that the Bank and Fidelity conspired to file a forgery which fraudulently augmented the collateral securing the phase one loan. They point out that, but for this fraud, the portion of the Property scheduled for development in phase three would be unencumbered and not subject to foreclosure as a result of the phase one and phase two loan defaults. We refer to these allegations as the "fraud claim."

While Benham and MVE raised the fraud claim in a variety of defenses, claims, motions, and actions, this appeal relates to MVE's assertion of the fraud claim through a 2015 quiet title action filed in the California Superior Court against Mi Nipomo, LLC ("Mi Nipomo") and Costa Pacifica Estates Homeowners Association ("Costa Pacifica"), parties with post-foreclosure interests in the Property.

Mi Nipomo and Costa Pacifica removed this quiet title action to the MVE bankruptcy court, and the bankruptcy court dismissed the adversary proceeding. Bankruptcy Court's Order on Motion to Dismiss, Apr. 13, 2016 ("Mem. Dec."). In short, it concluded that MVE lacked standing to bring a quiet title action as a result of previous orders and actions in the MVE and Benham cases. We now turn to those earlier proceedings.

Early proceedings in the MVE bankruptcy case. In March 2007, MVE filed a voluntary chapter 11 petition. The Property was the only significant scheduled asset.

The Bank, eventually and over MVE's opposition, obtained stay relief allowing it to proceed with a pre-petition judicial foreclosure action. It subsequently brought an emergency motion seeking to correct the legal description in the stay relief order so that it referred to the legal description from the Amended First Trust Deed and, thus, described the entirety of the Property. Benham opposed based on the fraud claim. The bankruptcy court overruled the objection and entered the amended stay relief order.

Thereafter, the bankruptcy court converted MVE's chapter 11 case to chapter 7; Jerry Namba was appointed as the chapter 7 trustee. And later that year, the California Department of Financial Institutions closed Bank, and the Federal Deposit Insurance Corporation ("FDIC") became its receiver and succeeded to its assets.³

Early proceedings in the Benham bankruptcy case. One day after Bank obtained stay relief in the MVE case, Benham filed a voluntary chapter 11 petition. The Bank then sought stay relief in Benham's case. Benham opposed and raised the fraud claim. The bankruptcy court, nonetheless, terminated the stay but declined to determine the validity, extent, priority, orenforceability of the Amended First Trust Deed.

The bankruptcy court eventually converted Benham's chapter 11 case to chapter 7.

Benham's interests in the Property and his related claims are administered. Benham's chapter 7 trustee filed a motion seeking approval of a settlement and authority to sell Benham estate assets, free and clear, for $450,000 to Nipomo Acquisition, LLC. As relevant here, these assets included: (1) any of Benham's, the Estate's, and the Trustee's claims against the Bank, the FDIC, Multibank, Fidelity, and their respective successors; (2) any and all claims against MVE; and (3) any claim, including under § 544, related to the development loans or the First Trust Deed, the Amended First Trust Deed, or the Second Trust Deed. These assets, thus, included Benham's interest in the fraud claim.

Benham objected to this motion. He also commenced an adversary proceeding based on the fraud claim against the FDIC, Fidelity, and others (the "Benham-FDIC AP"). The bankruptcy court eventually overruled Benham's objection and approved the sale to Nipomo Acquisition, LLC. The order approving the sale is now final.⁴

Once Nipomo Acquisition, LLC acquired the assets and, in particular, the fraud claim, it filed a notice of dismissal of the Benham-FDIC AP under Rule 7041. Further action in the adversary proceeding occurred, but the bankruptcy court eventually dismissed it over Benham's opposition. Benham didnot appeal.

Finally, Sequoia, then owner of the phase one loan rights, foreclosed on the First Trust Deed and the Amended First Trust Deed. Nipomo Real Estate Group, LLC and Banconsulting Services, LLC purchased the Property at the foreclosure sale. Appellee Mi Nipomo is the successor in interest to the foreclosing parties.

In this appeal, no one questions that the sale to Nipomo Acquisition, LLC, the dismissal of the Benham-FDIC AP, and the Sequoia foreclosure extinguished any interest that Benham personally possessed in the Property and the fraud claim. Benham, however, persisted in asserting this claim in and through the MVE case.

MVE's chapter 7 trustee abandons the estate's interest in the Property. After the Sequoia foreclosure, the MVE Trustee filed a notice of his intent to abandon the estate's interest, if any, in the Property. The Trustee wrote:

The Trustee has concluded that all of the Property is burdensome to the estate and is of inconsequential value or benefit to the estate. Specifically, the Property does not have any equity that can be liquidated for the benefit of the estate. Secured claims against the Property exceed $23,000,000 and proposed purchase offers for the Property have not exceeded $13,000,000. In addition, the estate lacks sufficient funds to continue to insure the Property and maintain 24-hour security. Therefore, based on the foregoing, the Trustee contends pursuant to his business judgment, that the abandonment of the estate's interest in the Property, if any, is in the best interests of the estate and its creditors.

Notice of Chapter 7 Trustee's Intention to Abandon Assets, Mar. 15, 2011, 2. The Trustee served both MVE and Benham with the notice and motion; neither opposed.

The bankruptcy court then entered its order authorizing abandonment of "the estate's interest, if any, in the [Property]" and stating "that such abandonment shall be deemed effective without further order of the Court" (the "Abandonment Order"). The Abandonment Order was not appealed.

MVE's chapter 7 trustee settles MVE's claims related to the Property. In June 2011, the MVE Trustee moved for Rule 9019 approval of a settlement with Sequoia, Fidelity, RES-CA MV Estates, LLC, and their predecessors and successors in interest (the "FDIC Parties"). In short, the terms were: (1) the MVE bankruptcy estate would receive $200,000 to settle its claim against the FDIC Parties for recovery of the reasonable, necessary costs and expenses incurred in preserving the Property for the FDIC Parties' benefit; and (2) the FDIC Parties...