Shamblin, In re

Decision Date22 November 1989
Docket NumberNo. 88-5840,88-5840
Citation890 F.2d 123
PartiesIn re William B. SHAMBLIN; Grace G. Shamblin, Debtors. PHOENIX BOND & INDEMNITY COMPANY; Stanford D. Marks; Debois Investment Group, Inc., Appellants, v. William B. SHAMBLIN; Grace Shamblin, Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Russell H. Rapoport, Encino, Cal., for appellants.

Gerard C. Heldrich, Jr., Chicago, Ill., for appellees.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel.

Before WRIGHT and FARRIS, Circuit Judges, and SMITH, * District Judge.

EUGENE A. WRIGHT, Circuit Judge.

Phoenix Bond & Indemnity Company, Stanford D. Marks, and DeBois Investment Group, Inc., appeal the decision of the Bankruptcy Appellate Panel. The panel reversed the bankruptcy court's refusal to set aside the tax sale of Grace Shamblin's real property. The panel also granted the tax sale purchaser a lien on the property to the extent of present equivalent value given. We reverse the panel's grant of a lien to the tax sale purchaser. We affirm the panel's decision in all other respects.

FACTS

Grace and William Shamblin filed a voluntary Chapter 11 bankruptcy petition in California on February 2, 1982. When the Shamblins filed for bankruptcy, Grace Shamblin owned an apartment building in Cook County, Illinois, on which she owed back taxes. The Shamblins failed to notify the Cook County Recorder's Office of their bankruptcy, although they later amended their bankruptcy schedule to include the Cook County Assessor as a creditor.

Stanford D. Marks is principal shareholder and principal operating officer of Phoenix Bond & Indemnity. Marks is also the managing officer and a director of DeBois Investment Group, Inc. The two firms share office space.

On February 22, 1982, the Circuit Court of Cook County entered judgment against Grace Shamblin's apartment building for back taxes. The Cook County Treasurer conducted a tax sale on May 19, 1982. Phoenix Bond & Indemnity paid $24,430.85 in back taxes, interest, and costs and received a Certificate of Purchase. Neither the Cook County officials nor Phoenix knew of the Shamblins' bankruptcy at that time.

A Phoenix employee received notice of the Shamblins' bankruptcy no later than May 22, 1984. Illinois law provides a two year redemption period for property sold at tax sales. This period expired on May 21, 1984. On May 22, 1984, Phoenix assigned its Certificate of Purchase to Debois. After discovering the pending bankruptcy, the Cook County state's attorney demanded that DeBois return the Certificate of Purchase. DeBois refused. On May 30, 1984, Phoenix, through Stanford Marks, filed an application for an order directing the county clerk to issue a tax deed. Although it is unclear exactly when Marks personally received notice of the bankruptcy, he knew unequivocally of the Shamblins' bankruptcy by June 25, 1984, when he received the Shamblins' complaint in their bankruptcy court action to set aside the tax The Shamblins filed this action in bankruptcy court on June 13, 1984 requesting that the court set aside the tax sale. Phoenix and Marks filed a joint answer on July 18, 1984. The bankruptcy court refused to set the sale aside, holding that the Shamblins' action was untimely under 11 U.S.C. Sec. 549(d)(1). The court held also that even though the sale violated the automatic stay of 11 U.S.C. Sec. 362, the sale was voidable only during the two year redemption period for tax sales under Illinois law. The bankruptcy appellate panel reversed, holding that both the tax sale and the tax deed violated the automatic stay and were therefore void. Finding that Phoenix was a good faith purchaser for value, however, the panel granted Debois, Phoenix's successor in interest, an 11 U.S.C. Sec. 549(c) lien against the property.

                sale.  Nevertheless, on July 3, 1984, when Marks argued on behalf of the Phoenix/Debois tax deed in Cook County Circuit Court, he informed the court of the Shamblins' possible bankruptcy, but said he was speaking from "second-hand information."    The tax deed was issued to DeBois on July 6, 1984
                
I. Mootness

Phoenix, Marks, and DeBois argue that the Shamblins' failure to obtain a stay pending appeal from the bankruptcy court order makes the appeal moot. "Bankruptcy's mootness rule applies when an appellant has failed to obtain a stay from an order that permits a sale of a debtor's assets." In re Onouli-Kona Land Co., 846 F.2d 1170, 1171 (9th Cir.1988). However, the rule operates only when a purchaser bought an asset in good faith. Id. at 1173. Lack of good faith includes fraudulent behavior or an attempt to take unfair advantage. See id.; In re Suchy, 786 F.2d 900, 902 (9th Cir.1985).

The tax deed was not obtained in good faith. Phoenix, Marks, and DeBois all had notice of the bankruptcy before the tax deed proceeding. They refused to return the Certificate of Purchase to Cook County authorities, they did not attempt to resolve the possible violation of the bankruptcy stay until after the deed was issued, and they made misleading statements to the court to obtain the order to issue the deed. The mootness rule does not apply. 1

II. Section 362 Automatic Stay
A. The May Tax Sale

The BAP held correctly that the tax sale was void from the outset. 11 U.S.C. Sec. 362 provides that a petition in bankruptcy operates as a stay on any act to create, perfect, or enforce any lien against property of the bankruptcy estate. Judicial proceedings in violation of this automatic stay are void. In re Stringer, 847 F.2d 549, 551 (9th Cir.1988). In Kalb v. Feuerstein, 308 U.S. 433, 60 S.Ct. 343, 84 L.Ed. 370 (1940), several mortgagees sought to confirm a sheriff's sale of a farm owned by persons with petitions pending in bankruptcy court. The Court stated:

Because that State court had been deprived of all jurisdiction or power to proceed with the foreclosure, the confirmation of sale, the execution of the sheriff's deed, the writ of assistance, and the ejection of appellants from their property--to the extent based upon the court's actions--were all without authority of law.

308 U.S. at 443, 60 S.Ct. at 348. 2 We decline to depart from this well established rule.

Numerous federal courts have followed Kalb and held tax and foreclosure sales in violation of the automatic stay to be void. See Richard v. City of Chicago, 80 B.R. 451, 453 (N.D.Ill.1987) (Illinois tax sale); In re Greer, 89 B.R. 757, 759 (Bankr.S.D.Ill.1988) (Illinois tax sale); In re Young, 14 B.R. 809, 811 (Bankr.N.D.Ill.1981) (Illinois tax sale); cf. In re Dennis, 14 B.R. 125, 126-27 (Bankr.E.D.Pa.1981) (sheriff's sale under Pennsylvania law). We agree.

Appellants Phoenix, Marks and DeBois argue that the bankruptcy court retroactively annulled the stay, thereby validating the tax sale. The bankruptcy court judgment discusses annulling the automatic stay, but the court's decision appears to rest on 11 U.S.C. Sec. 549(d)(1) and the lapse of the two-year redemption period.

Even if the bankruptcy court had annulled the stay retroactively, the BAP correctly held that the court would have abused its discretion by doing so. We need not decide whether equitable principles may, in a proper case, justify retroactive annulment of the automatic stay. 3 In this case, equity favors enforcement rather than annulment of the stay. Any equitable exception to the automatic stay should be narrow and applied only in extreme circumstances. See, e.g., Matthews v. Rosene, 739 F.2d 249, 251 (7th Cir.1984) (refusing, due to laches, to nullify a nearly three-year-old state court order declaring the validity of a land sale contract).

The appellants' behavior regarding the tax deed proceeding borders on bad faith. The equities therefore favor the Shamblins. Appellants claim that the stay should be annulled retroactively for purposes of the tax sale alone, which they claim was accomplished in good faith. However, issuance of the tax deed was inextricably intertwined with the tax sale proceeding. We decline to view separately the behavior surrounding these two events.

B. The Tax Deed Proceeding

The BAP correctly held that the tax deed proceeding was void due to the invalid tax sale. We agree with the analysis of this issue in Richard v. City of Chicago, 80 B.R. at 452-53. The facts in Richard were similar to this case and, like this case, Richard involved Illinois law. In Richard the purchaser argued that the tax sale was a voidable act ratified when the debtor let the two-year statutory redemption period lapse. The court rejected this argument, holding the tax sale void. Id. at 453. It further held invalid the tax deed issued because of the void tax sale. Id. at 455; see also In re Young, 14 B.R. at 812 (enjoining purchaser at tax sale from seeking issuance of tax deed because sale, conducted in violation of automatic stay, was null and void); cf. In re Wheeler, 5 B.R. 600, 603-04 (Bankr.N.D.Ga.1980) (holding delivery of deed, acceptance of check, and recording of deed all void actions and without legal effect) (Georgia law).

The decisions cited by Phoenix, Marks, and DeBois and relied on by the bankruptcy court involve facts different from this case. All involve situations where the bankruptcy petition was filed during the statutory redemption period. See, e.g., In re Tynan, 773 F.2d 177, 179 (7th Cir.1985) (Wright, J.); In re Martinson, 731 F.2d 543, 544 (8th Cir.1984); Johnson v. First Nat'l Bank, 719 F.2d 270, 272 (8th Cir.1983), cert. denied, 465 U.S. 1012, 104 S.Ct. 1015, 79 L.Ed.2d 245 (1984); In re Tabor Enters., Inc., 65 B.R. 42, 44 (Bankr.N.D.Ohio 1986) (under Illinois law). The Shamblins filed their petition well before the tax sale occurred.

The equities surrounding the tax deed proceeding also weigh against the appellants. They could have sought relief from the automatic stay before committing acts that violated...

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