Universal Farming Industries, In re, 88-5548

• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)
• Writing for the Court: Before WALLACE, POOLE and O'SCANNLAIN; O'SCANNLAIN
• Citation: 873 F.2d 1334
• Parties: , Bankr. L. Rep. P 72,883 In re UNIVERSAL FARMING INDUSTRIES, Debtor. George C. SPACEK, Plaintiff-Appellant, v. Jerry THOMEN, Defendant-Appellee.
• Docket Number: No. 88-5548,88-5548
• Decision Date: 08 May 1989

Page 1334

873 F.2d 1334 19 Bankr.Ct.Dec. 1078, Bankr. L. Rep. P 72,883 In re UNIVERSAL FARMING INDUSTRIES, Debtor.
George C. SPACEK, Plaintiff-Appellant,
v.
Jerry THOMEN, Defendant-Appellee. No. 88-5548. United States Court of Appeals,
Ninth Circuit. Argued and Submitted Dec. 8, 1988.
Decided May 8, 1989.

Page 1335

Leon L. Vickman, Encino, Cal., for plaintiff-appellant.

Ernest Lipschutz, Van Nuys, Cal., for defendant-appellee.

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

Before WALLACE, POOLE and O'SCANNLAIN, Circuit Judges.

O'SCANNLAIN, Circuit Judge:

George C. Spacek, holder of a trust deed on a piece of real property held by the debtor in a bankruptcy case, brought suit in bankruptcy court against Jerry Thomen, the holder of the first trust deed on the same piece of real property. Spacek claims that Thomen's trust deed should be equitably subordinated or, alternatively, that the first trust deed merged with the title to the property. We reject both contentions.

In February 1983, Thomen, the lawyer and business associate of Kewars Tabatabay ("Tabatabay"), purchased from a third party the first deed of trust on a property owned by Universal Farming Industries ("UFI"). UFI had filed a bankruptcy petition under Chapter 11 on January 11, 1983.

Spacek, holder of a deed of trust on the same real property, brought suit in the bankruptcy court, claiming that Thomen's claim should be equitably subordinated, or, alternatively, that the first deed of trust merged with the title to the real property. The bankruptcy court granted judgment for Thomen. Following the judgment, a number of creditors, including Thomen and Spacek, and the debtor stipulated to the dismissal of the debtor's Chapter 11 case. This stipulation expressly included a provision that the bankruptcy court would retain jurisdiction of this case. The district court affirmed the ruling of the bankruptcy court. Spacek filed a timely appeal.

DISCUSSION

1. Is the case moot due to the dismissal of the underlying bankruptcy?

Spacek asserts that this case is moot, due to the dismissal of the underlying bankruptcy. We disagree.

In the bankruptcy context the determination of whether a case becomes moot on the dismissal of the bankruptcy hinges on the question of how closely the issue in the case is connected to the underlying bankruptcy. See In re Omoto, 85 B.R. 98, 100 (Bankr. 9th Cir.1988); In re Dahlquist, 751 F.2d 295, 298 (8th Cir.1985). When the issue being litigated directly involves the debtor's reorganization, the case is mooted by the dismissal of the bankruptcy. Thus, for example, an appeal of a denial of a motion to reimpose the automatic stay under 11 U.S.C. Sec. 362(a) was dismissed as moot on the dismissal of the bankruptcy case. In re Income Property Builders, 699 F.2d 963, 964 (9th Cir.1982). However, if the issue is ancillary to the bankruptcy, the dismissal of the petition does not necessarily cause the case to become moot. For example, the Ninth Circuit held that the dismissal of a petition in bankruptcy did not bar an application for compensation for services rendered in connection with the bankruptcy. See U.S.A. Motel Corp. v. Danning, 521 F.2d 117 (9th Cir.1975).

Here, the controversy about the priority of Thomen's trust deed appears not to be so closely linked to the underlying bankruptcy that the dismissal of the Chapter 11 case renders the case moot. Presumably, even outside the bankruptcy context the value of Spacek's trust deed depends in part on the validity of Thomen's apparently prior trust deed. This would be true even

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if UFI, the corporation against which the two claims are held, is solvent and able to pay all creditors fully. The value of the claims against UFI will depend in part on how many claims will precede them in a potential insolvency. Thus, a legally cognizable interest in the outcome of the case survives the bankruptcy. We therefore consider the merits of the case.

2. Did the first deed of trust merge with the title of the real property?

Spacek contends that the claim represented by the first trust deed merged with the ownership interest in the property. We evaluate this claim under California law. See Firstmark Capital Corp. v. Hempel Fin. Corp., 859 F.2d 92, 93 (9th Cir.1988). The parties do not dispute that the law of California is controlling, and California is the forum state, so California law should govern. Id. (citation omitted).

In order to succeed on a merger of title theory, Spacek must show that the same entity owns both the trust deed and the property. Thomen appears to own the trust deed, while UFI owns the property. However, Spacek argues that in fact Tabatabay owned both the trust deed and the property. ¹ Spacek asserts that the connection between Tabatabay, Thomen, and UFI was such that Tabatabay, through his control of Thomen, was...