Opinion
MEMORANDUM DECISION-ORDER ON MOTION FOR RELIEF FROM STAY
MARGARET M. MANN, Bankruptcy Judge.
Before the Court is the Motion for Relief from Stay filed by Movant Bank of America on July 7, 2010 (the "Motion"). Movant seeks relief on the grounds that Movant's interest is not adequately protected, or alternatively that the Debtor has no equity in the property and it is not necessary for an effective reorganization. This matter came on for hearing on August 3, 2010 at 10:00 a.m. and was continued to August 13, 2010 at 2:00 for telephonic status conference.
BACKGROUND
Steven Stein ("Debtor") filed his Chapter 13 petition on March 3, 2010. On June 4, 2010, the Debtor filed a Declaration with Respect to Real Property in response to the Chapter 13 Trustee's request at the April 30th Meeting of Creditors. The Debtor stated that he jointly owns two real properties with Susan Corl. The property which is the subject of the Motion is a single-family house located at 5112 Whistlers Bend Way, El Dorado Hills, California (the" Property").
The Debtor obtained two loans from Movant Bank of America NA for the purchase of the Property and the construction of a swimming pool in the backyard. According to the Motion, the amount owed on the senior lien is the principal amount of $416,872.77 and delinquencies of $69,198.95 (of which $28,139.04 are arrears, $32,669.11 are escrow advances). In addition there is a Bank of America second lien for $157,982.00, and three mechanics' liens related to the construction of the pool which total $21,019.00.
The Property is valued at $500,000.00 in the Debtor's schedules and in the Motion. Movant later filed a Broker's Price Opinion on August 5, 2010 which values the Property at $445,000.00.
The Debtor is involved in litigation with Movant and the mechanic lien holder El Dorado Custom Pools over the Property. That litigation has been removed from the state court and transferred to this Court, as Adversary Proceeding No. 10-90305-LA, along with related litigation Adversary Proceeding No. 10-90307-LA. In the litigation, the Debtor alleges claims against Movant for failing to release $60,000 in escrow funds for the construction of the pool. The construction of the pool has not been completed, and the Property is currently vacant. The Debtor would like to rent the Property upon completion of the pool to generate cash to fund his reorganization.
The Debtor opposes the Motion, and argues that granting relief from stay would render any cross-claim judgment ineffective. Further, the Debtor argues that even if the Court finds there is no equity in the Property, the Property is necessary for an effective re-organization.
DISCUSSION
The Debtor asserts that his cross-claim against Movant, and his potential right of set-off, should be considered by the Court in this Motion, which would presumably be a factor in determining if there is any equity in the Property. Movant argues these claims should not be considered under the holding of the Ninth Circuit in In re Bialac, 694 F.2d 625 (9th Cir. 1982).
The Court finds Movant's reading of Bialac too narrow. While a hearing for relief from stay may not be the proper time to adjudicate claims and counterclaims, this does not mean the Court must turn a blind eye to their existence. See Collier on Bankruptcy, ¶ 362.08[6] (15th ed. Rev. 2007) ("this does not mean that the existence of affirmative defenses and possible counterclaims cannot be raised and considered by the court in deciding whether to vacate the stay, but simply that a resjudicata determination of the issues at that time would be inappropriate"); In re Hubbel, 427 B.R. 789, 796-97 (N.D. Ca. 2010).
In Hubbel, the Northern California district court recently considered this issue when debtors asserted TILA claims against lenders seeking relief from stay, and the issue was raised as to whether or not the loans had been rescinded. Although finding that the claims should be adjudicated in a separate adversary proceeding, the court found that the bankruptcy judge did not abuse its discretion in considering those claims and denying the relief sought. The court upheld the bankruptcy court's conclusion that the claims cast serious doubt as to the moving parties' right to relief from stay.
The district court noted the legislative history of section 362, which states that although such claims should not be adjudicated in the stay motion, "[h]owever, this would not preclude the party seeking continuance of the stay from presenting evidence on the existence of claims which the court may consider in exercising its discretion." Id. at 796. As in Hubbel, these claims may affect the amount of the debt, the value of the Property, the adequate protection necessary, or the prospect of reorganization. The Court will not close the door to evidence on the Movant's alleged failure to fund the pool construction, despite its narrow scope of relevance.
This Court will therefore not adjudicate the cross-claims asserted by the Debtor in conjunction with this Motion. However, it will consider evidence of these claims on the narrow issues of this relief from stay proceeding: adequate protection, equity and necessity of the property for an effective reorganization. 11 U.S.C. §§362(d)(1) and (2).
The Court will discuss the evidence necessary to resolve the relief from stay issues at the status conference scheduled for August 13, 2010, and will also schedule as well the evidentiary hearing at that time. The Court also suggests the parties explore mediation as a way to resolve their differences.