Opinion
No. 4-04-bk-02237-JMM, Adv. No. 4-04-ap-00061-JMM.
November 8, 2004
MEMORANDUM DECISION
The court heard evidence in this matter on November 3, 2004. After taking the matter under advisement, and having reviewed the written and oral evidence, as well as the law and the briefs of the parties, the court now rules. The following represents the court's findings of fact and conclusions of law.
FACTS
The Debtor and his non-debtor wife, Robyn Kile (collectively, "Kiles"), between 1998 and 2000, became indebted to both San Diego Funding ($493,400) and Federal Home Loans Corporation ($164,500). (Ex. 2, 3, 6.) Both the Debtor and his wife agreed with each lender to "due on sale" clauses. (Ex. 2,3.)
The Federal Home Loan promissory note was a participation between FHL (39.2097%), the Mudges (36.4742%), and Applegate (24.3161%). Collectively, these parties will be referred to as "FHL."
The property standing as collateral for the loans was a single family residence located in Solana Beach, California, where the Kiles reside.
By February 26, 2003, the Kiles had fallen onto financial hard times and became in default to FHL. As a consequence, FHL noticed the default pursuant to the California Deed of Trust statutes, and recorded it on February 26, 2003. (Ex. 8.)
Unknown to anyone but the Kiles, the Kiles, had purported to convey their respective interests in the Solana Beach home to the Kiles' wholly-owned limited liability company, Ribsy Productions ("Ribsy") (Ex. 65, 66). The Kiles never recorded these documents, and indeed, they were not in recordable form, lacking notarizations. Therefore, said unrecorded transfers, which also violated the "due on sale" provisions of the written agreements, were known only to the Kiles. Mr. Kile's testimony that the putative transfer instruments were signed, as dated "as of January 1, 2002," was not credible. Moreover, there was also no evidence that there was any valid consideration for the transfer.
Ribsy had been formed in 1998. (Ex. 28.)
The FHL foreclosure process continued apace, with the trustee under the Deed of Trust being Statewide Group, Inc. ("Statewide"). (Ex. 4.) Pursuant to California law, Statewide posted, published, and sent out the required mailings. (Ex. 30, 31, 32, 20, 21.) Eventually, on May 30, 2003, the Notice of Trustee's Sale was recorded. (Ex. 13.)
The sale was set for June 27, 2003. (Ex. 13.)
On May 29, 2003, in an effort to stave off the foreclosure sale, Ribsy filed a Chapter 11 proceeding in the Southern District of California, in San Diego. (Ex. 10, 19.) Ribsy noted, in its schedules, that it had no income and expenses, but listed an "equitable ownership" in the Solana Beach property.
Ribsy's attorney, Jeffrey Vanderveen, notified FHL and Statewide that Ribsy "owned" the residence and maintained that the automatic stay prevented foreclosure. (Ex. 11, 12.) Statewide immediately notified Vanderveen that the entity known as Ribsy was nowhere to be found in the chain of title, and that the record owners were still "Edward and Robyn Kile," husband and wife. (Ex. 33.)
Thereafter, the Kiles allegedly had the earlier deed notarized on June 6, 2003 — nine days after Ribsy filed Chapter 11 — and recorded the now-completed Quitclaim Deed three days later on June 9, 2003. (Ex. 7, 37.) However, Kile's testimony is not credible on that point, and the court finds that the deeds were not prepared until June 6, 2003.
Due to these manipulations, Statewide announced that its sale date of June 27, 2003, would be postponed "until we have a relief order, the case has been closed or the default has been cured." (Ex. 14.)
By June 9, 2003, Statewide had finished all necessary and statutory steps to publicize the trustee's sale. (Ex. 38.) All it did thereafter, until the Ribsy Chapter 11 was dismissed, was to continue its final sale date from time to time. (Ex. 15, 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57, 58, 60, 61, 62.)
Between May 29, 2003 and the ultimate dismissal of Ribsy's bankruptcy case on March 17, 2004, Ribsy lingered in Chapter 11. It filed a Plan and Disclosure Statement (Ex. 29), which the San Diego bankruptcy court found to be "facially unconfirmable." (Ex. 24 at 2:1.) The court also pointed out that "record title to the (Debtor's) property was not in the debtor on the date this case was filed." (Ex. 24 at 2:6-7.)
Ribsy's Plan and Disclosure Statement were objected to by FHL (Mudge).
On December 29, 2003, the United States Trustee moved to convert the case to Chapter 7, or for dismissal. (Ex. 24.)
On March 17, 2004, the bankruptcy court dismissed the case, with an 180-day bar to refiling. (Ex. 26.) Notice of the dismissal was sent to the few creditors and parties in interest on March 18, 2004. (Ex. 27.)
On or "effective as of" March 19, 2004, Ribsy purportedly executed a Quitclaim Deed back to the Kiles. (Ex. 16.) As with the earlier documents, that "deed" was neither notarized nor recorded. (Ex. 16.) As with the earlier transfer to Ribsy, there was no evidence provided that there was any consideration in connection with this transfer.
The foreclosure sale, which had been postponed so many times, went forward on March 29, 2004, and the property was sold to third-party bidders, Mark and Carol Campbell ("Campbells"). (Ex. 63, 1.) The Campbell were bona fide purchasers, without notice of any defects or problems. No evidence was presented to the contrary.
On March 30, 2004, eviction proceedings began against the Kiles, whose interests had been foreclosed the day before. (Ex. 17.)
On April 14, 2004, Mr. Kile, now acting without an attorney, wrote a letter to Statewide alleging a parade of injuries and seeking $2,000,000 in damages. (Ex. 64.) At trial, Mr. Kile was unable to provide any credible evidence that he suffered any actual damages.
Statewide ignored Mr. Kile's demand, so Edward Kile (without Robyn Kile joining), filed a new Chapter 11 case, this time in the District of Arizona.
This Chapter 11 case was filed on May 6, 2004, within the 180-day bar period set forth by the San Diego bankruptcy judge. Indeed, the new filing occurred only 1 1/2 months after the Ribsy dismissal. Although the Debtor here, in his complaint, affirmatively pled it as a suit to protect title, the lawsuit, is, in reality, only another manipulation of the bankruptcy process to avoid eviction and harass the Kiles' creditors.
The Kiles remain in the Solana Beach property, pending resolution of this case.
LEGAL ISSUES
Although the parties have set forth a number of legal issues for the court to consider, they may be grouped into three:
1. Were there stay violations in the Ribsy bankruptcy case?
2. Did Statewide follow the necessary statutory procedures in order to complete the trustee's sale?
3. Did the Debtor manipulate the bankruptcy Code so that this filing qualifies as a "bad faith" filing?
LEGAL ANALYSIS 1. Automatic Stay Issues.
As of the date of the Ribsy bankruptcy filing, Ribsy had no right, title, or interest in the Solana Beach property, legal or equitable. Judge Louise Adler of the San Diego bankruptcy court so found, and that finding, upon which the dismissal of the Ribsy case was based, was never appealed and is final. As such, it is res judicata.
Ribsy is an independent legal entity. LLCs are distinct legal entities, separate from their stockholders or members. LCCs are included within the definition of "person" in the California Corporations Code Section 20999.25(a); Abrahim Sons Enterprises v. Equilon Enterprises, LLC, 292 F.3d 958, 962 (9th Cir. 2002). Under California law, the actions of a corporation or LLC are deemed independent of the acts of its members. WEST'S ANN.CAL.CORP. CODE § 17003.
The automatic stay applies only to property owned as of thecommencement of the case. 11 U.S.C. § 362(a). The automatic stay applies to "property of the estate," which includes all of debtor's legal and equitable interests in property as of the commencement of the bankruptcy. 11 U.S.C. §§ 362(a)(3); 541(a). As important, the automatic stay is inapplicable to acts done postpetition with postpetition property of the estate. In re Plexus Enterprise, Inc., 289 B.R. 778 (M.D. Fla. 2002).
The interest which Mr. Kile claims that Ribsy held — an unrecorded, non-notarized transfer deed to real property — does not rise to a level sufficient to support the invocation of the automatic stay as to third parties. Property rights are governed by state law. Butner v. U.S., 440 U.S. 48 (1979). Under California law, an unrecorded real property instrument is only valid as between the parties thereto and those who have notice thereof. WEST'S ANN.CAL.CORP. CODE § 1217. Conversely, such a document is ineffective and invalid to create restrictions upon those not privy to such secret transfers. Under bankruptcy law, these secret actions transfer no "equitable" rights sufficient to trigger the automatic stay. Under California law, every conveyance of real property must be recorded to be valid against a subsequent purchaser of the property, but an unrecorded instrument is valid only as between parties thereto and those who have notice of it. In re Weisman, 5 F.3d 417 (9th Cir. 1993). CAL. CIV. CODE § 1216. Here, no one but the Kiles knew of any "transfer" prior to June 9, 2003. And the Kiles, who also own 100% of Ribsy, took no steps to advise anyone of that alleged "transfer."
Ribsy acquired no interest in the Solana Beach property until the deed to it was recorded, two weeks postpetition. The automatic stay in Ribsy's case, therefore, protected no interest in the Solana Beach property as of the date of the filing, because Ribsy did not own it on the date that it filed Chapter 11. Indeed, the Kiles resided in the property before and since the "transfer" to Ribsy; there were no written "rental agreements" placed into evidence by Mr. Kile (indeed there were no documents of any sort — other than the deed); and Ribsy never became liable on any of the underlying debt.
Thus, there were no stay violations in the Ribsy case, even if Mr. Kile (the Debtor herein) had standing to assert it.
However, Mr. Kile lacks standing to urge a violation of the Ribsy automatic stay. "A party seeking relief under the automatic stay provision must have standing in two respects: constitutional standing and standing under the Bankruptcy Code. City of Farmers Branch v. Pointer (In re Pointer), 952 F.2d 82, 85 (5th Cir.), cert. denied sub nom. Pointer v. Carrollton-Farmers Branch Indep. School Dist., 505 U.S. 1222, 112 S.Ct. 3035 (1992)." Mr. Kile was not listed as a creditor in the Ribsy case and, therefore, lacks standing, then and now, to pursue stay violation remedies on behalf of Ribsy. In re Fondiller, 707 F.2d 441 (9th Cir. 1983) (party must have pecuniary interest to be afforded standing).
Under the Bankruptcy Code, only a party that Congress has designated as a beneficiary of the stay has standing to bring an action to declare a violation of the stay to be void. James v. Washington Mut. Sav. Bank (In re Brooks), 871 F.2d 89, 90 (9th Cir. 1989). The Ninth Circuit has clearly held that the only legal beneficiaries of the stay are the debtor and the trustee. Tilley v. Vucurevich (In re Pecan Groves of Arizona), 951 F.2d 242, 245 (9th Cir. 1991). Mr. Kile qualifies as neither.
The Ninth Circuit BAP, in a reference to a Ninth Circuit case, In re Goodman, 991 F.2d 613 (9th Cir. 1993), noted that an argument might be crafted to allow a creditor to bring a stay violation action. In re Spaulding Composites Company, Inc., 207 B.R. 899 (9th Cir. BAP 1997). However, these cases need not be discussed here, since Edward Kile was never listed in Ribsy's schedules as a creditor. (Ex. 19.)
Thus, Edward Kile has not shown the required standing to assert a stay violation in the now-closed Ribsy case.
Additionally, any stay violations which could be asserted by Ribsy have been waived. Its case was dismissed and that dismissal order is final. Dismissal essentially returns parties to the status quo. 11 U.S.C. § 349. Ribsy never complained to the San Diego bankruptcy court about any alleged stay violation, and has not sought to reopen its case. Indeed, to avoid the San Diego bankruptcy court's mandate that Ribsy could not re-file for 180 days, an order designed to prevent continued delay relative to secured creditors' attempts to complete foreclosure, Ribsy simply attempted to transfer the property to the Kiles, and then only Mr. Kile filed this new bankruptcy — within the 180-day prohibited period and one state over from where the property is located. Such an action is a blatant bad faith attempt to harass and delay creditors with valid lien interests in the Solana Beach residence, as well as a fraudulent conveyance. To the extent that any Kile stay applies, it will be terminated and annulled. In re Duvar Apt., Inc., 205 B.R. 196 (9th Cir. BAP 1996); 11 U.S.C. § 362(d)(1) (cause).
2. Trustee's Sale Validity Issues
The trustee's sale to the Campbells, third-party purchasers, occurred on March 29, 2004. The trustee's deed to the Campbells was recorded on March 30, 2004. The recordation creates a conclusive presumption of validity as to all of the procedures associated with the sale. WEST'S ANN. CAL. CORP. CODE § 2924.
Had the Kiles or Ribsy, or whomever else they contend owned the property, wished to stop the foreclosure, their remedy was to proceed before the California Superior Court, state their specific grievances, and obtain injunctive relief. Instead, they chose to rely on the "quick fix" of the Bankruptcy Code and its automatic stay, as a substitute for a Superior Court proceeding. By doing so, they waived their claims to assert, pre-sale, that the sale was improperly conducted, and the defendants in this case are entitled to the protection of the conclusory presumption that the foreclosure procedures were correctly followed.
Nor was the stay violated by Statewide's procedure, during the Ribsy bankruptcy case, by the acts of orally postponing the sale date throughout Ribsy's Chapter 11 dismissal date. The Ninth Circuit clearly addressed that issue in In re Roach, 660 F.2d 1316 (9th Cir. 1981), when it held that such postponements merely hold the foreclosure process in status quo, and that doing so is not a stay violation.
Mr. Kile's testimony that he and Mrs. Kile executed deeds to Ribsy "as of January 1, 2002" is not credible. Had a transfer been executed on that date, it should have and would have been recorded. Mr. Kile is a law school graduate, although never licensed as a practicing lawyer. He also holds another advanced law degree, an LLM. Mr. Kile is sophisticated enough, with law school training, to realize that non-notarized, unrecorded real property instruments have no legal effect as to those who have no knowledge of such documents. A glimpse at the California statutes would have revealed as much.
There was no credible evidence to suggest that such deed was created prior to June 6, 2003, when it was notarized. The unrecorded, non-notarized document, even if created prior to June 6, 2003, was ineffective and did not transfer any rights in real property, "equitable" or otherwise. The court finds, from the evidence, that the transfer deed from the Kiles to Ribsy occurred upon its notarization on June 6, 2003, too late to invoke the Bankruptcy Code's automatic stay provisions.
The same is true of the other, putative transfer deed, this one from Ribsy to the Kiles two days after Ribsy's bankruptcy case was dismissed. (Ex. 6.) Apparently not learning from earlier mistakes, that document was also never notarized and recorded. Therefore, on this record, on the date of Mr. Kile's Arizona Chapter 11, ironically, Ribsy remained the only record owner. Thus, Mr. Kile, individually, had nothing to protect by filing Chapter 11, relying, once again, on unnotarized, unrecorded, and secret transfer documents. He was, in the words of William Shakespeare, "(h)oist with his own petard." Hamlet, Act iii, Sc. 4.
In his pleadings, the Debtor asserts that Statewide, on behalf of the trust beneficiaries, violated the California procedures, which are a prerequisite to conducting a valid trustee's sale.
However, the defending parties submitted the recording, posting, publication, and mailing documents that preceded the sale of the Solana Beach residence. These documents complied with California law.
Additionally, the execution and recordation of a Trustee's Deed upon sale creates " prima facie evidence of compliance with the statutory requirements "and conclusive evidence thereof in favor of bona fide purchasers . . . for value and without notice." WEST'S ANN.CAL.CORP. CODE § 2924.
The Debtor presented nothing to rebut either the conclusive presumption favoring the Campbells, nor any evidence contrary to the prima facie validity to be accorded to Statewide's procedural responsibilities.
The California statute set forth above states:
A recital in the [trustee's] deed executed pursuant to the power of sale of compliance with all requirements of law regarding the mailing of copies of notices or the publication of a copy of the notice of default or the personal delivery of the copy of the notice of default or the posting of copies of the notice of sale or the publication of a copy thereof shall constitute prima facie evidence of compliance with these requirements and conclusive evidence thereof in favor of bona fide purchasers and encumbrancers for value and without notice.
The Trustee's Deed (Ex. 1), contains clear statements concerning the necessary publication, posting, recording, and mailing, which satisfy the "recital" required by the statute.
In short, the sale and its procedures were conducted pursuant to law, without defect.
3. Bad Faith Filing Issues.
Raised by one of more of the defending parties in their Answers, it is apparent that the instant Chapter 11 case is a bad faith filing, designed only to manipulate the bankruptcy process and delay and harass creditors. Accordingly, the court finds that cause exists to annul, terminate, and dissolve any and all stays in this case that arguably relate or may relate to any interest that the Debtor holds, or asserts that he holds, in the Solana Beach property. 11 U.S.C. § 362(d)(1) (cause to grant stay relief).
RULING
The Debtor failed to meet his burden of proof with respect to any of the appearing parties, and his case against them will be dismissed with prejudice.
The Debtor also presented no case or cause of action against defendants Edward C. Combo, Isla Verde Association, the San Diego Tax Collector, Wells Fargo Home Mortgage, or EMC Mortgage Corp. Accordingly, any and all of Debtor's claims against such parties shall likewise be dismissed, with prejudice.
If such latter two entities are the successors to San Diego Funding's first lien interest, no argument was made or law presented to indicate that any liability or legal theory against them is viable.
The Debtor failed to prove his case, against any defendant or served party, by the necessary preponderance of the evidence. Moreover, if the Debtor, Robyn Kile (his wife), or any entity related to the Kiles shall file a new bankruptcy proceeding asserting any claims whatsoever to the Solana Beach property, that action, if filed in the District of Arizona, shall be assigned to the undersigned judge. If such filing occurs in any district other than the District of Arizona, that bankruptcy case shall be transferred to the District of Arizona and assigned to the undersigned judge, who will consider whether to retain it or transfer the case to the San Diego bankruptcy court.
Additionally, all stays, pursuant to the Bankruptcy Code, will be dissolved, terminated, and annulled.
Taxable costs shall be awarded to all of the appearing defendants herein who or which may be entitled to the same pursuant to California law. Therefore, since many of these matters arise out of contracts wherein the Debtor agreed to pay attorneys' fees, each defendant asserting entitlement to fees shall file an affidavit of actual attorneys' fees incurred and state the grounds therefor, and after a ten-day responsive period, the court will decide whether to award judgment therefor against the plaintiff, Edward Kile, and the community consisting of Edward Kile and Robyn Kile, his wife. If objections to the attorneys' fees requests are made, the court will consider the objections and rule without further hearing.
Thereafter, the court will ask the prevailing parties to lodge a proposed form of judgment. The court will not consider motions for reconsideration made by Mr. Kile. His sole remedy shall be by appeal.