Opinion
BAP No. CC-94-1327-JOV. Bankruptcy No. LA-91-60249-WL. Adv. No. LA-91-60389-WL.
Argued and Submitted May 17, 1995.
Decided August 31, 1995.
Susan Carole Jay, Los Angeles, CA, for appellant.
Louis Krass, Beverly Hills, CA, for appellee.
Before JONES, OLLASON and VOLINN, Bankruptcy Judges.
OPINION
Appellee, Leon Pizante (the "Debtor") filed a petition for relief in bankruptcy on January 4, 1991. The trustee instituted a § 548 action against the Debtor and his wife ("Mrs. Pizante"), which resulted in a judgment in favor of the trustee. In the § 548 proceedings, Mrs. Pizante defaulted in her discovery responses. The court deemed her default to be admissions. Appellant, Juan Hernandez ("Hernandez") brought an adversary proceeding under § 727 to deny discharge based on an alleged fraudulent transfer by two quitclaim deeds of the Debtor's interest in the Pizantes' residence to Mrs. Pizante. Hernandez sought to invoke collateral estoppel to preclude litigation of the issues which had been deemed admissions in the prior § 548 proceedings.
Unless otherwise indicated, all references to Chapters, Sections and Rules are to the Bankruptcy Code, 11 U.S.C. § 101, et seq. and to the Federal Rules of Bankruptcy Procedure, Rules 1001, et seq.
The bankruptcy court, however, declined to apply collateral estoppel in the subsequent § 727(a)(2) action to preclude the litigants from contesting the issue of fraudulent intent. Instead, the bankruptcy court accepted evidence on the issue of intent. By order dated March 7, 1994, the bankruptcy court upheld the Debtor's discharge. The court ruled that the Debtor did not intend to "hinder, delay or defraud creditors" by either the first or second quitclaim transfers of the Debtor's interest in the residence. Hernandez timely appealed. We AFFIRM.
I. FACTS
At all relevant times, the Debtor and Mrs. Pizante have lived at the same residence and have been married to each other. The Debtor is an attorney in the law practice of Pizante Gregg. In May of 1989, the Debtor was having financial difficulties. A client, Juan Hernandez, brought a malpractice claim against the Debtor. In addition, one of the Debtor's judgment creditors had instituted a state court action to sell the Pizantes' residence to satisfy the judgment. Mrs. Pizante opposed the sale on the ground that the property was held in joint tenancy, and her interest was not subject to sale.
1. First Conveyance — (Recorded May 16, 1989): Debtor Conveyed His Joint Tenancy Interest in Family Residence To His Wife, Mrs. Pizante, Via Quitclaim Deed.
The state court action by the Debtor's judgment creditor was settled by stipulation which provided that the creditor would postpone any right to execute against the residence for one year, and the Pizantes would be given nine (9) months to sell the property or refinance it to pay off existing lien creditors. The Debtor asserts that Mrs. Pizante agreed to the stipulation on the condition that the Debtor convey his interest in the residence to her, which he did by quitclaim deed on May 22, 1989. This deed was recorded on May 31, 1989, more than one year prior to the petition in bankruptcy.
2. Second Conveyance — (Recorded March 16, 1990): At Lender's Insistence, Debtor Conveyed Any Remaining Interest He Had In The Property Via Second Quitclaim Deed.
On February 27, 1990, the Pizantes obtained a loan in the amount of $775,000, secured by a second deed of trust on the residence. The lender required that the Debtor give a second quitclaim deed in favor of Mrs. Pizante to cover any potential community property interest in the property that the Debtor may have acquired in the interim period between the time of the first quitclaim deed to the date of the $775,000 loan. That same day, the Debtor executed a second quitclaim deed, which was recorded on March 16, 1990. On January 4, 1991, the Debtor filed a chapter 7 petition.
The Debtor asserts that the proceeds from this transaction were used to pay encumbrances, with a reserve set aside for Mrs. Pizante to make mortgage payments while attempting to sell the property. Also, $287,000 was paid to Mrs. Pizante in repayment of loans she made to the law partnership of Pizante Gregg between 1978 and 1985. These loans were evidenced by notes which were turned over to the trustee.
3. Section 548 Action:
On January 12, 1991, the trustee filed a § 548 complaint against the Debtor and Mrs. Pizante alleging that the two quitclaimed transfers of the residence constituted a fraudulent conveyance. After discovery, the actions against the Debtor were voluntarily dismissed by the trustee. Mrs. Pizante, however, submitted inadequate responses to requests for admissions and failed to comply with discovery dispute resolution procedures. On January 27, 1992, upon motion by the trustee, to which Mrs. Pizante failed to respond, the court entered a discovery order deeming the requests for admissions admitted and compelling Mrs. Pizante to respond to the interrogatories. Mrs. Pizante failed to comply with the discovery order and failed to bring a timely motion to reconsider the discovery order.
On February 20, 1992, the trustee filed a Motion for Summary Judgment pursuant to Federal Rule of Civil Procedure 36, as adopted by Bankruptcy Rule 7036, which deems a request for admissions admitted where a party fails to respond to discovery requests. On March 12, 1992, the bankruptcy court granted summary judgment in favor of the trustee. The court noted that such a ruling was supported by certain exigent circumstances such as Mrs. Pizante's failure to comply with the discovery order, ongoing foreclosure proceedings, and an upcoming continued hearing on a relief from stay motion by a lienholder against the residence. Based on Mrs. Pizante's deemed admissions, the bankruptcy court ruled that the transfer of the Debtor's interests in the residence was avoided as a fraudulent transfer, finding that:
9. The debtor made the transfer effectuated by the first deed and, to the extend [sic] the second deed effectuated a transfer (collectively the "subject transfers") the debtor also made that transfer, with the actual intent to hinder, delay, and/or defraud his creditors.4. Homestead Exemption Claim:
The trustee also objected to a homestead exemption claimed by the Debtor of his interest in the residence. The bankruptcy court ruled that the Debtor's interest in the residence was not exempt because the quitclaim deed was a voluntary transfer which disqualified the property from exemption pursuant to § 522(g). The bankruptcy court also noted that it had previously incorrectly stated that the Debtor was bound by the findings in the prior fraudulent conveyance adversary proceeding.
5. Section 727 Trial:
Hernandez filed a complaint claiming that the Debtor was not entitled to a discharge because of the transfer of the Debtor's interest in the residence to Mrs. Pizante. He sought to have the bankruptcy court apply collateral estoppel on the issue of fraudulent intent, claiming that the issue had already been decided in the § 548 proceeding. The bankruptcy court did not apply collateral estoppel, but instead received evidence on the issue of intent. After a trial held December 6, 1993, the bankruptcy court entered an order, dated March 7, 1994, which included the following findings of fact:
The Debtor did not intend to hinder, delay or defraud creditors by the execution of either of the quitclaim deeds. The deeds were executed at the insistence of his wife, Marilyn Pizante, who was extremely emotionally distraught and who had previously attempted to commit suicide and threatened to try again . . .
The court also found that the Debtor was not the real party in interest in the § 548 adversary proceeding, although he was named as defendant:
[T]he real party in interest [in the § 548 action] was the Debtor's wife, Marilyn Pizante, the record owner of the property sought to be recovered for the estate. She was represented by independent counsel. The Debtor did not control the defense of that adversary proceeding.
The court also made conclusions of law, including the following:
1. The doctrine of collateral estoppel or issue preclusion did not bind the Debtor to prior findings of intent to hinder, delay or defraud creditors.
2. The Debtor convinced the Court that he did not have the intent to hinder, delay of [sic] defraud creditors upon executing either of the two quitclaim deeds.
3. The first quitclaim deed effectively transferred the Debtor's interest in the [residence] more than one year prior to the filing of the bankruptcy. The second quitclaim deed did not transfer any interest in the property that had not been previously transferred by the first quitclaim deed.
4. The Debtor did not commit an act covered by 11 U.S.C. § 727(a)(2) because he did not have the required intent to hinder, delay or defraud a creditor and because the transfer of the property occurred more than that [sic] one year prior to bankruptcy . . .
ISSUE
1. Whether the bankruptcy court erred in declining to apply collateral estoppel where issues sought to be precluded were established by the admission by default of a codefendant in a prior action.
2. Whether the bankruptcy court clearly erred in sustaining the Debtor's discharge under § 727, finding that the Debtor lacked the requisite intent to "hinder, delay or defraud creditors" in conveying the residence.
STANDARD OF REVIEW
Although this Panel exercises de novo review over the rules governing collateral estoppel, the application of collateral estoppel in a particular case is left to the broad discretion of the trial court. In re Gottheiner, 703 F.2d 1136, 1139 (9th Cir. 1983). A bankruptcy court abuses its discretion if it bases its ruling on a clearly erroneous assessment of the evidence or an erroneous view of the law. In re Grantham Bros., 922 F.2d 1438, 1441 (9th Cir.), cert. denied, 502 U.S. 826, 112 S.Ct. 94, 116 L.Ed.2d 66 (1991).
Factual findings of the bankruptcy court are reviewed under the clearly erroneous standard. In re Bloom, 875 F.2d 224, 227 (9th Cir. 1989). Clear error exists when, after examining the evidence, the reviewing court is left with a definite and firm conviction that a mistake has been committed. United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948).
The selection of legal standards applied by the bankruptcy court is reviewed de novo. See Fjelstad v. American Honda Motor Co., 762 F.2d 1334, 1337 (9th Cir. 1985). Mixed questions of law and fact are reviewed de novo. In re Wade, 115 B.R. 222, 225 (9th Cir. BAP 1990), aff'd, 948 F.2d 1122 (9th Cir. 1991).
DISCUSSION
A. Applicability of the Doctrine of Collateral Estoppel
The principle of collateral estoppel does apply in bankruptcy court to bar relitigation of issues that were previously decided in a prior state court action. Grogan v. Garner, 498 U.S. 279, 285 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991). The moving party must prove four elements in order for collateral estoppel to apply: (1) the issue sought to be precluded must be the same as that involved in the prior action; (2) the issue must have been litigated in the prior action; (3) the issue must have been determined by a valid and final judgment; and (4) the determination must have been essential to the prior judgment. In re Miera, 926 F.2d 741, 743 (8th Cir. 1991). The Supreme Court has repeatedly recognized the limitation that collateral estoppel cannot be applied against a party unless that party had a "full and fair opportunity" to litigate that issue in the prior action. Allen v. McCurry, 449 U.S. 90, 95, 101 S.Ct. 411, 415, 66 L.Ed.2d 308 (1980). The full and fair opportunity requirement will not be met if the party whom collateral estoppel is being closure proceedings. Thereafter, Capital West filed for Chapter 11 bankruptcy and proposed a plan of reorganization to the bankruptcy court ("the Plan"). Under the Plan, the interest rate on the Woodson Note would be reduced from 15 to 12 percent and its term extended by 5 years. The interest rate on the Trilex note would be reduced by 2 percent and its term extended by ten years. The Reilly Note would remain unchanged except that: (1) Capital West would be relieved of the obligation to pay mortgage insurance; (2) the "surplus cash" provisions would be eliminated, and; (3) the provision requiring junior financing documents to include language allowing HUD to foreclose in the event of a deed in lieu of foreclosure would be eliminated.
Over Reilly's objections, Judge Morgan approved the Plan. Both Reilly and HUD have now appealed to this Court.
LEGAL STANDARD
Pursuant to Rule 8013 of the Federal Rules of Bankruptcy, the district court may affirm, modify or reverse the bankruptcy court's decision, or remand for further proceedings. The factual determinations of the bankruptcy court are subject to the "clearly erroneous" standard, while the bankruptcy court's conclusions of law are subject to de novo review. In re Comer, 723 F.2d 737 (9th Cir. 1984).
ANALYSIS
The parties raise the following five issues on appeal: 1) whether the bankruptcy court properly balanced the goals and policies of the National Housing Act and Chapter 11 of the Bankruptcy Act; 2) whether the bankruptcy court's treatment of Reilly was fair and equitable within the meaning of § 1129(b) of the Bankruptcy Code; 3) whether the bankruptcy court properly concluded that the Plan did not unfairly discriminate against Reilly; 4) whether the bankruptcy court properly calculated the value of Reilly's secured claim; and 5) whether the bankruptcy court properly implemented the Plan.
As discussed below, the Court agrees with Appellants on the first issue. Because this issue is dispositive, the Court does not find it necessary to address Appellants' other four arguments.
I. Balancing the Objectives of the National Housing Act Versus Those of Chapter 11 of the Bankruptcy Act
Appellants contend that the bankruptcy court improperly balanced the objectives of the National Housing Act versus those of Chapter 11 of the Bankruptcy Act when it deleted certain provisions of the HUD Regulatory Agreement governing the Reilly Note. Capital West responds that the bankruptcy court's decision was the optimal outcome under both statutes because it preserved Reilly's, Trilex's and Woodson's rights as creditors while allowing The Woods to avoid foreclosure and to continue to provide 160 unit of low income housing. Since this is a mixed question of law and fact, the Court will apply a de novo standard of review. Carpenters Pension Trust Fund v. Underground Construction Co., Inc., 31 F.3d 776, 778 (9th Cir. 1994); United States v. McConney, 728 F.2d 1195, 1202-03 (9th Cir. 1984), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984).
When confronted with two different statutory schemes, the court must attempt to harmonize the goals and policies of each. National Labor Relations Board v. Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984). The primary objectives of the National Housing Act are to provide a "decent home and suitable living environment for every American family" by: (1) motivating lenders to loan money, and; (2) assisting private industry to avoid foreclosure. Beck Park Apartments v. U.S. Department of Housing, 695 F.2d 366, 368 (9th Cir. 1982); U.S. v. American Nat'l Bank, 443 F. Supp. 167 (N.D.Ill. 1977). The objectives of Chapter 11 are: (1) to permit successful rehabilitation of the debtor, and; (2) to maximize the value of the bankruptcy estate. Id. at 527, 104 S.Ct. at 1196; Toibb v. Radloff, 501 U.S. 157, 163, 111 S.Ct. 2197, 2201, 115 L.Ed.2d 145 (1991).
In its initial memorandum opinion confirming the Plan, the bankruptcy court found that the Plan "preserve[d] the concerns of both Chapter 11 and the National Housing Act." The court determined that removing the mortgage insurance requirement on the Reilly Note would allow Capital West to forestall foreclosure by using that money to refinance the Woodson Note. The court also found that removal of the "surplus cash" provisions of the Reilly Note would enable Capital West to "restructure payment without the burden of meeting other obligations first." The court concluded by stating:
By allowing Capital West the best possible chance to succeed, the court furthers the Federal Housing Act's purpose by enabling Capital West to continue to provide affordable housing to at least 160 individuals . . . If Capital West were to suffer foreclosure, the purposes of both Chapter 11 and the Federal Housing Act would be frustrated.
After both Reilly and HUD filed motions for reconsideration, the bankruptcy court issued another opinion, further concluding that "[a]ny negative effect on the secondary housing market is outweighed by the benefit of providing affordable housing."
The Court finds that the bankruptcy court's decision improperly balanced the goals and policies of the National Housing Act versus those of Chapter 11 of the Bankruptcy Act. First, the positive effect of the Plan in forestalling foreclosure on The Woods' 160 units of housing pales in comparison to the possible negative ramifications that will result from the precedential effect of allowing a debtor to avoid provisions of a HUD Regulatory Agreement simply by filing for bankruptcy. If HUD guarantees can be easily circumvented through bankruptcy, banks will be more likely to require larger downpayments or charge higher interest rates for mortgages, in direct contravention of the purpose behind the National Housing Act.
Second, deleting the "surplus cash" provisions will undermine HUD's policy in assuring safe and affordable housing. Without these provisions, debtors are relieved of the requirement that they reserve adequate funds to maintain and repair their property before using that money to pay off junior lien holders. Having accepted the benefits of HUD-insured loans in the form of lower interest payments, debtors should not thereafter be allowed to avoid their responsibility to provide suitable, well-maintained housing for their tenants.
Third, HUD-insured notes are traded as part of the Federal Housing Act Project Loan Certificate Series Pool in which private individuals own and trade interests. When the provisions of a HUD Regulatory Agreement are modified, the market value of the note to which they are attached is altered. For example, deleting the requirement that the debtor pay mortgage insurance makes a note more risky, thereby reducing its value at the agreed upon interest rate. Allowing bankruptcy courts to make such modifications will inject a substantial amount of uncertainty into this more than $1 trillion secondary mortgage market.
Fourth, and perhaps most importantly, Appellees have offered no legal precedent to support the bankruptcy court's actions, nor is the Court aware of any. The courts that have considered the legal effect of HUD Regulatory Agreements have emphasized the importance of the federal interest in enforcing their terms, and have uniformly refused to alter or delete their provisions. See, e.g., In re EES Lambert Associates, 62 B.R. 328, 336 (Bankr.N.D.Ill. 1986) ("The regulatory [a]greement . . . is not some slight contractual undertaking that can be circumvented by the filing of a bankruptcy petition."); In re Marion Carefree, 1994 WL 115911 (Bankr.N.D.Ohio) at * 2-3 (quoting In re Bolin Oil, Co., 51 B.R. 936, 938 (Bankr.N.D.Ohio 1985)) (commenting that "[h]owever expansive the bankruptcy court's powers may be to protect the property interests of debtors-in-possession, it does not extend to enlarging the rights of a debtor under a contract or rewriting its terms").
In sum, the goals of Chapter 11 and the National Housing Act would be better served by a plan of reorganization that allows The Woods to avoid foreclosure, but does not inject such uncertainty into our nation's low-income housing market.
CONCLUSION
Based on the foregoing, the Court finds that the bankruptcy court erred when it modified the HUD Regulatory Agreement. The case is REVERSED AND REMANDED to the bankruptcy court for further proceedings consistent with this Court's opinion.
IT IS SO ORDERED.