Opinion
No. 00-42066 J, Adv. No. 00-4482 AJ
June 14, 2001
DECISION: CROSS MOTIONS FOR SUMMARY JUDGMENT
This is an adversary proceeding in which plaintiffs Webster and Angela Southall, the above debtors (jointly, "the Southalls"), seek to avoid a foreclosure sale of certain real property located on 79th Ave. in Oakland, California (the "Property"), and money damages, against defendants Fairbanks Capital Corporation ("Fairbanks"), the foreclosing creditor, and SHK Properties, Inc. ("SHK"), which purchased the Property at the foreclosure sale. The Southalls contend that the foreclosure sale was a nullity because Fairbanks did not properly serve its motion for relief from the automatic stay by which it obtained leave to conduct the foreclosure sale. The parties have filed cross-motions for summary judgment pursuant to Fed.R.Civ.P. 56, which applies in adversary proceedings pursuant to Fed.R.Bankr.P. 7056.
The court concludes that genuine issues of material fact are present with respect to the issue of whether Fairbanks served its motion for relief from the automatic stay in compliance with Fed.R.Bankr.P. 7004(b)(9). The court also concludes, however, that even if Fairbanks did not effect service of its stay relief motion in compliance with Fed.R.Bankr.P. 7004(b)(9): (a) SHK is protected by Bankruptcy Code § 549(c), and (b) Fairbanks is entitled to annullment of the automatic stay such to validate its actions at issue herein.
Unless as otherwise stated, all further section references herein are to the United States Bankruptcy Code, 11 U.S.C. § 101 et. seq.
The court will therefore deny the Southalls' motion for summary judgment and grant the motions for summary judgment filed by Fairbanks and SHK.
DISCUSSION
A. Background
On April 4, 2000, Webster Southall filed a voluntary chapter 13 petition herein. He filed the petition pro se. On April 19, the Southalls filed an amended chapter 13 petition; the amendment added Angela Southall as a debtor, and listed attorney Richard L. Boeckholt ("Boeckholt") as the Southalls' counsel. The Southalls did not serve a copy of the amended petition on Fairbanks. Nor did the Southalls record a copy of the original or amended chapter 13 bankruptcy petition with the recorder of Alameda County, California, where the Property is located.
The Southalls scheduled the Property as having a value of $85,000, subject to a first lien in favor of Fairbanks in the sum of $65,000.
On May 28, 2000, the Southalls signed a Substitution of Attorney stating that they were substituting Boeckholt as their counsel in the place of Webster Southall, acting in pro per. The document does not appear to have been filed or served on anyone until after the Southalls filed the complaint herein.
On June 6, 2000, the Clerk of this court caused to be mailed to the scheduled creditors, including Fairbanks, a Notice of Commencement of Case stating that the Southalls had filed a chapter 13 case. The notice listed Boeckholt as the Southalls' counsel.
On June 9, 2000, Fairbanks filed a motion for relief from the automatic stay imposed under § 362(a) seeking relief to foreclose on the Property, and set the matter for hearing. The motion alleged, inter alia, that the loan secured by the Property was in default at the date of the petition, and that the Southalls had failed to make two postpetition loan payments as they were required to do, In re Ellis, 60 B.R. 432 (9th Cir. BAP 1985). Fairbanks served the moving papers on debtor Webster Southall. Fairbanks did not serve Boeckholt. The court's docket at the time stated that Webster Southall was a pro se debtor. A declaration filed by Charles Nunley, Fairbanks's counsel herein, stated that he was unaware that Webster Southall had retained counsel, and that he had served the motion only on Webster Southall in reliance on the court's docket.
On July 21, the hearing on Fairbanks's motion went forward. Neither the Southalls nor Boeckholt appeared. At the conclusion of the hearing, the court ruled that stay relief would be granted. On July 24, Fairbanks served a copy of a proposed stay relief order on Webster Southall. On August 2, the court entered its order granting Fairbanks's motion. The facts before the court do not reveal whether Fairbanks served a copy of the signed order on the Southalls. The declaration filed by Fairbanks's counsel in support of its motion states that he was unaware that the Southalls were represented by counsel until commencement of the present adversary proceeding.
The file for R.S. No. 00-0881, the number assigned to Fairbank's stay relief motion, contains an unassigned proof of service of the order.
On October 3, 2000, Fairbanks caused a foreclosure sale to be held. SHK purchased the Property for the cash sum of $78,200. (The the amount of the debt then owing to Fairbanks was in the sum of $80,503.) Thereafter, SHK recorded a trustee's deed.
On November 9, 2000, the Southalls filed the present adversary proceeding against Fairbanks and SHK. It is their contention that the order granting Fairbanks relief from the automatic stay is void because Fairbanks did not serve Boeckholt with a copy of its motion in compliance with Fed.R.Bankr.P. 7004(b)(9), which provides, in relevant part:
Although Fed.R.Bankr.P. 7004 is part of the rules that govern adversary proceedings, it applies to motions for relief from the automatic stay via Rules 4001(a)(1) and 9014.
Except as provided in subdivision (h), in addition to the methods of service authorized by Rule 4(e)-(j) F.R.Civ.P., service may be made within the United States by first class mail postage prepaid as follows: . . .
(9) Upon the debtor, after a petition has been filed by or served upon the debtor and until the case is dismissed or closed, by mailing copies of the summons and complaint to the debtor at the address shown in the petition or statement of affairs or to such other address as the debtor may designate in a filed writing and, if the debtor is represented by an attorney, to the attorney at the attorney's post-office address.
The Southalls argue that because the foreclosure sale was held pursuant to a stay relief order that was void, the foreclosure sale was also void, and SHK must therefore return the Property to them. The Southalls do not allege any bad faith or intentional misconduct on the part of Fairbanks or SHK.
B. Fairbanks's Failure to Serve Boeckholt
Fairbanks does not dispute that proper service under Fed.R.Bankr.P. 7004(b)(9) requires service of motion papers on a bankruptcy debtor's counsel of record. It argues, however, that because the Southalls did not serve it with the amended bankruptcy petition in compliance with Fed.R.Bankr.P. 1009, or with the Notice of Substitution of Attorney in compliance with the court's local rules, the Southalls are responsible for Fairbanks's failure to serve Boeckholt and that service of the stay relief motion was therefore valid. There is indeed authority for the proposition that otherwise invalid service under Fed.R.Bankr.P. 7004(b)(9) may be excused if such invalidity resulted from a failure by debtor's attorney to file and serve a change of address on the parties. See In re Cossio, 163 B.R. 150 (9th Cir. BAP 1994), aff'd 56 F.3d 79.
Fed.R.Bankr.P. 1009 provides: A voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed. The debtor shall give notice of the amendment to the trustee and to any entity affected thereby. On motion of a party in interest, after notice and a hearing, the court may order any volutary petition, list, schedule, or statement to be amended and the clerk shall give notice of the amendment to entities designated by the court.
The bankruptcy court's local rule B.L.R. 1001-2(a)17, incorporating district court's Civil L.R. 3-11, requires a party proceeding pro se whose address changes to serve a notice of change of address on "all opposing parties."
Nevertheless, the Declarations filed by Fairbanks are not adequate to rebut the presumption that the notice sent out by the court on June 6, 2000, which stated that Boeckholt was the Southalls' counsel, was received by Fairbanks. This is so because Fairbanks's counsel is not competent to testify as to whether Fairbanks received the notice, and because a mere declaration of non-receipt is not sufficient to rebut the presumption. In re Ricketts, 80 B.R. 495, 498-99 (9th Cir. BAP 1987); In re Carter, 511 F.2d 1203 (9th Cir. 1975); In re Bucknum, 951 F.2d 204, 207 (9th Cir. 1991).
The court is not suggesting that the clerk of court's service of the Notice of Commencement of Case on Fairbanks was necessarily adequate service, or that Fairbanks cannot attempt to rebut the presumption of receipt. The court does believe, however, that the declarations now before the court are insufficient to permit a finding in the present context that Fairbanks was notified or served with notice of the fact that Boeckholt was the Southalls' counsel.
The court believes that a genuine issue of material fact is present as to whether Fairbanks was served by the clerk of court with notice of the amended bankruptcy petition, and thus put on notice that Boeckholt represented the Southalls.
Fairbanks has also argued that it substantially complied with service of process requirements, and that service on Webster Southall comports with due process requirements. The Southalls dispute that Fairbanks substantially complied, and also argue that "substantial compliance" with service of process requirements is not legally sufficient service. Given the conclusions expressed in sections C. and D., the court need not address these arguments.
C. Rights of SHK
Here the court assumes, arguendo, that Fairbanks failed to serve Boeckholt with its stay relief motion, without just cause or excuse, and that the resulting order was thus void.
It is true that acts in violation of the automatic stay are void. In re Schwartz, 954 F.2d 569, 571 (9th Cir. 1992). Even so, the weight of authority is that Bankruptcy Code § 549(c) protects a good faith purchaser of real property for present fair equivalent value, without knowledge of the commencement of the case, even if the postpetition transfer was unauthorized, unless a copy of the petition was recorded in the real property records before the deed at issue was recorded. See Schwartz, 954 F.2d at 574 ("Subsection 549(c) is an exception to section 362 regardless of whether violations of the automatic stay are void or merely voidable.") See also In re Shaw, 157 B.R. 151 (9th Cir. BAP 1993) (holding that a purchaser at a tax lien sale held in violation of § 362(a) is eligible for protection under § 549(c), but that the purchaser at the sale at issue failed to establish payment of "equivalent value"). In re Williams, 124 B.R. 311 (Bankr.C.D.Cal. 1991), cited by the Southalls, is not authority to the contrary; in Williams, unlike the present case, the debtor recorded a copy of the bankruptcy petition in the real property records. Id. at 313.
Bankruptcy Code § 549(c) provides: (c) The trustee may not avoid under subsection (a) of this section a transfer of real property to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value unless a copy or notice of the petition was filed, where a transfer of such real property may be recorded to perfect such transfer, before such transfer is so perfected that a bona fide purchaser of such property, against whom applicable law permits such transfer to be perfected, could not acquire an interest that is superior to the interest of such good faith purchaser. A good faith purchaser without knowledge of the commencement of the case and for less than present fair equivalent value has a lien on the property transferred to the extent of any present value given, unless a copy or notice of the petition was so filed before such transfer was so perfected.
Here, the undisputed facts show that SHK is protected by § 549(c). SHK paid cash (present value) in the sum of $78,200, an amount that the court holds is "fair equivalent value" for purposes of § 549(c), based on the Southalls' valuation. The Southalls did not record a copy of their bankruptcy petition, and SHK did record a trustee's deed of the property. The uncontroverted declaration filed by David Underwood states that SHK purchased the Property without knowledge of the bankruptcy case. SHK is therefore protected by § 549(c).
D. Annulment of the Automatic Stay
Even if § 549(c) were inapplicable, the court would grant the motions for summary judgment filed by SHK and Fairbanks because, in an appropriate case, the court may annul the automatic stay, i.e., grant retroactive relief to validate an otherwise void action. See § 362(d); Schwartz, 954 F.2d at 572. Whether annulment is appropriate must be determined on a case by case basis, and requires the court to balance the equities. In re National Environmental Waste Corp., 129 F.3d 1052, 1055 (9th Cir. 1997). The court believes that this is an appropriate case for annulment, for numerous reasons.
First, it is undisputed that the Southalls failed to make their required loan payments to Fairbanks after they filed chapter 13, and thus, that Fairbanks alleged and established cause for relief from the automatic stay. Section 362(d)(1). The facts also show that the Southalls had little or no equity in the Property at the time of the foreclosure sale.
Moreover, there is no indication or allegation in the record that the Southalls did not receive Fairbanks's moving papers, and the Southalls have not so alleged. It thus appears that the Southalls elected not to attend the hearing on the stay relief motion, or to contest it. (The record is silent as to whether the Southalls notified Boeckholt of Fairbanks's stay relief motion.)
In addition, at the time it purchased the Property, SHK was and is an innocent third party who parted in good faith with present, fair, equivalent value in exchange for title.
It is also clear from the record that the Southalls failed to serve any notice of Boeckholt's entry into the case on Fairbanks, as they were required to do pursuant to Fed.R.Bankr.P. 1009 and B.L.R. 1001-2(a)17.
Finally, it appears that even if the court were to avoid the foreclosure sale and restore the parties to the status quo, immediate entry of a stay relief order followed by a new foreclosure sale would be appropriate because of the substantial loan defaults, without apparent intent or means on the part of the Southalls to effect a cure. Thus avoidance of the sale would be an idle act. The court holds that even if the order granting Fairbanks stay relief was invalid because of Fairbanks's failure to serve its motion on Boeckholt, grounds are present to annul the stay.
At oral argument, Boeckholt suggested that the Southalls' chapter 13 discharge would immunize them from having to repay their debt to Fairbanks and that they could also keep the Property. This argument appears to be based on the following facts. On November 20, 2000, eleven days after the Southalls filed this adversary proceeding, the Southalls filed an amended chapter 13 plan that ignored the fact that they no longer owned the Property. The plan provided that the Southalls would cure the prepetition arrearage to Fairbanks, make the contractual monthly postpetition loan payments, and that all creditors would be paid in full within six months. On January 18, 2001, the court, unaware that the Southalls did not own the Property, confirmed the plan. On February 13, 2001, the chapter 13 trustee filed a certification that the Southalls had completed their plan, and an order of discharge issued on February 16, 2001. However, were the court to order the return of the Property, the revived debt to Fairbanks would not be discharged because, among other reasons, such debt would have arisen after the date of the discharge order, or alternatively, because the debtors did not pay it in full in accordance with their plan. See § 1328(a).
E. CONCLUSION
Although the court has concluded that a genuine issue of material fact is present with respect to Fed.R.Bankr.P. 7004(b)(9), the court holds that no genuine issues of material fact are present as to the right of SHK Properties to protection under § 549(c) and Fairbanks's entitlement to an order annulling the automatic stay. This ruling moots out the Fed.R.Bankr.P. 7004(b)(9) issue.
The court will therefore deny the Southalls' motion for summary judgment and grant summary judgment in favor Fairbanks and SHK.
The court acknowledges that Fairbanks and SHK did not request annulment of the stay in their moving papers. Even so, when the facts show that they are entitled to relief on a theory other than that pled, the court may grant such relief. See Fed.R.Civ.P. 54(c) and Fed.R.Bankr.P. 7054 ("every final judgment shall grant the relief to which the party in whose favor it is rendered is entitled, even if such party has not demanded such relief in the pleadings"). See also Cool Fuel Inc. v. Connett, 685 F.2d 309, 311 (9th Cir. 1982) (holding that sua sponte grant of summary judgment to the party opposing summary judgment is permissible if the documents presented establish absence of genuine issue of material fact as to movant's case).