Opinion
MEMORANDUM DECISION
LAURA S. TAYLOR, JUDGE United States Bankruptcy Court
Louis George Valle and Cynthia Ann Valle ("Debtors") leased a home (the "Home") from Rosalia Mariz ("Lessor") by lease dated August 1, 2009 (the "Lease"). Unbeknownst to the Debtors, Lessor was in default of her obligations on a loan secured by the Home (the "Loan"), and, as a result, the real estate secured lender (the "Lender") recorded a notice of default on June 29, 2009.
At issue here is the intersection between the Protecting Tenants in Foreclosure Act (the "Act") and the automatic stay. The Act allows renters to remain in a leasehold for the later of 90 days or the end of the lease term if, among other things, they entered into a lease prior to the date of a "Notice of Foreclosure." Movant Southland Home Mortgage LLC ("Movant") argues that a notice of default provided under California law is a "Notice of Foreclosure" for purposes of the Act and that, as a result, the Act does not protect Debtors. Debtors argue, to the contrary, that a California notice of default is not a "Notice of Foreclosure" within the meaning of the Act and, thus, that they are entitled to remain in possession of the Home through the Lease term.
The Court, having considered various documents filed by the parties and having independently researched this matter, concludes that Movant provided erroneous authority to the Court and, in particular, failed to appropriately advise the Court of modifications to the Act which make clear that a notice of default is not a "Notice of Foreclosure" within the meaning of the Act. As a result, the Court concludes that the Act protects Debtors and that relief from stay to allow eviction is not appropriate provided that they remain current on Lease payments. The Court also finds on this record that any defaults under the Lease were caused, in whole or in part, by Movant's unwillingness to accept payments and lack of appropriate cooperation and that Debtors should have a short opportunity to become current on Lease obligations.
Finally, the Court notes that the Act requires that the rental amount not be substantially less than fair market rental value. Movant argued that the Lease is not at market, but provides no real evidence in this regard. The Court concludes on this record that the Lease is at or near market here as there is no evidence that the transaction is not arms-length, the Debtors have use of the Home but the Movant remains in control of the remainder of the Property and, in particular, of the avocado crop thereon, and the Movant's evidence and argument should be given little if any weight in this regard given serious misrepresentations of law and fact made to the Court by Movant in connection with this case.
Finally, the Court agrees with the parties that, except as to the matters directly decided herein, all issues should be decided by the State Court.
1. Facts.
Prior to August 1, 2009, Lessor obtained a loan and secured her obligations with a deed of trust on real property located in Fallbrook, California (the "Property"). The Property consists of at least the Home and an avocado grove, possibly among other things.
Lessor defaulted in her obligations to Lender and, as a result, on June 29, 2009, Lender executed and delivered a notice of default under the California Civil Code.
Notwithstanding the notice of default. Lessor entered into the Lease with Debtors on August 1, 2009. The Lease relates to the Home and provides for a two-year term. The Debtors assert that the Lease results from an arm's length transaction; the Movant provides no evidence supporting a contrary conclusion.
Lender recorded its Notice of Trustee's Sale on October 5, 2009. Lessor delayed this foreclosure through the filing of two bankruptcy cases. Debtors were not involved in this effort and paid rent to Lessor continuously throughout this period. Finally, Movant purchased the Property at Lender's May 26, 2010 foreclosure sale. Thereafter, Movant moved to evict Debtors from the Home.
Movant initiated an unlawfiil detainer action in the State Court. The State Court issued a minute order thereon after a trial on July 20, 2010. The Minute Order requires that Movant: "... prepare the judgment, if warranted." The Debtors sought ex parte relief thereafter (the "Ex Parte Motion"). The Register of Actions Notice ("State Court Docket") provided by Movant does not indicate the result of the Ex Parte Motion and also confirms that prior to issuance of any order, post July 20, 2010 judgment, or writ of possession, the Debtors initiated a chapter 7 bankruptcy.
Notwithstanding the Lease, Movant is in full control of the avocado crop located on the Property and engages in active farming of the same through an agent.
Movant initially sought relief from stay by motion filed on September 2, 2010 (the "First Motion").
The Debtors opposed the First Motion asserting, among other things, that they were protected by the Act. The Court denied the First Motion, without prejudice, based on Movant's failure to provide any declaratory or other admissible evidence as required by the Local Rules of this Court and Movant's failure to respond in any manner to Debtors' arguments regarding the Act.
Thereafter, on October 12, 2010, Movant filed a second relief from stay motion (the "Motion"). The Movant properly supported the Motion with declaratory evidence, but, once again, failed to respond to the arguments regarding the Act. At a hearing in connection with the Motion, Movant sent appearance counsel who was unable or unwilling to argue the merits and agreed to January dates for a continued hearing in connection with this matter.
Thereafter, on November 17, 2010, Movant filed an emergency application seeking to expedite the hearing date. In connection therewith. Movant filed the Declaration of Steven Niednagel (the "Niednagel Declaration") and requested that the Court expedite hearing on this matter due to an alleged emergency situation. The Niednagel Declaration suggested that Debtors were involved in a prior conversion of an avocado crop on the Property, that they were operating a business on the Property, that they intended actions inconsistent with Movant's interest in the current avocado crop, and that Movant reasonably assumed that grave injury would result if Debtors stayed in the Home. Based on the significant concerns created by this document, the Court expedited the hearing date.
Debtors responded to the Niednagel Declaration by the Declaration of Cynthia Valle filed on December 14, 2010. The Cynthia Valle Declaration made clear that the Niednagel Declaration contained significant misstatements of fact. In particular, it evidenced that the Debtors do not operate a business on the Property, that the Debtors have not, do not, and will not interfere with the avocado crop in that Movant is completely in control of the avocado crop through onsite management, that the Lease covers only the Home, and that Ms. Valle has worked at her church for over 17 years.
At the hearing on this matter, the Court questioned Movant regarding the apparent lack of candor in the Niednagel Declaration. The Movant failed to satisfy the Court that any true evidentiary dispute exists on these issues and, instead, confirmed the lack of merit in the Niednagel Declaration. The Court ultimately concluded that it would not continue its inquiry, but notes that the Niednagel Declaration appeared to contain what can generously be described as inaccuracies and certainly reflected more paranoia than precision in its creation.
Also at the hearing, and in relation to the arguments regarding the Act, the Court advised counsel for Movant of its concerns regarding the meaning of the term "Notice of Foreclosure" as used in the Act. As the Court explained, the Act is federal legislation and the foreclosure systems of the fifty states are widely variant. Thus, use of the term "Notice of Foreclosure, " is ambiguous as to whether it equates to a notice of default under California law. The Court noted that under California law there are several documents that are recorded during the non-judicial foreclosure process and that each could constitute a "Notice of Foreclosure" within the meaning of the Act. Here, only the notice of default issued prior to the Lease. As a result, if this is the operative document, the Act does not protect Debtors. If, however, the operative document for purposes of the Act is a notice of sale or the notice of completion of foreclosure, then the Lease pre-dates these documents and the Act protects the Debtors.
Counsel for Movant argued vigorously that the notice of default was the operative document. In fact, she advised the Court that she has been so arguing all over the State and that she would be able to provide authority to the Court. As a result, the Court set this matter out for additional briefing on two issues. First, the Court asked that the parties respond with precision to the meaning of the term "Notice of Foreclosure" under the Act. Second, the Court asked for additional argument as to whether issue preclusion bars this Court from determining that the Act protects Debtors such that the Motion must be denied.
The Court received all evidence and argument and carefully considered the same and now concludes as follows:
2. This Court Is Not Bound By The Determinations Of The Court Below As To Interpretation Of The Act.
For purposes of California law, issue preclusion does not occur until an order is final and non-appealable. Border Business Park, Inc. v. City of San Diego, 142 Cal.App.4th 1538, 1564 (2006). In this case, the record fails to establish that there is a final non-appealable judgment. There is no notice of entry on the State Court Docket, so Debtors had 180 days from July 20, 2010 to appeal if the Minute Order constituted entry of a judgment. Cal. R. Ct. 8.104. And as the Minute Order submitted into evidence required Movant to prepare a judgment, it does not appear that the Minute Order suffices to commence the running of the time to appeal. Cal. R. Ct. 8.104(c). And finally, the unresolved Ex Parte Motion may have extended the time for appeal. Cal. R. Ct. 8.108(b), (c), and (e). Thus, the Court has no evidence indicating that any determination was final such that issue preclusion is appropriate.
Further, there is insufficient evidence from which the Court can determine what was necessarily decided by the State Court. As discussed above, the Court will defer to the State Court and allow it to make appropriate determinations consistent with its ruling or after appeal in most regards, but concludes that it is free to examine the meaning of "Notice of Foreclosure" under the Act in connection with the Motion.
3. The Notice Of Default Is Not A Notice Of Foreclosure For Purposes Of The Act.
The Act protects tenants who enter into bona fide leases prior to a "Notice of Foreclosure." The Act originally failed to define "Notice of Foreclosure." Subsequently, Congress amended the Act and expressly provided as follows:
For the purposes of this section, the date of the notice of foreclosure shall be deemed to be the date on which complete title of a property is transferred to a successor entity or person as a result of an order of a court or pursuant to provisions in a mortgage, deed of trust, or security deed. Dodd-Frank Wall Street Reform and Consumer Protection Act, PO 11-203, July 21, 2010, 124 Stat. 1376 ("Dodd-Frank Act").
The above referenced amendment was scheduled to take effect one day after its date of enactment. 12 USCS § 5220; (citing § 1400(c) of Act July 21, 2010, P.L. 111-203).
Rules of statutory construction focus on determining the legislative intent behind a statute. Both the United States Supreme Court and the Ninth Circuit recognize that: "Subsequent legislation declaring the intent of an earlier statute is entitled to great weight of statutory construction." Loving v. United States, 517 U.S. 748, 770 (1996) (citations omitted); Chong Yia Yang v. California Department of Social Services, 183 F.3d 953, 961 (9th Cir. 1999).
Further, the Ninth Circuit has stated that: "Titles are also an appropriate source from which to discern legislative intent." United States v. Nader, 542 F.3d 713, 717 (9th Cir. 2008) (citations omitted). The title of section 1484 of the Dodd-Frank Act is "Protecting Tenants at Foreclosure Extension and Clarification." Thus, it is clear that the subsequent legislation declares the intent of the earlier statute. In short, Congress enacted this amendment expressly to clarify the meaning of "Notice of Foreclosure" and to remove any ambiguity.
Thus, the Court concludes that this modification makes clear that a notice of default is not a "Notice of Foreclosure" for purposes of the Act. A notice of default does not give notice of the date on which "complete title of a property is transferred." Indeed, it does not even provide a date for a foreclosure sale.
The Court notes that even without this clarifying language it would have found it unlikely that Congress intended the notice of default to be a "Notice of Foreclosure." Under California law, a notice of default does not say that a foreclosure will occur and certainly does not say that a foreclosure has occurred. Instead, it is a preliminary notice that advises a party that a foreclosure will be appropriate if additional actions are not taken. Thus, the Court finds that Movant's principal argument is without merit. The Act clearly protects Debtors; the fact that the Notice of Default issued prior to execution and delivery of the Lease in no way bars application of the Act here.
The Court emphasizes its deep disappointment in the lack of candor exhibited by Movant's counsel. Given her asserted expertise regarding the Act, it is possible that her failure to bring the Dodd-Frank Act to the attention of the Court was intentional. In any event, it was inconsistent with her obligations to the Court. But Debtors' counsel also failed to alert the Court to this change directly. Thus, while the Court considered issuance of an Order to Show Cause and the initiation of a further inquiry, the Court's current view is to limit this matter to a stem warning that the Court expects nothing less than a citation to all relevant portions of a statute.
4. Other Aspects Of The Act Do Not Bar Protection For Debtors Here.
The Act also requires that a Lease must be bona fide. The Court finds on this record that the Lease meets this requirement. First, there is no evidence that the Debtors are a child, spouse, or parent of the Lessor. Second, the Debtors' evidence state that the Debtors and Lessor entered into the Lease pursuant to an arm's length transaction, and the Movant submits no evidence to the contrary. The Debtors' current difficulties also support a determination that they were not part of any scheme by the Lessor. Finally, there is no evidence that the rental is for substantially less than market value for the Home. While Movant argued that the Lease was not fair market. Movant failed to provide any evidence in this regard. Given the serious inaccuracies in Movant's submission of evidence and arguments of the law, the Court certainly will not rely on this bald assertion. The Court notes that the Debtors believe the rent to be reasonable and that, in particular, they assert an interest only in the Home and understand that they are required to share the Property with an avocado farming operation. This would necessarily impact the value of a home rental. As a result, the Court concludes that the Act protects Debtors and relief from stay is not appropriate provided that rent is paid.
5. Debtors Must Become Current On Rent Promptly.
The Movant also argued that the Debtors are in default on rent. But here, the evidence establishes that the Movant was unwilling to properly account for rent and/or to accept rent and otherwise failed to cooperate with the Debtors. The Movant's unwillingness in this regard cannot be used to the detriment of the Debtors. Having said this, however, the Debtors must become current on post-foreclosure rent and remain current thereafter. As a result, the Court will modify the stay to provide that the stay lifts unless they make all monthly rental payments that remain due to Movant through March 21, 2011 no later than March 21, 2011.
CONCLUSION
As a result of the above, the Court grants the Motion only to a limited extent. Immediate relief from stay is not appropriate because the Act protects Debtors' interest in the Lease, and it cannot be terminated by the Movant solely as a result of its foreclosure. Having said the foregoing, however, the stay will lift for all purposes if rent does not become current as discussed above.
The Court notes that the automatic stay will soon terminate as the Debtors receive a discharge and the case is closed. At that point, however, the discharge similarly will be applicable and will protect Debtors. The Court agrees that post-discharge issues should be addressed by the State Court, albeit subject to the interpretation of the Act as contained herein.
The Debtors are to submit an order consistent with this Memorandum Decision within 14 days.