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In Re: Lupi Paulo Edwards v. Wells Fargo Bank

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT


July 12, 2011

IN RE: LUPI PAULO EDWARDS, DEBTOR. LUPI PAULO EDWARDS, APPELLANT,
v.
WELLS FARGO BANK, N.A., TRUSTEE, APPELLEE.

Appeal from the United States Bankruptcy Court for the Central District of California Honorable Peter H. Carroll, Chief Bankruptcy Judge, Presiding Bk. No. LA-10-42638-PC

The opinion of the court was delivered by: Markell, Bankruptcy Judge:

SUSAN M SPRAUL, CLERK

U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

OPINION

Submitted Without Oral Argument on March 17, 2011*fn1

Filed July 12, 2011

Before: MARKELL, PAPPAS, and DUNN, Bankruptcy Judges.

INTRODUCTION

Debtor Lupi Edwards ("Edwards") appeals the bankruptcy court's order granting relief from the automatic stay to appellee Wells Fargo Bank, as trustee for certain mortgage-backed securities ("Wells Fargo"). We AFFIRM.

FACTS

On August 5, 2010, Edwards filed a voluntary chapter 7*fn2 bankruptcy petition. Within days, Wells Fargo filed a motion for relief from the automatic stay with respect to Edwards' residence, located in Long Beach, California (the "Property").

In support of its motion, Wells Fargo attached a copy of a post-foreclosure Trustee's Deed Upon Sale dated May 17, 2010 ("Trustee's Deed"). The Trustee's Deed conveys title to the Property to Wells Fargo based on the completion of a non-judicial foreclosure sale at which Wells Fargo was the successful bidder ("Foreclosure Sale"). The Trustee's Deed identifies Power Default Services, Inc. as trustee and grantor, and Wells Fargo as grantee. Wells Fargo recorded the Trustee's Deed in Los Angeles County on May 20, 2010, almost three months before Edwards filed her bankruptcy case.

Wells Fargo also attached copies of the following documents to its motion for relief from stay: (1) a Notice to Vacate Property, addressed to Edwards' and dated May 28, 2010; (2) a complaint for unlawful detainer filed in the Los Angeles County

Superior Court ("State Court"), dated June 3, 2010 ("Unlawful Detainer Action"); (3) an order of the State Court in the Unlawful Detainer Action, dated July 14, 2010, granting summary judgment in Wells Fargo's favor in the Unlawful Detainer Action ("Unlawful Detainer Judgment"); and (4) a Writ of Possession in favor of Wells Fargo, issued on July 26, 2010.

On August 26, 2010, Edwards filed her response to Wells Fargo's motion for relief from stay. In her response, Edwards asserted that the Property was still hers, was unencumbered and was worth $180,000. Moreover, Edwards asserted that the Property was necessary for her reorganization.*fn3

In support of her response, Edwards argued:

Movant [Wells Fargo] unlawfully foreclosed this property, & executed an UNLAWFUL EVICTION against the debtor. [¶] Movant has NO STANDING to bring this motion, [¶] An ADVERSARY PROCEEDING is pending in this case against [Wells Fargo] to recover property and money, and the motion should be DENIED so that the debtor's rights are not prejudiced by defendant's wrongful actions against the debtor and the bankruptcy estate.

(Emphasis added.)

Other than a proof of insurance form, the only document that Edwards attached in support of her response was a copy of her notice of appeal of the Unlawful Detainer Judgment.*fn4

Despite Edwards' reference to a pending adversary proceeding, there was none, at least when she filed her response.

Edwards did not file her adversary proceeding until September 9, 2010 - the same day as the hearing on the motion for relief from stay.*fn5

On September 9, 2010, the bankruptcy court heard Wells Fargo's motion for relief from stay. Wells Fargo appeared through counsel, and Edwards appeared pro se. Edwards briefly argued that the foreclosure sale was invalid, arguing primarily that Gold Country Escrow was the original trustee on her deed of trust, and that she had never received notice of a change. She contended that this lack of notice rendered any change of trustee improper. In her view, only Gold Country Escrow had the capacity to foreclose and pass title under the deed of trust to Wells Fargo.

After confirming the facts of the Unlawful Detainer Judgment and the Writ of Possession with both Wells Fargo and Edwards, the bankruptcy court determined that cause existed to grant relief from stay pursuant to § 362(d)(1) and granted Wells Fargo its requested relief. The court also stated that its tentative ruling, issued the day before the hearing, would become the court's final order.

On September 13, 2010, Wells Fargo submitted an Order Granting Motion for Relief From Stay, which the court entered incorporating its rulings from the hearing and from the tentative ruling (the "Relief from Stay Order").

Edwards timely filed her appeal.*fn6

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(A) and (G), and we have jurisdiction under 28 U.S.C. § 158.

ISSUE

Did the bankruptcy court abuse its discretion in granting Wells Fargo's motion for relief from the automatic stay?

STANDARDS OF REVIEW

We review an order granting relief from stay for abuse of discretion. Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), ___ B.R. ___, 2011 WL 2304200, at *12 (9th Cir. BAP June 10, 2011); Kronemyer v. Am. Contractors Indem. Co. (In re Kronemyer), 405 B.R. 915, 919 (9th Cir. BAP 2009). As noted in Veal, this standard has two parts:

The abuse of discretion test involves two distinct determinations: first, whether the court applied the correct legal standard; and second, whether the factual findings supporting the legal analysis were clearly erroneous. United States v. Hinkson, 585 F.3d 1247, 1261-63 (9th Cir. 2009) (en banc).

If the court failed to apply the correct legal standard, then it has "necessarily abuse[d] its discretion." Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990).

This prong of the determination is considered de novo. Hinkson, 585 F.3d at 1261-62.

In re Veal, 2011 WL 2304200, at *12.

DISCUSSION

A. Preliminary Issue: The Record on Appeal

The panel notes that both parties referenced or included numerous documents in their briefs and excepts of record that were not presented to the bankruptcy court. Evidence, or 11 purported evidence, that was not properly before the bankruptcy 12 court is not part of the record on appeal. See Kirshner v. 13 Uniden Corp. of Am., 842 F.2d 1074, 1077 (9th Cir. 1988); see 14 also Fed. R. App. P. 10. As such, we can only consider those 15 documents that were before the bankruptcy court when it granted 16 Wells Fargo's motion for relief from stay, along with those 17 documents delineated in Rule 8006.

B. Wells Fargo's Standing

19 We first address Edwards' argument that Wells Fargo lacked 20 standing. Standing is a "threshold question in every federal 21 case, determining the power of the court to entertain the suit."

22 Warth v. Seldin, 422 U.S. 490, 498 (1975); see also Thomas v. 23 Mundell, 572 F.3d 756, 760 (9th Cir. 2009); In re Veal, 2011 WL 24 2304200, at *4. Although standing has both constitutional and 25 prudential dimensions, Edwards challenges only the prudential standing of Wells Fargo.*fn7

Prudential standing imposes limitations on the exercise of federal jurisdiction. Elk Grove Unified School Dist. v. Newdow, 542 U.S. 1, 11 (2004). One aspect of prudential standing is that a movant must assert its own legal rights, and may not assert the legal rights of others. See id. at 12; see also Chapman v. Pier 1 Imports (U.S.) Inc., 631 F.3d 939, 960 (9th Cir. 2011); In re Veal, 2011 WL 2304200, at *5. In this context, prudential standing essentially melds with the concept of "real party in interest" under Civil Rule 17.*fn8 In re Veal, 2011 WL 2304200, at *6. Among other policy considerations, the real party in interest requirement "ensures that the party bringing the action owns or has rights that can be vindicated by proving the elements of the claim for relief asserted." Id.

Section 362(d) allows a party to bring a motion for relief from stay if it establishes that it is a "party in interest."

While the Code does not define the term "party in interest," this status is "determined on a case-by-case basis, with reference to the interest asserted and how [that] interest is affected by the automatic stay." In re Kronemyer, 405 B.R. at 919 (quoting In re Woodberry, 383 B.R. 373, 378 (Bankr. D.S.C. 2008)).

This panel has previously held that "a party seeking stay 3 relief need only establish that it has a colorable claim to 4 enforce a right against property of the estate." In re Veal, 5 2011 WL 2304200, at *11; Biggs v. Stovin (In re Luz Int'l, Ltd.), 6 219 B.R. 837, 842 (9th Cir. BAP 1998); see also First Fed. Bank 7 of Cal. v. Robbins (In re Robbins), 310 B.R. 626, 631 (9th Cir. 8 BAP 2004).

9 Veal essentially recognizes that a movant has a colorable 10 claim sufficient to bestow upon it standing to prosecute a motion 11 under § 362 if it either: (a) owns or has another form of 12 property interest in a note secured by the debtor's (or the 13 estate's) property; or (b) is a "person entitled to enforce" 14 ("PETE") such a note under applicable state law. Id. at *10.

15 When standing is challenged, applicable non-bankruptcy law 16 provides the tests to establish a property interest or PETE 17 status. As Veal indicates, property interests are typically 18 established by showing compliance with local law, usually the 19 relevant provisions of Article 9 of the Uniform Commercial Code 20 ("UCC"), while PETE status is shown by reference to the 21 applicable provisions of UCC Article 3. Id. at **6-10.

22 The issue here is not, as it was in Veal, whether Wells 23 Fargo has an ownership or other property interest in the debtor's 24 secured note. Indeed, due to the foreclosure, the debtor's note 25 has been satisfied by Wells Fargo's credit bid. Rather the issue 26 here is the simpler one of whether, when taken together, Wells 27 Fargo's recorded Trustee's Deed and the Unlawful Detainer 28 Judgment demonstrate that Wells Fargo has some property interest in the Property. As shown below, this combination establishes, under applicable California law, that Wells Fargo is the presumptive current title owner. As a result, there can be no doubt that Wells Fargo has a sufficient "colorable" claim required for standing.*fn9

Edwards, however, argues that Wells Fargo is not the proper party to move for relief from stay because the trustee on her Deed of Trust was Gold Country Escrow; therefore, the parties conducting the foreclosure, T.D. Services or Power Default Services, as the case may be, lacked the authority to sell the Property at the Foreclosure Sale on May 17, 2010. That contention is baseless on this record and under applicable California law.

The duly-recorded Trustee's Deed provides that Wells Fargo is the presumptive current record owner with respect to the Property. See, e.g., In re Salazar, 448 B.R. 814, 819 (Bankr. S.D. Cal. 2011) (bank moving for relief from stay established a prima facie case of standing as it was the title holder on the subject property under a recorded Trustee's Deed Upon Sale).

Pursuant to its title to the Property, Wells Fargo acquired additional rights and remedies when it subsequently obtained the Unlawful Detainer Judgment and Writ of Possession to the Property. Wells Fargo possessed these interests and rights before Edwards filed her bankruptcy petition, and at the time it moved for relief from stay.

Moreover, under California law, Wells Fargo took title free 4 and clear to the Property upon completion of the Foreclosure 5 Sale. See 4 Harry D. Miller and Marvin B. Starr, CAL. REAL ESTATE 6 § 10:208 (3d ed. 2009) (under California law, "[t]he purchaser at 7 the foreclosure sale receives title free and clear of any right, 8 title, or interest of the trustor or any grantee or successor of 9 the trustor.").

10 Under these facts, we find that Wells Fargo satisfied the 11 threshold showing of a colorable claim to an ownership interest 12 in the Property, as well as enforceable rights to the Property 13 thereunder. In turn, this establishes Wells Fargo's status as a 14 real party in interest, as it is clear that Wells Fargo is 15 asserting its own legal rights. Therefore, Wells Fargo had 16 standing to seek relief from the automatic stay.

C. Cause for Relief From Stay

We now turn to the merits. Section 362(d)(1) provides that, 19 "[o]n request of a party in interest and after notice and a 20 hearing, the court shall grant relief from the stay . . . (1) for 21 cause, including the lack of adequate protection of an interest 22 in property of such party in interest." Although the Bankruptcy 23 Code does not expressly define this term, "cause" for relief from 24 stay under § 362(d)(1) is determined on a case-by-case basis. In 25 re Kronemyer, 405 B.R. at 921.

26 As briefly mentioned above, in California, once a 27 foreclosure sale concludes and the purchaser records the deed in 28 accordance with applicable law, the original trustor or borrower 1 no longer has an interest or right in the subject real property.

2 See Bebensee-Wong v. Fed. Nat'l Mortg. Ass'n (In re 3 Bebensee-Wong), 248 B.R. 820 (9th Cir. BAP 2000) (construing Cal. 4 Civ. Code § 2924h(c)); see also Kathleen P. March and Hon. Alan 5 M. Ahart, CALIFORNIA PRACTICE GUIDE: BANKRUPTCY, ¶ 8:1196 (2010), 6 available at Westlaw CABANKR ("Where a real property non-judicial 7 foreclosure was completed and the deed recorded prepetition, the 8 debtor has neither equitable nor legal title to the property at 9 the time the bankruptcy petition is filed.") (emphasis in 10 original). Accordingly, upon the original trustor's subsequent 11 bankruptcy filing, "there is no reason not to allow the creditor 12 to repossess because filing a bankruptcy petition after loss of 13 ownership cannot reinstate the debtor's title." Id. at ¶ 8:1195 14 (citing § 541(a)). Instead, the debtor is essentially a 15 "squatter," and thus cause for relief from stay is established. 16 Id. at ¶ 8:1196.

In this matter, the bankruptcy court found that cause 18 existed based on the pre-petition Foreclosure Sale, and the 19 subsequent Unlawful Detainer Judgment and Writ of Possession. In 20 ruling from the bench at the relief from stay hearing, the court 21 stated:

Wells Fargo initiated the unlawful detainer action as the owner of the property. Evidently, [Edwards] did 23 not respond to that unlawful detainer action.

A judgment was entered by a State Court, which determined 24 the right of possession to that property based upon evidence that was presented to that State Court judge.

I am not about to question that judgment. A writ of 26 possession was issued pursuant to that judgment. The only issue before this Court is whether or not there is 27 some cause to lift the protection of the Bankruptcy Court to allow that State Court judgment to be 28 enforced. And the Court believes that Wells Fargo has established that cause.

Hrg. Trans. (Sep. 9, 2010) at 3:1-12.

In its Relief from Stay Order, the court determined that under California law, Edwards' had no right of redemption once the pre-petition Foreclosure Sale was completed. The court also found that Edwards was served with a required three-day notice to quit or pay rent on May 28, 2010, and that Wells Fargo obtained the Unlawful Detainer Judgment on July 14, 2010. On this basis, the court determined that Edwards "ha[d] no right to ignore the foreclosure and attempt to reorganize the debt." The court

further determined that Edwards "filed the bankruptcy petition on August 5, 2010 in an apparent effort to stay enforcement of the unlawful detainer judgment." As such, the court properly found that Edwards no longer had an interest in the Property, and Wells Fargo established cause to obtain relief from stay.*fn10

Based on the foregoing, and upon our review of Wells Fargo's rights as a purchaser at a foreclosure sale, we find that the court's factual findings were not clearly erroneous. Therefore, the court did not abuse its discretion in granting Wells Fargo relief from the automatic stay.

D. The Adversary Proceeding

Edwards further claims that the bankruptcy court erred in 3 granting relief from stay because she had commenced an adversary 4 proceeding against Wells Fargo challenging its title. The crux 5 of Edwards' complaint was that the Foreclosure Sale, Unlawful 6 Detainer Action, subsequent Unlawful Detainer Judgment and Writ 7 of Possession were improper, fraudulent, illegal and invalid.

8 As a preliminary matter, it is not clear that the adversary 9 proceeding complaint was before the court at the September 9 10 hearing. Although Edwards referenced an adversary proceeding in 11 her response to Wells Fargo's motion for relief from stay, the 12 bankruptcy docket reflects that the adversary proceeding was not 13 filed until September 9, 2010, the same day as the relief from 14 stay hearing. There is no indication that Edwards actually 15 presented a copy of her complaint, or even mentioned it, to the 16 court at or before the September 9 hearing.

17 Even if the court could have assumed that Edwards had filed 18 an adversary complaint, it would not change our analysis. The 19 bankruptcy court generally has broad discretion in granting 20 relief from stay for cause under § 362(d). Groshong v. Sapp (In 21 re Mila, Inc.), 423 B.R. 537, 542 (9th Cir. BAP 2010).

This 22 includes granting relief from stay to enforce a prepetition state 23 court judgment, in spite of whether the debtor has initiated a 24 related adversary proceeding. See generally In re Robbins, 310 25 B.R. at 630 (granting or denying relief from stay while adversary 26 proceeding is pending is within the sound discretion of the 27 bankruptcy court); In re Kronemyer, 405 B.R. at 921-22 (court did 28 not abuse discretion in granting creditor relief from stay to continue state court litigation despite a pending adversary proceeding).

Moreover, once a California state court grants an unlawful detainer judgment in favor of a foreclosure sale purchaser, the original trustor or borrower is foreclosed under the doctrine of claim preclusion from arguing that the foreclosure sale itself was improper.*fn11 See Freeze v. Salot, 122 Cal. App. 2d 561, 565-66, 266 P.2d 140, 142-43 (1954)(after defendant obtained a judgment against plaintiff in an unlawful detainer action, res judicata precluded plaintiff's re-litigation of wrongful foreclosure claims in subsequent lawsuit). 28 U.S.C. § 1738 requires that federal courts give state court judgments the same effect as the judgment would be given under the applicable state law.

Edwards' complaint, much like her argument before this panel, seemingly advances the same state law claims, rights and defenses that she asserted (or should have asserted) before the State Court. As previously discussed, the State Court rendered judgment in favor of Wells Fargo in the Unlawful Detainer Action. Edwards was therefore precluded from continuing to assert that the Foreclosure Sale was improper, fraudulent, illegal and invalid in her bankruptcy case. It could not have been an abuse of discretion in these circumstances to grant relief from stay.

In sum, we find that based on the record in this case, the bankruptcy court did not abuse its discretion in granting Wells Fargo relief from the automatic stay under § 362(d)(1).*fn12

3 CONCLUSION

For all of the reasons set forth above, the bankruptcy court's order granting relief from stay is AFFIRMED.


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