FILED
1 MAY 10 2012
2 ORDERED PUBLISHED SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
O F TH E N IN TH C IR C U IT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5
6 In re: ) BAP No. CC-11-1144-KiMkH
)
7 FIRST YORKSHIRE HOLDINGS, ) Bk. No. SV 10-26058-AA
INC., )
8 )
Debtor. )
9 ______________________________)
)
10 FIRST YORKSHIRE HOLDINGS, )
INC., )
11 )
Appellant, )
12 )
v. ) O P I N I O N
13 )
PACIFICA L 22, LLC., )
14 )
Appellee. )
15 ______________________________)
16
17 Argued and Submitted on October 21, 2011
at Pasadena, California
18
Filed - May 10, 2012
19
Appeal from the United States Bankruptcy Court
20 for the Central District of California
21 Hon. Alan M. Ahart, Bankruptcy Judge, Presiding
_____________________________________
22
23 Appearances: Moses S. Bardavid of the Law Offices of Moses S.
Bardavid, for Appellant First Yorkshire Holdings,
24 Inc.; Martin W. Phillips of the Law Offices of
Martin W. Phillips, argued for Appellee Pacifica L
25 22, LLC.
26
27 Before: KIRSCHER, MARKELL, and HOLLOWELL, Bankruptcy Judges.
28
1 KIRSCHER, Bankruptcy Judge:
2
3 Appellant, debtor First Yorkshire Holdings, Inc. (“First
4 Yorkshire”), appeals an order from the bankruptcy court granting
5 appellee, Pacifica L 22, LLC (“Pacifica”), relief from the
6 automatic stay under
11 U.S.C. § 362(d)(2) and (d)(4).1 As we
7 find the bankruptcy court abused its discretion by failing to
8 make any findings on the equity and value of First Yorkshire’s
9 property interest in its junior deed of trust under § 362(d)(2),
10 We VACATE and REMAND with instructions to enter findings. We
11 also find the bankruptcy court abused its discretion in granting
12 relief under § 362(d)(4), when relief under § 362(d)(4)
13 potentially could affect other non-debtor parties, and because
14 the bankruptcy court failed to make any findings on that matter.
15 We VACATE that portion of the order granting relief under
16 § 364(d)(4)and REMAND with instructions to enter findings.
17 I. FACTUAL AND PROCEDURAL BACKGROUND
18 A. Prepetition events.
19 First Yorkshire is a Delaware corporation formed for the
20 sole purpose of acquiring and thereafter selling interests in
21 real property. Since its inception, First Yorkshire obtained an
22 interest in three separate parcels of real property in Southern
23 California. This encumbered real property is located on Tryon
24 Road in Los Angeles, California (the “Real Property”).
25
26 1
Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code,
11 U.S.C. §§ 101-1532, and
27 to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
The Federal Rules of Civil Procedure will be referred to as
28 “FRCP.”
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1 On January 22, 2009, non-debtor borrower Alejandro Elias
2 Weissmann (“Weissmann”) obtained a purchase money loan in the
3 amount of $1.32 million from East West Bank to purchase the Real
4 Property. In exchange for the loan, Weissmann executed a note
5 and a first deed of trust in favor of East West Bank. On January
6 26, 2009, Weissmann executed a grant deed gifting the Real
7 Property to Serron Investments, Inc. (“Serron”), which took the
8 Real Property subject to the note and East West Bank’s first deed
9 of trust. East West Bank’s first deed of trust was recorded in
10 Los Angeles County on January 30, 2009. Weissmann’s grant deed
11 to Serron was recorded in Los Angeles County on September 22,
12 2009.
13 On April 9, 2010, Serron executed two more deeds of trust on
14 the Real Property: a second deed of trust in favor of First
15 Yorkshire (“FY’s Lien Interest”)in the amount of $265,000, and a
16 third deed of trust in favor of Durham Development, Inc. in the
17 amount of $245,000. The second and third deeds of trust were
18 recorded in Los Angeles County several months later on November
19 30, 2010. Meanwhile, on September 15, 2010, East West Bank
20 assigned its interest in the note and first deed of trust to
21 Pacifica. The Assignment of Deed of Trust was recorded in Los
22 Angeles County on September 22, 2010.
23 On December 22, 2010, Serron executed a grant deed granting
24 back to Weissmann a 25% interest in the Real Property, thereby
25 making them co-owners. First Yorkshire filed a chapter 11
26 petition for relief on December 23, 2010, just 23 days after
27 recording its FY’s Lien Interest.
28
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1 B. Pacifica’s motion for relief from stay.2
2 FY’s Lien Interest on the Real Property is listed in
3 Schedule A. On January 31, 2011, Pacifica moved for relief from
4 stay under § 362(d)(1), (d)(2)(A) and (B), and (d)(4) (the “Stay
5 Relief Motion”). To support its motion, Pacifica offered the
6 note, the deeds of trust, the assignment, a declaration from a
7 real estate broker opining on the Real Property’s fair market
8 value, and a declaration from Manoj Chawla (“Chawla”), Pacifica’s
9 general manager.
10 According to Pacifica, a Notice of Default had been recorded
11 on the Real Property on August 23, 2010, a Notice of Sale had
12 been recorded on November 30, 2010, and a foreclosure sale was
13 scheduled for February 28, 2011. As of January 19, 2011, the
14 total debt owed to Pacifica on the Real Property was
15 $1,386,326.40. First Yorkshire was owed at least $265,000.
16 Based solely on an exterior inspection conducted on January 14,
17 2011, Pacifica’s real estate broker valued the Real Property at
18 $1.5 million. Assuming estimated costs of sale at $120,000,
19 Pacifica asserted that the debt on the Real Property exceeded its
20 interest, thus leaving no “equity” in the Real Property for FY’s
21 Lien Interest.
22 Pacifica further contended that the transfer or issuance of
23 the grant deed from Weissmann to Serron (and then partially back
24
25 2
Pacifica moved for relief from stay in First Yorkshire’s
bankruptcy because FY’s Lien Interest in the Real Property (and
26 the rights contained therein) is considered property of the
estate, which would invoke the stay under § 362(a). See First
27 Fed. Bank of Cal. v. Cogar (In re Cogar),
210 B.R. 803, 809 (9th
Cir. BAP 1997)(property is defined broadly under § 541 and
28 includes liens held by the debtor on property of a third party).
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1 to Weissmann), and the issuance of junior trust deeds by Serron
2 to First Yorkshire and Durham Development, Inc., manifested acts
3 of fraud and bad faith supporting the extraordinary relief
4 allowed under § 362(d)(4). Pacifica asserted in an affidavit
5 attached in support of its Stay Relief Motion that “it appear[ed]
6 [First Yorkshire] and other parties claiming fractional interests
7 in the [P]roperty [were] preparing a series of [bankruptcy]
8 filings based on these recent transfers of interest.”
9 First Yorkshire’s opposition to the Stay Relief Motion
10 included a declaration from its principal, Oscar Broederlow
11 (“Broederlow”), and a certified appraisal valuing the Real
12 Property at $2 million. First Yorkshire argued that Pacifica’s
13 claim under § 362(d)(1) failed because Pacifica made no clear
14 argument as to why it was not adequately protected, and lack of
15 payments did not automatically entitle it to relief from stay.
16 In any event, First Yorkshire offered to pay Pacifica 5%
17 interest-only payments on Pacifica’s loan as a good faith
18 adequate protection payment.3
19 First Yorkshire contended that Pacifica’s claim under
20 § 362(d)(2)(A) and (B) also failed because, based on the Real
21 Property’s value of $2 million, First Yorkshire had equity in the
22 Real Property and, according to Broederlow, the Real Property was
23 “an essential piece of an effective reorganization that [was] in
24 prospect.”
25 Finally, First Yorkshire rejected Pacifica’s allegations of
26
27 3
Because the bankruptcy court did not grant Pacifica
relief under § 362(d)(1), we need not address that issue any
28 further.
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1 fraud and bad faith under § 362(d)(4). First Yorkshire asserted
2 that it did not promptly record its second deed of trust only
3 because the Real Property owners were in continuous negotiations
4 with East West Bank for a loan modification, and a recorded
5 second deed of trust could have been detrimental to that process.
6 First Yorkshire further asserted that the Real Property owners
7 were negotiating with potential buyers and hoped to secure an
8 offer that would pay off in full the debt to Pacifica and First
9 Yorkshire.
10 In its tentative ruling dated March 1, 2011, the bankruptcy
11 court expressed its inclination to grant the Stay Relief Motion
12 under § 362(d)(2) because “this debtor has no equity in the
13 [Real] [P]roperty and this debtor has not demonstrated that the
14 [Real] [P]roperty is necessary for this debtor’s reorganization.”
15 (Emphasis in original). The court was also inclined to grant
16 relief under § 362(d)(4), but the tentative ruling did not
17 articulate the basis for that inclination.
18 The bankruptcy court held a hearing on the Stay Relief
19 Motion on March 2, 2011. Both parties were given the opportunity
20 to argue their positions. First Yorkshire asserted that its note
21 and second deed of trust were property of the estate, and that it
22 had equity in the Real Property based on its valuation of $2
23 million. Pacifica contended that no equity could exist for First
24 Yorkshire because it did not have an ownership interest in the
25 Real Property. Pacifica also asserted what it believed were
26 facts supporting its claim under § 362(d)(4). First Yorkshire
27 rejected Pacifica’s § 362(d)(4) claim, contending that none of
28 the underlying actions by the Real Property owners or First
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1 Yorkshire were unlawful, nor did they support such a claim.
2 First Yorkshire further noted that its Schedule A disclosed a
3 security interest in a second property, as well as a fee interest
4 in a third.
5 After hearing argument from the parties, the bankruptcy
6 court granted the Stay Relief Motion under § 362(d)(2) for the
7 reasons stated in its tentative ruling, but it declined to grant
8 relief under § 362(d)(4). In seeking clarification of the
9 ruling, counsel for First Yorkshire inquired:
10 COUNSEL: All right. And so no 362(d)(4)?
11 COURT: But no 362(d)(4) relief. Otherwise, my tentative
stands.
12
13 Hr’g Tr. 9:13-15, Mar. 2, 2011. The court instructed Pacifica’s
14 counsel to prepare the order. Hr’g Tr. 9:19-20.
15 Shortly thereafter, Pacifica lodged its proposed order
16 granting the Stay Relief Motion under § 362(d)(2). First
17 Yorkshire thereafter objected to Pacifica’s lodged order and
18 submitted its own proposed order. Two weeks later, on March 28,
19 2011, the bankruptcy court entered its own order granting the
20 Stay Relief Motion under both § 362(d)(2) and (d)(4) (the “Stay
21 Relief Order”). The top portion of the order read: “CHANGES MADE
22 BY COURT.” First Yorkshire timely appealed the Stay Relief Order
23 on April 1, 2011.4
24
4
On October 3, 2011, First Yorkshire filed an emergency
25 motion for stay pending appeal due to an October 4 foreclosure
sale of the Real Property. The Panel entered an order on October
26 4, 2011, granting the stay to maintain the status quo on appeal,
which will remain in effect until entry of our written
27 disposition. The stay will be vacated by separate order
effective upon the date the mandate is issued to the bankruptcy
28 (continued...)
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1 II. JURISDICTION
2 The bankruptcy court had jurisdiction under 28 U.S.C.
3 §§ 1334 and 157(b)(2)(G). We have jurisdiction under 28 U.S.C.
4 § 158.
5 III. ISSUES
6 1. Did the bankruptcy court abuse its discretion in granting
7 the Stay Relief Motion under § 362(d)(2)?
8 2. Did the bankruptcy court abuse its discretion in granting
9 the Stay Relief Motion under § 362(d)(4)?
10 IV. STANDARD OF REVIEW
11 We review a bankruptcy court’s order granting relief from
12 the automatic stay for an abuse of discretion. Arneson v.
13 Farmers Ins. Exch. (In re Arneson),
282 B.R. 883, 887 (9th Cir.
14 BAP 2002). To determine whether the bankruptcy court abused its
15 discretion, we conduct a two-step inquiry: (1) we review de novo
16 whether the bankruptcy court “identified the correct legal rule
17 to apply to the relief requested” and (2) if it did, whether the
18 bankruptcy court's application of the legal standard was
19 illogical, implausible or “without support in inferences that may
20 be drawn from the facts in the record.” United States v.
21 Hinkson,
585 F.3d 1247, 1261-62 (9th Cir. 2009)(en banc).
22 V. DISCUSSION
23 A. The bankruptcy court abused its discretion when it granted
the Stay Relief Motion under § 362(d)(2).
24
Equity, for purposes of § 362(d)(2)(A), is the difference
25
26 4
(...continued)
court; however, given that the Panel is vacating and remanding
27 for further findings and for conducting other matters in
accordance with our opinion, the automatic stay under § 362 will
28 remain in effect.
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1 between the value of the property and all encumbrances on it.
2 Sun Valley Newspapers, Inc. v. Sun World Corp. (In re Sun Valley
3 Newspapers, Inc.),
171 B.R. 71, 75 (9th Cir. BAP 1994)(citing
4 Stewart v. Gurley,
745 F.2d 1194, 1196 (9th Cir. 1984)). “The
5 concept of ‘equity’ in property is based on the premise that the
6 property itself has some economic value to its owner.” Scripps
7 GSB I, LLC, v A Partners, LLC (In re A Partners, LLC),
344 B.R.
8 114, 121 (Bankr. E.D. Cal. 2006)(emphasis added). Such
9 conclusion is further supported by the definition of equity: “An
10 ownership interest” determined by “the amount by which the value
11 of or an interest in property exceeds secured claims or liens.”
12 Black’s Law Dictionary 560 (7th ed. 1999).
13 No doubt exists, however, that FY’s Lien Interest on a third
14 party’s real property constitutes property of First Yorkshire’s
15 bankruptcy estate under § 541. First Fed. Bank of Cal. v. Cogar
16 (In re Cogar),
210 B.R. 803, 809 (9th Cir. BAP 1997)(property is
17 defined broadly under § 541 and includes a lien held by the
18 debtor on property of a third party; however, such lien does not
19 allow debtor to restructure the terms of a priority lien held by
20 a creditor of the third party).
21 First Yorkshire contends the bankruptcy court erred in
22 granting relief under § 362(d)(2) because, based on a valuation
23 of the Real Property at $2 million and the prospect of a sale, it
24 was clear that First Yorkshire had equity in the Real Property,
25 and that its secured lien had value, thus proving its necessity
26 for an effective reorganization. The bankruptcy court issued no
27 findings as to what value it considered in granting the Stay
28 Relief Motion. We can not decipher from the record what
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1 methodology was used in determining value and consequently equity
2 or the lack of equity in FY’s Lien Interest. Did the bankruptcy
3 court use Pacifica’s proffered value of $1,500,000 or First
4 Yorkshire’s value of $2,000,000, or some other value? What costs
5 or expenses of sale may have decreased the value remaining to
6 secure the several liens on the property? Other alternative
7 valuations may also be available to determine the value of FY’s
8 Lien Interest, such as soliciting opinions from mortgage brokers
9 as to the value of FY’s Lien Interest depending on whether it is
10 secured or unsecured. Other factors may also impact value such
11 as statutory rights of the lien holder, i.e., the right to
12 collect rents on default; the right to foreclose on default; the
13 right to receive notice of the default in a senior lien; the
14 right to purchase the property at a foreclosure sale; the right
15 to redeem; the right to take title to the property in lieu of
16 foreclosure with the consent of the owners; and the right to cure
17 defaults owed to senior creditors. See
Cal. Civ. Code §§ 2924,
18 2927.
19 Section 362(d)(2) requires the bankruptcy court, on request
20 of a party in interest, to grant relief from the automatic stay
21 when debtor has no equity in the property, and the property is
22 not necessary to debtor’s effective reorganization. Pursuant to
23 § 362(g), the moving party has the burden of proof on the issue
24 of debtor’s equity; the debtor has the burden of proof on all
25 other issues. Pacifica had the burden to establish that First
26 Yorkshire did not have equity in FY’s Lien Interest, and as
27 noted, we are unable to determine what value the bankruptcy court
28 used in determining the lack of equity.
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1 First Yorkshire contends on appeal that it provided evidence
2 of its financial ability to exert its rights as a junior lien
3 holder to either redeem or reinstate the loan. This issue was
4 never specifically raised before the bankruptcy court. We
5 generally will not consider issues raised for the first time on
6 appeal. United States v. Pimentel-Flores,
339 F.3d 959, 967 (9th
7 Cir. 2003) and will not do so here. Such assertions by First
8 Yorkshire were unnecessary as Pacifica failed to carry its burden
9 in clearly establishing that First Yorkshire did not have equity
10 in FY’s Lien Interest. The requirements of § 362(d)(2) are
11 conjunctive and with Pacifica failing to carry its burden, First
12 Yorkshire was not required to go forward on whether FY’s Lien
13 Interest was necessary to an effective reorganization. See In re
14 A Partners, LLC, 344 B.R. at 126 (If debtor has no equity in
15 property then debtor must establish that property is necessary to
16 an effective reorganization.).
17 The Stay Relief Motion is a contested motion under Rule 9014
18 and is subject to FRCP 52(a), which requires the bankruptcy court
19 to find the facts specifically and state its conclusions of law
20 separately. In the absence of complete findings, we may vacate a
21 judgment and remand the case to the bankruptcy court to make the
22 required findings. See United States. v. Ameline,
409 F.3d 1073
23 (9th Cir. 2005).
24 Accordingly, the bankruptcy court abused its discretion by
25 failing to make findings establishing value and determining that
26 First Yorkshire did not have equity in FY’s Lien Interest. We
27 VACATE and REMAND for further proceedings in accordance with this
28 decision.
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1 B. The bankruptcy court abused its discretion when in granted
the Stay Relief Motion under § 362(d)(4).
2
The special relief afforded creditors in § 362(d)(4)5 was
3
added in 2005 under BAPCPA. It permits the bankruptcy court to
4
grant in rem relief from the automatic stay in order to address
5
schemes using bankruptcy to thwart legitimate foreclosure efforts
6
through one or more transfers of interest in real property. If
7
the court’s order granting relief under § 362(d)(4) is recorded
8
in compliance with applicable state law, it is binding in any
9
other bankruptcy case filed in the next two years purporting to
10
affect the same real property. See § 362(d)(4), § 362(b)(20).
11
To obtain relief under § 362(d)(4), the court must find
12
three elements to be present. First, debtor’s bankruptcy filing
13
must have been part of a scheme. Second, the object of the
14
15 5
Until December 22, 2010, § 362(d)(4) read as follows:
16 (d) On request of a party in interest and after notice and a
hearing, the court shall grant relief from the stay . . . such as
17 by terminating, annulling, modifying, or conditioning such stay--
18 (4)with respect to a stay of an act against real property
under subsection (a), by a creditor whose claim is secured
19 by an interest in such real property, if the court finds
that the filing of the petition was part of a scheme to
20 delay, hinder, and defraud creditors that involved either--
(A) transfer of all or part ownership of, or other
21 interest in, such real property without the consent of
the secured creditor or court approval; or
22 (B) multiple bankruptcy filings affecting such real
property (emphasis added).
23
The revised statute, as amended by the Bankruptcy Technical
24 Corrections Act of 2010, Pub. L. No. 111-327,
124 Stat. 3557
(2010) (effective December 22, 2010) eliminated the conjunctive
25 “and” in paragraph (4) and replaced it with the disjunctive “or.”
Therefore, the party seeking relief from stay under § 362(d)(4)
26 must show only a scheme by debtor to delay, hinder, or defraud,
just as in § 727(a)(2).
27 In the stay Relief Order entered on March 28, 2011, the
bankruptcy court erroneously applied the older version of
28 paragraph (4). Upon remand, it should apply the amended statute.
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1 scheme must be to delay, hinder, or defraud creditors. Third,
2 the scheme must involve either (a) the transfer of some interest
3 in the real property without the secured creditor’s consent or
4 court approval, or (b) multiple bankruptcy filings affecting the
5 property.6 For the court to grant relief under § 362(d)(4), and
6 thus trigger two years of prospective relief as to the subject
7 real property, it must affirmatively find that the three elements
8 above are present. In re Abdul Muhaimin, 343 B.R. at 169 (“The
9 precise language is: ‘if the court finds . . . .’ For the court
10 to make such an affirmative finding, it must have proof of the
11 elements required to justify such relief.”).
12 As recognized by the bankruptcy court in In re Abdul
13 Muhaimin, relief under § 362(d)(4) has serious implications. By
14 seeking relief under § 362(d)(4), the creditor requests specific
15 prospective protection against not only the debtor, but also
16 every non-debtor, co-owner, and subsequent owner of the property.
17 Id. If granted, such relief nullifies the ability of the debtor
18 and any other third party with an interest in the property to
19 obtain the benefits of the automatic stay in future bankruptcy
20 cases for a period of two years. Id.
21 First Yorkshire contends that the bankruptcy court violated
22 its due process rights when it entered relief under § 362(d)(4)
23 despite stating at the hearing that such relief was not justified
24
25 6
As noted by one bankruptcy court, § 362(g) would appear
to put the burden of proof of these elements on the debtor as the
26 opposing party. In re Abdul Muhaimin,
343 B.R. 159, 169 (Bankr.
D. Md. 2006). However, the court concluded that such a result is
27 nonsensical. We agree. In any event, Pacifica has never
contended that it did not have the burden of proof on this issue.
28
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1 on the record. While we disagree that First Yorkshire was denied
2 due process since it had ample opportunity to defend the Stay
3 Relief Motion, we do note that the Stay Relief Order contains no
4 findings whatsoever establishing why Pacifica was entitled to
5 such relief. Because the Stay Relief Motion is a contested
6 matter under Rule 9014 it is subject to FRCP 52(a), which
7 requires the bankruptcy court to find the facts specifically and
8 state its conclusions of law separately.
9 In the absence of complete findings, we may vacate a
10 judgment and remand the case to the bankruptcy court to make the
11 required findings. See United States. v. Ameline,
409 F.3d 1073
12 (9th Cir. 2005). We note that a bankruptcy court’s failure to
13 make factual findings as required by FRCP 52(a) does not require
14 reversal and remand unless a full understanding of the issues
15 under review is not possible without aid of the findings. See
16 Simeonoff v. Hiner,
249 F.3d 883, 891 (9th Cir. 2001). Here, it
17 is not clear without further findings from the bankruptcy court
18 that Pacifica carried its burden of proof on all of the elements
19 for relief from stay under § 362(d)(4). Findings are
20 particularly important here because of the in rem nature of the
21 Stay Relief Order and the detrimental effect it has on parties
22 besides First Yorkshire.
23 Accordingly, we VACATE the portion of the Stay Relief Order
24 granting relief under § 362(d)(4) and REMAND with instructions
25 that the bankruptcy court make the required findings supporting
26 such relief.
27 VI. CONCLUSION
28 For the foregoing reasons, we VACATE the order granting the
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1 Stay Relief Order under § 362(d)(2) and granting relief under
2 § 362(d)(4) and REMAND these matters to the bankruptcy court to
3 enter findings and to conduct other matters in accordance with
4 our opinion.
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