FILED
NOV 6 2020
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-20-1130-LST
MICHAEL K. MALONEY,
Debtor. Bk. No. 6:20-bk-10369-SY
MICHAEL K. MALONEY,
Appellant,
v. MEMORANDUM*
CORTRUST BANK, N.A.; HENNEPIN
COUNTY SHERIFF’S OFFICE,
Appellees.
Appeal from the United States Bankruptcy Court
for the Central District of California
Honorable Scott Ho Yun, Bankruptcy Judge, Presiding
Before: LAFFERTY, SPRAKER, and TAYLOR, Bankruptcy Judges.
INTRODUCTION
Post-petition, appellee CorTrust Bank, N.A. (“CorTrust”) foreclosed
on two income properties owned by a limited liability company of which
Debtor was a member. Despite the fact that Debtor did not own the
properties, he filed a motion to set aside the sale and for sanctions for
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
willful violation of the automatic stay. He argued that he had legal and
equitable interests in the properties sufficient to render them property of
the bankruptcy estate protected by the automatic stay. The bankruptcy
court rejected this argument, finding that Debtor had not provided any
proof that he had any ownership interest in the properties. It accordingly
denied the motion.
We AFFIRM.
FACTUAL BACKGROUND1
In January 2012, Debtor and his longtime domestic partner, Matthew
Wehling, formed Kyle Properties, LLC (the “LLC”) in the state of
Minnesota. The couple formed the LLC to manage and protect their assets,
because they did not at that time have the option to marry. The primary
business of the LLC, as set forth in its operating agreement, is to acquire
real estate and resell or rent it out “on behalf of the individual Members.”
The LLC purchased real property in Minnesota, including two
residential properties in Robbinsdale, Minnesota (the “Properties”). In
2016, the LLC refinanced the debt on its properties through First Minnesota
Bank, N.A. In November 2019, CorTrust succeeded by merger to First
Minnesota Bank’s interest in the relevant notes and mortgages. Shortly
1
The parties did not provide complete excerpts of the record. We have therefore
exercised our discretion to examine the bankruptcy court’s docket and available imaged
papers in the bankruptcy case. See Woods & Erickson, LLP v. Leonard (In re AVI, Inc.),
389
B.R. 721, 725 n.2 (9th Cir. BAP 2008).
2
thereafter, CorTrust notified the LLC of a default on the loans secured by
the Properties. A foreclosure sale was set for January 22, 2020.
Debtor filed a chapter 132 petition on January 16, 2020. He did not list
the Properties on Schedule A of his original schedules, although he
included the notation, “See Business Property” at line 1.2 of Schedule A.
On Schedule B, he listed his 50 percent interest in the LLC, noting that it
owned three rental properties. On Schedule D he listed the debts owed to
CorTrust, indicating that the Properties secured the claims. He did not list
on Schedule D or F an obligation to Kenwood Finance that was secured by
a junior lien on the Properties and which he had personally guaranteed.
The Properties were sold to CorTrust at a foreclosure sale on
February 19, 2020, subject to the LLC’s right of redemption under
Minnesota law.3 Debtor thereafter filed an amended Schedule A that listed
the Properties as rental/vacation residences owned by “at least one of the
debtors [sic] and another.”
On April 6, 2020, Debtor filed a “Motion to Set Aside Sheriff’s Sale
and Sanctions for Violation of Automatic Stay” (the “Motion”). Debtor
sought to have the bankruptcy court set aside the sale of the Properties and
2
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532. “Rule” references are to the Federal Rules of
Bankruptcy Procedure.
3
See Minn. Stat. § 580.23 (setting six-month redemption period).
3
to impose sanctions under § 362(k)4 on CorTrust, CorTrust’s attorneys,
David Lenhardt and Jeff Braegelman, and the Hennepin County
(Minnesota) Sheriff for willfully violating the automatic stay by conducting
the foreclosure sale during the pendency of Debtor’s chapter 13 case.
Debtor contended that the foreclosure sale violated the automatic stay
because he had legal and equitable interests in the Properties.
CorTrust opposed the Motion, arguing that: (1) it was procedurally
improper because it was not filed as an adversary proceeding; (2) the
automatic stay did not extend to the LLC’s assets; and (3) there was no
other basis upon which to find that the stay applied to the Properties.
Debtor filed a verified reply, arguing that the relief he sought did not
require an adversary proceeding and repeating his assertion that he had
legal and equitable interests in the Properties and that CorTrust had an
obligation to determine whether the stay applied before proceeding with
its foreclosure sale.
At the hearing on the Motion, the bankruptcy court denied it. The
court noted procedural defects with the Motion. First, the court stated that
it could not find the proof of service for the Motion, and, if the proof of
service attached to Debtor’s declaration was the operative one, service on
the Hennepin County Sheriff’s Office did not appear to have been made in
accordance with the Rules, and there was no reference to Mr. Braegelman
4
Debtor cited § 362(h) in the Motion.
4
having been served. Second, the court found that sanctions under § 362(k)
had to be sought by adversary proceeding. And third, the court found that
it lacked jurisdiction to set aside a foreclosure sale in Minnesota.
With respect to the merits, the court found that nothing in the
documentation submitted in connection with the Motion established that
Debtor had any interest in the Properties, noting that the exhibits showed
that the Properties had been purchased in the name of the LLC.
Accordingly, the court found that the Properties were not property of the
estate and thus the automatic stay did not apply. The court expressed
skepticism that Debtor did not know the consequences of holding property
in an LLC, noting that Debtor was a former attorney who had worked for
title insurance companies and that he had filed multiple bankruptcies over
the years, including one in which he had made a similar argument about
property ownership that was rejected.
Debtor timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A) and (O). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Whether the bankruptcy court erred in denying Debtor’s Motion.
5
STANDARD OF REVIEW
Whether property is property of the estate is a question of law that
we review de novo. Gaughan v. Smith (In re Smith),
342 B.R. 801, 805 (9th
Cir. BAP 2006). Similarly, we review de novo the issue of whether the
automatic stay provisions of § 362(a) have been violated. Mwangi v. Wells
Fargo Bank, N.A. (In re Mwangi),
764 F.3d 1168, 1173 (9th Cir. 2014). De novo
means review is independent, with no deference given to the bankruptcy
court’s conclusion. See First Ave. W. Bldg., LLC v. James (In re Onecast Media,
Inc.),
439 F.3d 558, 561 (9th Cir. 2006).
DISCUSSION
Although the bankruptcy court pointed out several procedural
defects in the Motion (which arguably could have been remedied), it
denied the Motion on the merits because Debtor had not shown that he
was entitled to the relief requested. Debtor argues that the bankruptcy
court erred in finding that the Properties were not property of the estate
and thus were not protected by the automatic stay in Debtor’s individual
bankruptcy case. These are essentially the same arguments he made in the
bankruptcy court, and, like that court, we find them unpersuasive.
As a general rule, the automatic stay protects only the debtor,
property of the debtor, or property of the estate, but it does not protect
non-debtor parties or their property. Chugach Timber Corp. v. N. Stevedoring
& Handling Corp. (In re Chugach Forest Prods., Inc.),
23 F.3d 241, 246 (9th Cir.
6
1994) (citations omitted). The bankruptcy estate consists of “all legal or
equitable interests of the debtor in property as of the commencement of the
case.” 11 U.S.C. § 541(a)(1). Although the question of whether an interest
claimed by a debtor is property of the estate is a federal question to be
decided by federal law, bankruptcy courts must look to state law to
determine whether and to what extent the debtor has any legal or equitable
interests in property as of the commencement of the case. McCarthy,
Johnson & Miller v. N. Bay Plumbing, Inc. (In re Pettit),
217 F.3d 1072, 1078
(9th Cir. 2000) (citing Butner v. United States,
440 U.S. 48, 54–55 (1979)).
Under Minnesota law, “[a] limited liability company is an entity
distinct from its members.” Minn. Stat. § 322C.0104. And Minnesota law in
effect at the time the LLC was formed provided that “[a] member has no
interest in specific limited liability company property. All property of the
limited liability company is property of the limited liability company
itself.” Minn. Stat. § 322B.30 (repealed Jan. 1, 2018).5
Debtor argues that his interest in the Properties stems from the fact
that he, either in his individual capacity or as a “partner” in the LLC, could
have “engaged in any number of personal ownership activities, and
5
In 2014, the Minnesota legislature passed the Minnesota Revised Uniform
Limited Liability Company Act, codified at chapter 322C, to replace chapter 322B. See
2014 Minn. Laws ch. 157, arts. 1, § 1, at 1; 2, §§ 29, at 76; 31, at 77 (enacting chapter 322C,
effective August 1, 2015, and repealing chapter 322B, effective January 1, 2018). 40
Ventures LLC, v. Minnesquam, L.L.C., No. A19-2082,
2020 WL 5507887, at *3 n.4 (Minn. Ct.
App. Sept. 14, 2020) (unpublished opinion).
7
thereby exercised powers over the [Properties] for his own interests.” He
contends that whether property interests held by corporations are property
of the estate depends on the facts of each case, citing In re Schyma,
68 B.R.
52 (Bankr. D. Minn. 1985). He argues that the bankruptcy court did not
determine whether the facts of this case resulted in the Properties being
part of the bankruptcy estate. But Schyma is inapplicable because the court
in that case sought to determine the existence of a partnership; the case did
not at all involve a limited liability company.
Debtor does not specify what provisions in the “ownership
documents” (undefined) would result in his having an interest in the
Properties sufficient for them to be included in the bankruptcy estate. His
argument seems to be that because the LLC was set up for the benefit of the
individual members, and because part of the funds to purchase the
Properties came from the members’ individual savings, this changed the
character of the LLC so as to render its assets property of the individual
members. He contends, without authority, that because the LLC was
organized as a “domestic partnership,” it is distinguishable from a
corporation that issues stock.
But the LLC is, on its face, a limited liability company governed by
Minnesota law. Debtor cites no Minnesota law to support the proposition
that the circumstances present here resulted in the members of the LLC
obtaining legal or equitable interests in the Properties. In fact, such a
8
proposition is in direct contradiction to a common (and legitimate) reason
for forming a limited liability company, which is to protect its members
(and thus their individually owned property) from personal liability for the
debts and obligations of the entity. Krueger v. Zeman Constr. Co.,
758
N.W.2d 881, 890 (Minn. Ct. App. 2008).
Finally, Debtor argues that because CorTrust had notice of the
bankruptcy filing and was aware that Debtor had personally guaranteed
the debt underlying the junior lien on the Properties, it should have sought
relief from the automatic stay. But this argument presupposes that the
Properties were property of the estate, or, at a minimum, that there was
some basis to conclude that the stay might apply, which in turn should
have prompted CorTrust to seek clarification from the bankruptcy court.
Given that the Properties were held in the name of the LLC, and Debtor
failed to include the Properties on his initial schedules, there is no factual
or legal basis to assert that CorTrust could or should have anticipated that
he would claim an individual interest in the Properties.
Because Debtor has articulated no legal or factual basis to conclude
that he had equitable or legal interests in the Properties, he has not met his
burden to show that the bankruptcy court erred in denying the Motion on
the merits. For this reason, we need not address Debtor’s arguments that
the bankruptcy court erred in finding that there were procedural errors
9
with the Motion.6
CONCLUSION
For these reasons, we AFFIRM.
6
In any event, we see no error in those findings. Although a § 362(k) motion does
not require an adversary proceeding, a request for injunctive relief does, and service on
the Hennepin County Sheriff was not in accordance with Rule 7004. And although the
bankruptcy court correctly found that it lacked jurisdiction to set aside a foreclosure
sale in Minnesota, it is of no moment: if the court had found that the sale violated the
stay, it would be void. Schwartz v. United States (In re Schwartz),
954 F.2d 569, 571 (9th
Cir.1992).
10
