In re: Nathaniel Basola Sobayo

FILED
JUN 9 2021
NOT FOR PUBLICATION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. NC-20-1151-BSG
NATHANIEL BASOLA SOBAYO,
Debtor. Bk. No. 19-50887-SLJ
NATHANIEL BASOLA SOBAYO Adv. No. 19-05044-SLJ
Appellant,
v. MEMORANDUM1
HIEN THI NGUYEN; ROBERT K. LANE;
DANIEL BUTT; KHIEM NGUYEN;
AVALON NGUYEN GARDNER LIVING
TRUST; HONG JACQUELINE
GARDNER,
Appellees.
Appeal from the United States Bankruptcy Court
for the Northern District of California
Stephen L. Johnson, Bankruptcy Judge, Presiding
Before: BRAND, SPRAKER, and GAN, Bankruptcy Judges.
INTRODUCTION
Nathaniel B. Sobayo appeals an order dismissing with prejudice his
adversary complaint against Hien Thi Nguyen ("Nguyen"), Khiem Nguyen,
1
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.
1
and their attorney, Robert K. Lane (collectively, "Defendants").2 Sobayo
claimed that Defendants willfully violated the automatic stay with their
foreclosure sales of real property purportedly co-owned by Sobayo and his
solely-owned limited liability company, Kingsway Capital Partners, LLC
("Kingsway"). On Defendants' motion to dismiss, the bankruptcy court
determined that there was no stay violation and therefore neither Sobayo nor
Kingsway had a claim against Defendants. Sobayo also appeals a previous
order setting aside a default entered against Defendants. Seeing no reversible
error by the bankruptcy court with respect to either order, we AFFIRM.
FACTS
A. Events leading to the adversary complaint3
In May 2017, Kingsway purchased a single-family home which it
financed by borrowing $580,000 from Nguyen ("Residence"). The promissory
note was secured by a deed of trust against the Residence in favor of Nguyen.
Once Kingsway ceased making payments to Nguyen in February 2018,
Defendants started foreclosure proceedings. What followed was a series of
state court litigation and bankruptcy filings by Kingsway and Sobayo in what
could only be viewed as an attempt to enjoin the foreclosure sales.
Kingsway filed a chapter 11 4 case on October 31, 2018. It was dismissed
on November 8, 2018, for lack of counsel. One week later, Kingsway
2
Appellees Daniel Butt, Avalon Nguyen Gardner Living Trust, and Hong
Jacqueline Gardner did not appear in this appeal.
3 We exercised our discretion to take judicial notice of documents electronically filed
in the bankruptcy court in this case. See Atwood v. Chase Manhattan Mortg. Co. (In re
Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
2
transferred 95% of its interest in the Residence to Sobayo. This left Kingsway
with a 5% interest in the Residence.
Sobayo then began filing his chapter 13 cases. The first was filed on
December 5, 2018, and dismissed on February 4, 2019, for failure to file
documents. The second was filed on April 30, 2019. The 30-day automatic
stay in the second case was set to expire on May 30. After briefly extending
the stay, the bankruptcy court terminated the stay in Sobayo's second case on
June 25, 2019. The second case was ultimately dismissed in August 2019.
On May 1, 2019, Defendants foreclosed on Kingsway's 5% interest in
the Residence. On July 3, 2019, Defendants foreclosed on Sobayo's 95%
interest in the Residence.
B. The adversary complaint
1. The default
Sobayo then filed the instant adversary complaint against Defendants.
He alleged that Defendants violated the automatic stay in his second case
with the May 1 foreclosure sale of Kingsway's 5% interest in the Residence.
When Defendants did not file an answer by the deadline, Sobayo
obtained an entry of default. Just before Sobayo filed his motions for default
judgment, Defendants moved to set aside the default on the ground that they
did not receive service of the summons and complaint. Defendants argued
4
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, all "Rule" references are to the Federal Rules of
Bankruptcy Procedure, and all "Civil Rule" references are to the Federal Rules of Civil
Procedure.
3
that they first learned of the adversary complaint in a pleading Sobayo filed
in state court months later. In response, Sobayo filed a 63-page document
requesting a continuance to find an attorney, which Defendants' opposed.
A hearing on the motion to set aside the entry of default was set for
March 24, 2020. However, with the court closure due to the COVID-19
pandemic and the bankruptcy court's belief that oral argument was
unnecessary to decide the issue, on March 20, 2020, the court entered a
written decision and order and vacated the hearing. The court granted
Defendants' motion on three grounds. First, it questioned the veracity of
Sobayo's certificate of service and found that Defendants may not have been
served with the summons and complaint. The court further found that
Defendants presented a meritorious defense. It appeared from the record that
they did not violate the automatic stay with respect to Kingsway or Sobayo
with the two foreclosure sales. Finally, the court found that Sobayo would
suffer no prejudice if the default were set aside. Sobayo's motions for default
judgment were denied as moot.
Sobayo appealed the order setting aside the entry of default to the BAP.
The appeal was dismissed as interlocutory on May 26, 2020.
2. The motion to dismiss
Defendants then moved to dismiss Sobayo's complaint under Civil Rule
12(b)(6) and Rule 7012, arguing that he failed to state a claim upon which
relief could be granted. Although Sobayo's complaint appeared to address
only the foreclosure of Kingsway's 5% interest in the Residence, Defendants
4
argued that neither foreclosure sale violated the automatic stay in either
debtor's case. As argued by Defendants, the foreclosure of Kingsway's 5%
interest in the Residence occurred on May 1, 2019, months after its chapter 11
case was dismissed. Further, Sobayo's individual bankruptcy filing on April
30, 2019, had no effect on Kingsway's 5% interest in the Residence, so the May
1 foreclosure sale did not violate the stay in Sobayo's case either. Finally, the
foreclosure of Sobayo's 95% interest in the Residence on July 3, 2019, did not
violate the stay in Sobayo's case because there was no stay in effect in his case
after June 25, 2019.
Sobayo opposed the motion to dismiss and requested a continuance to
find an attorney. His lengthy "cut and paste" brief offered little in defense of
the motion, other than to say that Defendants violated the automatic stay.
The bankruptcy court entered a written decision and order granting
Defendants' motion to dismiss, finding that, as a matter of law, the two
foreclosure sales did not violate the automatic stay in either debtor's case. The
court further found that granting Sobayo leave to amend would be futile. His
complaint was dismissed with prejudice. This timely appeal followed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(G). We have jurisdiction under 28 U.S.C. § 158.55
Defendants argue that Sobayo lacked standing to bring the adversary, and thus
lacks standing to appeal, because it was Kingsway's interest that was foreclosed in the first
sale, not Sobayo's. If the order addressed only Kingsway's interest we would agree. But the
bankruptcy court also found that Defendants did not violate the automatic stay with the
foreclosure of Sobayo's 95% interest. Thus, he is a "person aggrieved," at least in part, by
5
ISSUES
1. Did the bankruptcy court abuse its discretion in setting aside the entry
of default?6
2. Did the bankruptcy court err in dismissing Sobayo's complaint?
3. Did the bankruptcy court abuse its discretion in dismissing Sobayo's
complaint without leave to amend?
STANDARDS OF REVIEW
We review for abuse of discretion the bankruptcy court's decision to set
aside an entry of default. Mendoza v. Wight Vineyard Mgmt., 783 F.2d 941, 945
(9th Cir. 1986).
We review de novo the bankruptcy court's grant of a Civil Rule 12(b)(6)
motion to dismiss. Movsesian v. Victoria Versicherung AG, 670 F.3d 1067, 1071
(9th Cir. 2012). In considering a motion to dismiss under Civil Rule 12(b)(6),
all well-pleaded factual allegations in the complaint must be accepted as true
and construed in the light most favorable to the plaintiff. Johnson v. Riverside
Healthcare Sys., LP, 534 F.3d 1116, 1122 (9th Cir. 2008).
We review the bankruptcy court's dismissal of a complaint without
leave to amend and with prejudice for abuse of discretion. Tracht Gut, LLC v.
L.A. Cnty. Treasurer & Tax Collector (In re Tracht Gut, LLC), 836 F.3d 1146, 1150
the order. See Fondiller v. Robertson (In re Fondiller), 707 F.2d 441, 442-43 (9th Cir. 1983).
6 Now that the bankruptcy court has entered a final order dismissing the complaint
with prejudice, the interlocutory order setting aside the default is reviewable on appeal.
See Harvey v. Waldron, 210 F.3d 1008, 1012 (9th Cir. 2000) (an appeal from a final judgment
draws in question all earlier, non-final orders which led to the judgment), overruled in part
on other grounds by Wallace v. Kato, 549 U.S. 384 (2007).
6
(9th Cir. 2016) (citing AE ex rel. Hernandez v. Cnty. of Tulare, 666 F.3d 631, 636
(9th Cir. 2012)). A bankruptcy court abuses its discretion if it applies the
wrong legal standard, or misapplies the correct legal standard, or if it makes
factual findings that are illogical, implausible, or without support in
inferences that may be drawn from the facts in the record. United States v.
Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009) (en banc).
DISCUSSION
A. The bankruptcy court did not abuse its discretion in setting aside the
entry of default.
The court may set aside an entry of default for good cause. Civil Rule
55(c); Rule 7055. Defaults are disfavored by the courts, since defaults are
inconsistent with the court's preference for resolving disputes on the merits.
United States v. Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d 1085,
1091 (9th Cir. 2010). The court's discretion is particularly broad where a party
seeks to set aside an entry of default rather than a default judgment.
Mendoza, 783 F.2d at 945.
A court should consider three factors when deciding whether to set
aside a default: (1) whether the movant engaged in culpable conduct that led
to the default; (2) whether the movant had no meritorious defense; and (3)
whether setting aside the default would prejudice the non-moving party.
Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d at 1091. The factors are
disjunctive, and the court may deny relief if any one of the three is true. Id.7
Sobayo's brief not only violates a number of appellate briefing rules, it
is incomprehensible. However, he appears to argue that the bankruptcy court
erred in finding that he may not have served Defendants with the summons
and complaint. Defendants maintained that they were not served and that
they did not learn of Sobayo's adversary action until he referenced it in a state
court filing months later. Sobayo claimed he did serve Defendants through
his process server, Mr. Christopher Franz Wuillemin. "If a defendant has
received actual or constructive notice of the filing of the action and failed to
answer, its conduct is culpable." Franchise Holding II, LLC v. Huntington Rests.
Grp., Inc., 375 F.3d 922, 926 (9th Cir. 2004) (cleaned up).
The bankruptcy court questioned Sobayo's purported service, and for
good reason. Mr. Wuillemin's business address listed in the certificate of
service was the same as Sobayo's home address. The court further observed
that Mr. Wuillemin's email address in another pleading filed by Sobayo was
nathaniel.sobayo@gmail.com. Given the record, the court's finding that
Defendants may have not been served was not clearly erroneous. In addition,
when Defendants did learn of Sobayo's complaint and the entry of default,
they promptly filed the motion to set aside. This too cuts against any
culpability.
Sobayo fails to address the bankruptcy court's other reasons for setting
aside the default – meritorious defense and lack of prejudice to Sobayo. A
defense is meritorious if "there is some possibility that the outcome of the suit
after a full trial will be contrary to the result achieved by the default." Haw.
8
Carpenters' Tr. Funds v. Stone, 794 F.2d 508, 513 (9th Cir. 1986) (citation
omitted). In their motion to set aside, Defendants offered strong prima facie
evidence that they did not violate the automatic stay with the two foreclosure
sales. And, as the court later found, they did not. There was also no prejudice
to Sobayo. As the court correctly observed, setting aside the default meant
only that Sobayo had to litigate his claims on the merits, which is what he
signed up for when he filed his complaint. There was no evidence that setting
aside the default would hinder Sobayo's ability to prosecute his case. See TCI
Grp. Life Ins. Plan v. Knoebber, 244 F.3d 691, 701 (9th Cir. 2001), overruled on
other grounds by Egelhoff v. Egelhoff, 532 U.S. 141 (2001) (delay in resolution of
the case is not enough to establish prejudice when setting aside a default; the
standard is whether plaintiff's ability to pursue its claim will be hindered).
In sum, all of the "good cause" factors supported setting aside the entry
of default. Accordingly, the bankruptcy court did not abuse its discretion in
granting Defendants' motion. To the extent Sobayo contends that the court
violated his due process rights by vacating the hearing set for March 24, 2020,
and deciding the matter on the papers, we disagree. The courthouse was
closed for in-person hearings during this time due to the COVID-19
pandemic. Further, Sobayo had the opportunity to present an objection in his
papers. "[I]t is well settled that oral argument is not necessary to satisfy due
process." Toquero v. I.N.S., 956 F.2d 193, 196 n.4 (9th Cir. 1992) (citing cases).
Given the circumstances, the bankruptcy court was well within its discretion
to dispense with oral argument and vacate the hearing.
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B. The bankruptcy court did not err in dismissing Sobayo's complaint.
Under Civil Rule 12(b)(6), applicable here by Rule 7012, a complaint is
subject to dismissal where it lacks a cognizable legal theory, Balistreri v.
Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990), or where the allegations
on their face "show that relief is barred" for some legal reason, Jones v. Bock,
549 U.S. 199, 215 (2007). When ruling on a Civil Rule 12(b)(6) motion to
dismiss, the court may consider documents attached to the complaint,
documents incorporated by reference in the complaint, or matters of judicial
notice without converting the motion into one for summary judgment. United
States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).
The pleading of a pro se litigant is held to a less stringent standard than
a pleading drafted by an attorney and is afforded the benefit of any doubt.
Hebbe v. Pliler, 627 F.3d 338, 342 (9th Cir. 2010). Further, a pro se litigant must
be given leave to amend unless it is absolutely clear that the complaint's
deficiencies cannot be cured by amendment. Lucas v. Dep't of Corr., 66 F.3d
245, 248 (9th Cir. 1995).
Sobayo argues that the bankruptcy court erred in granting the motion
to dismiss because Defendants violated the automatic stay. Precisely, Sobayo
argues that the Kingsway entity is his personal property, and thus any
interest Kingsway held in the Residence was his interest as well. Hence, his
argument goes, Defendants violated the automatic stay in his individual
chapter 13 case filed on April 30, 2019, when they foreclosed on Kingsway's
5% interest in the Residence on May 1, 2019.
10
As the bankruptcy court explained, Sobayo has a fundamental
misunderstanding as to the legal separation between him and his solely-
owned LLC. Kingsway is (or was) a Delaware limited liability company.
Under Delaware law, although a limited liability company interest is
personal property, a member has no interest in specific property of the LLC.
DEL. CODE ANN. TIT. 6, § 18-701. See also Burtch v. Opus, L.L.C. (In re Opus East
L.L.C.), 480 B.R. 561, 575 (Bankr. D. Del. 2012) (finding under § 18-701 that the
chapter 7 trustee lacked standing to bring a cause of action for conversion of
the LLC's property because the sole member of the LLC had no interest in the
LLC's property). Thus, Sobayo, as a member of Kingsway, had no interest in
Kingsway's 5% interest in the Residence, and Defendants' foreclosure of
Kingsway's interest could not have violated the automatic stay in Sobayo's
chapter 13 case. And, to be thorough, the later foreclosure of Sobayo's 95%
interest in the Residence on July 3, 2019, did not violate the stay in Sobayo's
case because it terminated on June 25, 2019.
Sobayo's claims were barred as a matter of law. Accordingly, the
bankruptcy court did not err in granting Defendants' motion and dismissing
the complaint.
C. The bankruptcy court did not abuse its discretion in dismissing
Sobayo's complaint without leave to amend.
"Dismissal of a pro se complaint without leave to amend is proper only
if it is absolutely clear that the deficiencies of the complaint could not be
11
cured by amendment." Schucker v. Rockwood, 846 F.2d 1202, 1203-04 (9th Cir.
1988) (cleaned up); see also Lucas, 66 F.3d at 248.
Sobayo did not request an opportunity to amend his complaint. He
does not contend that the bankruptcy court should have allowed him to
amend his complaint nor does he suggest what amendment he would make
had he been allowed to do so. However, given that his claims are barred as a
matter of law, any deficiencies of his complaint could not be cured by
amendment. See Jones, 549 U.S. at 215 (a complaint is subject to dismissal
under Civil Rule 12(b)(6) where the allegations on their face are barred for
some legal reason). Accordingly, the bankruptcy court did not abuse its
discretion in dismissing Sobayo's complaint without leave to amend. 7
CONCLUSION
For the reasons stated above, we AFFIRM.
7
In his final plea, Sobayo asks that we provide him justice by correcting all of the
evils done to him by Defendants and others with respect to the Residence. This Panel is
bound by the Code as well as other federal and state law. We cannot correct any of his
perceived wrongs inconsistent with the law and the facts of the case.
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