Hudson v. Martingale Investments, LLC (In Re Hudson)

FILED
JAN 14, 2014
1
SUSAN M. SPRAUL, CLERK
2 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-13-1264-BaPaKu
)
6 JOHN E. HUDSON, ) BK No. 2:13-bk-15622-SK
)
7 Debtor. )
______________________________)
8 )
JOHN E. HUDSON, )
9 )
Appellant, )
10 )
v. ) MEMORANDUM*
11 )
MARTINGALE INVESTMENTS, LLC; )
12 KATHY A. DOCKERY, Chapter 13 )
TRUSTEE, )
13 )
Appellee. )
14 ______________________________)
15 Argued and Submitted on November 21, 2013
at Pasadena, California
16
Filed - January 14, 2014
17
Appeal from the United States Bankruptcy Court
18 for the Central District of California
19 Honorable Sandra R. Klein, Bankruptcy Judge, Presiding
______________________________________
20
Appearances: Thomas B. Ure, III, argued for Appellant John E.
21 Hudson; William S. Fitch argued for Appellee
Martingale Investments, LLC.
22 ______________________________________
23
Before: BALLINGER, Jr.,** PAPPAS and KURTZ, Bankruptcy Judges.
24
25
*This disposition is not appropriate for publication. Although it may be cited
26 for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no
precedential value. See 9th Cir. BAP Rule 8013-1.
27
**Hon. Eddward P. Ballinger, Jr., Bankruptcy Judge for the District of Arizona,
sitting by designation.
28
1 Appellant, John E. Hudson (“Hudson” or “Debtor”), appeals
2 the bankruptcy court's “Order Granting Motion For Relief From
3 Stay Under 11 U.S.C. § 362 (Unlawful Detainer)” (the “Stay Lift
4 Order”). The Stay Lift Order annulled the automatic stay
5 retroactive to the bankruptcy petition date. The central issue
6 on appeal is whether the bankruptcy court erred in admitting
7 evidence that a foreclosure sale occurred pre-petition. We
8 REVERSE the bankruptcy court’s ruling that the sale occurred pre-
9 petition and the order annulling the stay.
10 I. FACTS
11 Hudson filed a chapter 131 bankruptcy petition on March 5,
12 2013, at 10:28 a.m., in the Central District of California.
13 According to Appellee, Martingale Investments, LLC
14 (“Martingale”), earlier that day, at 10:01 a.m., a trustee’s sale
15 was completed at which Martingale purchased Hudson’s home located
16 at 1658, 1660, 1662 and 1664 South Vann Ness Avenue, Los Angeles,
17 California (“Property”). A Trustee’s Deed Upon Sale was issued
18 to Martingale on March 12, 2013 (“Trustee Deed”). After
19 receiving a Notice to Quit, Hudson did not vacate the Property.
20 On March 26, 2013, Martingale filed a complaint for unlawful
21 detainer in state court.
22 In April, 2013, Martingale filed a motion to lift the stay
23 in order to continue the unlawful detainer action and obtain
24 possession of the Property. In the stay lift motion, Martingale
25 asserted that it purchased the Property at a foreclosure sale
26
1 Unless otherwise indicated, all chapter, section and rule references are to the
27 Bankruptcy Code, 11 U.S.C. §§ 101-1532, and to the Federal Rules of Bankruptcy
Procedure, Rules 1001-9037. The Federal Rules of Evidence are referred to as
28 “FRE.”
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1 just prior to the filing of the petition and that Martingale
2 subsequently commenced the unlawful detainer action without
3 knowledge of the bankruptcy filing. Martingale sought annulment2
4 of the stay retroactive to the petition date to avoid having to
5 re-file the unlawful detainer action. Attached to the stay lift
6 motion was a declaration of Olivia Reyes, Martingale’s property
7 manager (the “Reyes Declaration”).
8 In her declaration, Reyes stated that she was a “custodian”
9 of Martingale’s books and records with “personal knowledge” of
10 the Hudson account and that Martingale was unaware of the
11 bankruptcy at the time the unlawful detainer action was
12 commenced. More important, Reyes claimed Martingale purchased the
13 Property at a public sale on March 5, 2013, and that the “sale
14 was completed at 10:01 a.m.” Attached in support of the Reyes
15 Declaration was a report (“Sale Report”) obtained from the
16 trustee who conducted the sale, NDex West, LLC (“NDex”). The
17 Sale Report is actually an e-mail message prepared by Priority
18 Posting & Publishing, Inc. (“Priority Posting”) containing
19 essential information about the sale, including the date and time
20 it was conducted, sales price, number of bidders and witnesses,
21 etc.
22 Hudson objected to the stay lift motion, arguing two main
23 points. First, he claimed there was no admissible evidence that
24 the sale occurred pre-petition because the Sale Report was not
25 properly authenticated and was comprised of inadmissible hearsay
26
27 2 “[S]ection 362 gives the bankruptcy court wide latitude in crafting relief from
the automatic stay, including the power to grant retroactive relief from the
28 stay.” In re Schwartz, 954 F.2d 569, 572 (9th Cir. 1992).
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1 statements by Reyes, who lacked personal knowledge regarding the
2 sale. Second, Hudson argued the post-petition recording of the
3 Trustee Deed voided the sale. Hudson attached a declaration to
4 his objection in which he stated his intention to file a motion
5 to rescind the sale.3 He also asserted that while the Sale
6 Report indicated “Sale Conducted at: 10:01 AM,” “conducted” does
7 not mean the same as “completed” or “concluded.”
8 Martingale replied, claiming inter alia, that the recording
9 of the Trustee Deed did not violate the automatic stay because it
10 related back to the date of the trustee sale. Martingale
11 submitted the declaration of Ric Juarez (“Juarez Declaration”),
12 an NDex employee, in which Juarez stated that “the sale was
13 completed at 10:01 a.m.” The Juarez Declaration also based its
14 conclusion solely on the contents of Priority Posting’s email
15 message.
16 The bankruptcy court held a hearing on the stay relief
17 request on May 15, 2013, and stated:
18 THE COURT: I reviewed the motion, as well as the opposition,
and the timing is that – - and I believe there is admissible
19 evidence, although Debtor argues there isn’t. The
foreclosure sale took place at 10:01 a.m. on March 5th. The
20 bankruptcy case was filed a few minutes later....
21 May 15, 2013 Hr’g Tr. at 1:13-19. After hearing from the
22 parties, the court addressed Martingale’s counsel:
23 THE COURT: [Y]ou included supplemental evidence regarding the
time of sale, and it was before the time of the bankruptcy.
24 The foreclosure was at 10:01 and the bankruptcy was at 10:28.
25 May 15, 2013 Hr’g Tr. at 2:19-22. The bankruptcy court granted
26 the stay lift motion, finding that Martingale’s evidence as to
27
3 The bankruptcy court docket does not indicate such motion was ever filed. The
28 administrative case was dismissed by Order dated September 30, 2013.
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1 the time of the sale was admissible and that under California law
2 the post-petition recording of the Trustee Deed did not violate
3 the automatic stay.4 On May 21, 2013, the court entered the Stay
4 Lift Order granting the motion.5 This timely appeal followed.
5 II. JURISDICTION
6 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
7 §§ 1334 and 157(b)(2)(A) and (G). This Court has jurisdiction
8 under 28 U.S.C. § 158.
9 We also have an independent duty to determine whether an
10 appeal is moot.6 See United States v. Golden Valley Elec. Ass’n,
11 689 F.3d 1108, 1112 (9th Cir. 2012). We lack jurisdiction over
12 moot appeals. I.R.S. v. Pattullo (In re Pattullo), 271 F.3d 898,
13 901 (9th. Cir. 2001). Generally, the failure to obtain a stay of
14 an order that approves a sale or lifts the automatic stay moots
15 an appeal. See Onouli-Kona Land Co. v. Estate of Richards
16 (In re Onouli-Kona Land Co.), 846 F.2d 1170, 1171 (9th Cir.
17 1988). The record indicates Hudson did not obtain a stay of the
18 Stay Lift Order. However, the issue here is whether there was an
19 automatic stay in effect at the time of the foreclosure sale.
20 See Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571
21 (9th Cir. 1992) (violations of the automatic stay are void, not
22 voidable). The failure to obtain a stay pending appeal does not
23 prevent us from determining whether the automatic stay was
24
4 Hudson does not appeal the bankruptcy court’s finding that the recording of the
25 Trustee Deed was not void and did not violate the automatic stay.
26 5 The bankruptcy court annulled the automatic stay under section 362(d)(1).
27 6 Hudson filed a response to this Court’s notice of possible mootness and asserted
that the matter is not moot. Martingale did not respond and has not otherwise
28 moved for dismissal on mootness grounds.
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1 applicable at the time of the foreclosure sale. If the stay was
2 in effect, then the sale is void.
3 We also find that it is possible to grant Hudson effective
4 relief by vacating the Stay Lift Order. “The test for mootness of
5 an appeal is whether the appellate court can give the appellant
6 any effective relief in the event that it decides the matter on
7 the merits in his favor. If it can grant such relief, the matter
8 is not moot.” Felster Publ’g v. Burrell (In re Burrell),
9 415 F.3d 994, 998 (9th Cir. 2005) (quoting Garcia v. Lawn,
10 805 F.2d 1400, 1402 (9th Cir. 1986)). “The basic question in
11 determining mootness is whether there is a present controversy as
12 to which effective relief can be granted.” See Feldman v. Bomar,
13 518 F.3d 637, 642 (9th Cir. 2008)(quoting Nw. Envtl. Def. Ctr. v.
14 Gordon, 849 F.2d 1241, 1245 (9th Cir. 1988)). Here, there is a
15 live controversy as to whether the foreclosure sale occurred
16 prior to the petition date.
17 III. ISSUE
18 Did the bankruptcy court abuse its discretion when it
19 admitted evidence as to the time of the foreclosure sale?
20 IV. STANDARDS OF REVIEW
21 We review an order granting relief from stay for abuse of
22 discretion. Veal v. Am. Home Mortg. Servicing, Inc.
23 (In re Veal), 450 B.R. 897, 915 (9th Cir. BAP 2011). A
24 bankruptcy court’s evidentiary rulings are also reviewed under
25 the abuse of discretion test and should not be reversed unless
26 the error was prejudicial. Latman v. Burdette, 366 F.3d 774, 786
27 (9th Cir. 2004) (“To reverse on the basis of an erroneous
28 evidentiary ruling, we must conclude both that the bankruptcy
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1 court abused its discretion and that the error was
2 prejudicial.”).
3 In applying an abuse of discretion test, we first “determine
4 de novo whether the [bankruptcy] court identified the correct
5 legal rule to apply to the relief requested.” United States v.
6 Hinkson, 585 F.3d, 1247, 1262 (9th Cir. 2009). If the bankruptcy
7 court identified the correct legal rule, we then determine
8 whether its “application of the correct legal standard [to the
9 facts] was (1) ‘illogical,’ (2) ‘implausible,’ or (3) without
10 ‘support in inferences that may be drawn from the facts in the
11 record.’” Id. (quoting Anderson v. City of Bessemer City, N.C.,
12 470 U.S. 564, 577, 105 S. Ct. 1504, 84 L. Ed. 2d 58 (1985)). If the
13 bankruptcy court did not identify the correct legal rule, or its
14 application of the correct legal standard to the facts was
15 illogical, implausible, or without support in inferences that may
16 be drawn from the facts in the record, then the bankruptcy court
17 has abused its discretion. Id. We may also affirm on any ground
18 supported by the record. Shanks v. Dressel, 540 F.3d 1082, 1086
19 (9th Cir. 2008).
20 V. DISCUSSION
21 Hudson argues that the bankruptcy court erred when it found
22 the Sale Report constituted admissible evidence.7 Specifically,
23 Hudson claims that the Sale Report is unauthenticated because
24 both Reyes and Juarez lacked personal knowledge of the date and
25 time of the sale.
26 With respect to the question of when the Property was sold,
27
7 The trial court has broad discretion as to whether to admit or exclude evidence.
28 See Burgess v. Premier Corp.,727 F.2d 826, 833 (9th Cir. 1984).
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1 the bankruptcy judge acknowledged Hudson’s objection at the stay
2 lift hearing, but found there was admissible evidence supporting
3 Martingale’s position. The bankruptcy court made no specific
4 reference to the Sale Report.8 However, because the Sale Report
5 is the only substantive evidence supporting Martingale’s position
6 as to the time of the trustee’s sale, it is clear the court gave
7 it evidentiary value. If the admission of the Sale Report was an
8 abuse of discretion and prejudicial, then the Stay Lift Order
9 must be reversed.
10 The Business Records Exception
11 Bankruptcy court decisions must be supported by admissible
12 evidence. All of the evidence supporting the court’s ruling in
13 this case is hearsay.9 FRE 802 requires that when, as here,
14 there is an objection to this type of evidence, it must be
15 excluded unless an exception to the hearsay rule applies.
16 FRE 803(6) sets forth an often-used hearsay exception,
17 commonly referred to as the “business records exception” that
18 provides, in pertinent part:
19 The following are not excluded by the rule against hearsay,
regardless of whether the declarant is available as a
20 witness:
21 . . .
22 (6) Records of a Regularly Conducted Activity. A record of
an act, event, condition, opinion, or diagnosis if:
23
24
25 8 The hearing was primarily focused on the debtor’s failed argument that the
recording of the Trustee Deed was void and violated the stay.
26
9 Both the Reyes and Juarez Declarations rely on the time of sale representation
27 contained in the Sale Report. This representation was made out of court, by one
other than a trial witness and was offered to prove that the trustee’s sale was
28 consummated at the time stated in the report. FRE 801(c).
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1 (A) the record was made at or near the time by -- or
from information transmitted by -- someone with
2 knowledge;
3 (B) the record was kept in the course of a regularly
conducted activity of a business, organization,
4 occupation, or calling, whether or not for profit;
5 (C) making the record was a regular practice of that
activity;
6
(D) all these conditions are shown by the testimony of
7 the custodian or another qualified witness, . . . ;
and
8
(E) neither the source of the information nor the method
9 or circumstances of preparation indicate a lack of
trustworthiness.
10
As shown below, although Reyes and Juarez are qualified
11
custodians or witnesses, the proper foundation was not laid for
12
the admission of the Sale Report.
13
The Declarants are Custodians or Qualified Witnesses
14 Under FRE 803(6)
15 The foundational requirement found in FRE 803(6) dictates
16 that offered records be authenticated by testimony from a
17 custodian or other qualified witness from the business. Hudson
18 argues that because there is no declaration from a party with
19 first–hand knowledge of the time of the sale, the bankruptcy
20 court should have excluded the Sale Report as hearsay. It is
21 true that both Reyes and Juarez lacked knowledge as to whether
22 the Sale Report was “made at or near the time” by “someone with
23 knowledge.” But subsection (6) of FRE 803 does not require the
24 business custodian to certify he or she has first–hand knowledge
25 of the facts set forth in the records being authenticated.10 In
26
10 It is clear both Reyes and Juarez qualify as authenticating witnesses. First,
27 in their declarations, Reyes states she is “custodian of records” of Martingale,
and Juarez states he has “custody and control” of the books and records of NDex.
28 (continued...)
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1 addition, the business records exception does not require the
2 records’ custodian to lay the foundational evidence for
3 admission; some other qualified witness can provide the
4 foundation. “A witness does not have to be the custodian of
5 documents offered into evidence to establish Rule 803(6)’s
6 foundational requirements.” United States v. Childs, 5 F.3d
7 1328, 1334 (9th Cir. 1998). “The phrase ‘other qualified
8 witness’ is broadly interpreted to require only that the witness
9 understand the record-keeping system.” Id. (quoting United
10 States v. Ray, 930 F.2d 1368, 1370 (9th Cir. 1991)). Although
11 Reyes and Juarez did not prepare the Sale Report, their
12 declarations establish that they qualify both as custodians and
13 other qualified witnesses. The problem here is that neither
14 declaration contains the foundational showing required for
15 admissibility of materials such as the Sale Report, which is not
16 a Martingale document, but is a third party record of Priority
17 Posting found in Martingale’s and NDex’s files.
18 FRE 803(6) Applies to Third Party Business Records
19 Where a business has a substantial interest in the
20 trustworthiness and accuracy of the records, documents received
21 from another business are admissible as business records under
22 FRE 803(6). The Ninth Circuit has held that a document kept in
23 the regular course of business, but not made by the business, can
24 still qualify as a business record of the enterprise if there is
25 testimony that the document was kept in the regular course of
26
10(...continued)
27 Second, the declarations establish that Reyes and Juarez “understand the record-
keeping system.” And both the Reyes and Juarez Declarations establish that they
28 have custody of the Sale Report and are familiar with the record–keeping system.
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1 business and the business regularly relied on the document.
2 Childs, 5 F.3d at 1334. In Childs, the Ninth Circuit held that
3 documents prepared by third parties and incorporated into the
4 records of an auto dealership were properly admitted based on
5 witness testimony that the documents were kept in the regular
6 course of the dealership’s business and were relied upon by the
7 dealership. Id.; see also MRT Constr. Inc. v. Hardrives, Inc.,
8 158 F.3d 478, 483 (9th Cir. 1998)(“[R]ecords a business receives
9 from others are admissible under [FRE 803(6)] when those records
10 are kept in the regular course of that business, relied upon by
11 that business, and where that business has a substantial interest
12 in the accuracy of the records.”). Several other circuits also
13 interpret FRE 803(6) to permit admission of documents
14 incorporated into a business’s records that were prepared by
15 third parties.11 Simply put, for the Sale Report12 to be properly
16 admitted, Martingale must establish (through a custodian of
17 record or qualified witness) that it or NDex kept and relied on
18 the Sale Report in the regular course of business.
19 Martingale Failed to Establish the Admissibility
of the Sale Report
20
21 The Reyes Declaration referred to (and attached) Priority
22 Posting’s Sale Report as evidence of the time of the sale.
23 Reyes stated that “I have personal knowledge concerning the
24
25 11 United States v. Doe, 960 F.2d 221, 223 (1st Cir. 1992); United States v.
Jakobetz, 955 F.2d 786, 801 (2d Cir. 1992); United States v. Sokolow, 91 F.3d 396,
26 403 (3d Cir. 1996); United States v. Ullrich, 580 F.2d 765, 772 (5th Cir. 1978);
United States v. Parker, 749 F.2d 628, 633 (11th Cir. 1984).
27
12 The Sale Report is “[a] record of an act, event, condition . . .” under
28 FRE 803(6).
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1 method of entry into the records and books. Those entries are
2 made at or near the time of the occurrence during the ordinary
3 course and scope of my duties.” Reyes then stated that the sale
4 occurred at 10:01 a.m.
5 The Juarez Declaration also referred to the Sale Report as
6 evidence of the time of sale. Juarez stated that he had “custody
7 and control of the books and records” and that entries into those
8 books and records were “made at or near the time of the
9 occurrence during the ordinary course and scope of my duties.”
10 However, neither Reyes nor Juarez testified that the Sale Report
11 was kept in the regular course of Martingale’s or NDex’s
12 business.
13 The declarations also failed to provide any evidence that
14 either Martingale or NDex relied upon the Sale Report. No
15 custodian or other qualified witness provided this required
16 foundation. Thus the declarations fail to provide the necessary
17 foundational showing required under the test set forth in Childs
18 and MRT. Because the Sale Report lacks proper authentication, it
19 cannot satisfy the business records exception to the hearsay
20 rule. We conclude that the bankruptcy court abused its
21 discretion when it admitted the Sale Report.
22 Hudson was Prejudiced by the Improper Admission
of the Sale Report
23
24 For us to reverse based on an erroneous evidentiary ruling,
25 we must conclude not only that the bankruptcy court abused its
26 discretion, but this error must have been prejudicial. Latman,
27 366 F.3d at 786; see also Johnson v. Neilson (In re Slatkin),
28 525 F.3d 805, 811 (9th Cir. 2008). We recognize trial courts are
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1 given broad discretion to choose between two reasonable views of
2 the evidence. See Anderson v. City of Bessemer City, N.C.,
3 470 U.S. 564, 573-574, 105 S. Ct. 1504, 1511, 84 L. Ed. 2d 518
4 (1985). The Ninth Circuit’s abuse of discretion test as stated
5 in Hinkson, supra, was founded on the general principles
6 contained in Anderson. Both of those cases hold that a trial
7 court’s findings are not clearly erroneous, even if the appellate
8 court has a definite and firm conviction that a mistake has been
9 made, so long as the trial court’s findings were not illogical,
10 implausible and had support in inferences that may be drawn from
11 facts in the record. See also Lundell v. Ulrich (In re Lundell),
12 236 B.R. 720, 725 (9th Cir. BAP 1999); Amick v. Bradford
13 (In re Bradford), 112 B.R. 347, 352 (9th Cir. BAP 1990).
14 Had the proper foundation been laid, we would find that the
15 bankruptcy court was within its discretion when it considered and
16 accepted the facts from the Sale Report. However, no
17 foundational witness testified that Martingale or NDex kept and
18 relied upon the Sale Report in the regular course of business.
19 Therefore, the Sale Report cannot be admitted as a business
20 record under FRE 806(6). Accordingly, the Sale Report is
21 inadmissible, and the bankruptcy court abused its discretion when
22 it considered the Sale Report in granting the stay lift motion.
23 Given the lack of any other evidence in the record of the
24 time of the trustee’s sale, we cannot say that the erroneous
25 admission of the Sale Report was harmless error. The evidence
26 was critical to the granting of the Stay Lift Order, which
27 retroactively annulled the automatic stay, thereby prejudicing
28 the debtor and his ability to reorganize.
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1 VI. CONCLUSION
2 For the foregoing reasons, the bankruptcy court abused its
3 discretion when it admitted the Sale Report. We REVERSE the
4 bankruptcy court’s ruling that the sale occurred pre-petition and
5 the Stay Lift Order.
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