Ninth Circuit Case Notes – Fall 2021

By Lauren Bernton and Danny Newman

The Ninth Circuit’s published debtor-creditor decision load was very light the last several months. We view this as yet another result of the various COVID-19 emergency protections for borrowers promulgated by various states and the federal government. Fewer bankruptcy filings and fewer foreclosures have led one year later to fewer cases reaching the Ninth Circuit for decision.

Res Judicata Applies to Bankruptcy Exemptions

In re Albert, 998 F.3d 1088 (2021)

In a win for common sense, the Ninth Circuit applied res judicata principles to exemption elections in successive or converted bankruptcy cases in In re Albert—applying a rule the Ninth Circuit BAP had long applied but that the Ninth Circuit had never explicitly adopted in a published decision.

Lenore Albert petitioned for Chapter 13 bankruptcy and sought to exempt from her estate counterclaims she had filed in state court against Ford Motor Credit Company, as well as accounts receivable from former clients of her sole proprietorship. Albert is a California resident and thus opted for exemptions under California Code of Civil Procedure sections 704.140 and 704.210 as the basis for exempting her counterclaims, and section 704.210 as the basis for exempting her accounts receivable.1

When the Chapter 13 trustee objected, arguing that for various reasons Albert was ineligible for the exemptions under California law, the bankruptcy court ruled that those exemptions were inapplicable and, eventually, converted her case to Chapter 7. Among other things, Albert failed to appeal the court’s ruling disallowing her exemptions.

After Albert claimed identical exemptions in her Chapter 7 schedules, the Chapter 7 trustee again objected to them, this time making the same arguments the Chapter 13 trustee did—plus arguing that the issue was already decided, and Albert was thus barred from seeking those exemptions by res judicata. Albert failed to timely respond to the Chapter 7 trustee’s objection, instead filing all her previous filings as a 419-page pleading the night before the hearing. The bankruptcy judge refused to entertain her pleadings and sustained the Chapter 7 trustee’s objections to her exemptions. The BAP affirmed on res judicata grounds and on the merits. Albert appealed.

The Ninth Circuit began by recognizing that the BAP has long applied res judicata to a debtor’s bankruptcy exemptions, citing In re Cogliano, 355 B.R. 792, 802–05 (9th Cir. BAP 2006) and In re Magallanes, 96 B.R. 253, 256–57 (9th Cir. BAP 1988). However, Albert argued that Law v. Siegel, 571 U.S. 415 (2014), abrogated those decisions by barring courts from denying bankruptcy exemptions on equitable grounds, including res judicata.

The Ninth Circuit disagreed. The panel first distinguished Law on the facts—namely that the debtor in Law “unquestionably qualified” for the disputed exemptions but had been denied them due to misconduct, and the Supreme Court reversed because the bankruptcy court’s equitable powers “must yield to the Code’s more specific mandates.” The Albert panel reasoned that “because no Code provision bars bankruptcy courts from deeming prior orders preclusive, the conflict animating Law is not present here.” In re Albert, 998 F.3d at 1092. The panel further reasoned that to hold otherwise would both undermine the finality of exemption orders and frustrate the trustee’s duty to close the estate expeditiously and diligently. Id.

Having established that the bankruptcy court could disallow Albert’s exemptions on res judicata grounds, the panel next confirmed that the bankruptcy court and the BAP appropriately applied res judicata—this time issue preclusion—to Albert’s exemptions. The Ninth Circuit reasoned that Albert’s exemption arguments were precluded because (1) the initial exemptions in Chapter 13 and the amended exemptions in the Chapter 7 case were legally identical; (2) the Chapter 13 proceeding on the exemptions had resulted in a final judgment on the merits; and (3) the party against whom preclusion was asserted—Albert—was a party in the first Chapter 13 proceeding. Id. at 1093. The Court further held that the fact that she changed the amount claimed under each exemption was irrelevant to the question of whether the issue in the two proceedings was legally identical, as the underlying legal basis for the exemption was the same.

The decision is a welcome one for multiple reasons. First, it limits the ability of vexatious litigants to cost their bankruptcy estates and judicial resources by putting beyond doubt that res judicata applies to bankruptcy exemptions (and other oft-contested matters). Second, it clarifies that Law is narrowly applicable. Finally, it emphasizes that bankruptcy courts still have broad discretion to apply equitable powers and common law doctrines in a manner to conserve judicial and estate resources.

Foreclosure under Nevada Statute Providing HOAs Superpriority Lien May Be Set Aside by First Lienholder for Violation of Automatic Stay

Bank of New York Mellon v. Enchantment at Sunset Bay Condominium Association, 2 F.4th 1229 (2021)

Close watchers of this space know that Nevada Revised Statute Chapter 116 provides homeowner’s associations superpriority liens over lenders in first position under the relevant deed of trust, and that resulting litigation from that statute has created all sorts of disputes that the Ninth Circuit has had to resolve since the 2008 financial crisis.

Indeed, in just the last newsletter, we explained that Wells Fargo Bank, N.A. v. Mahogany Meadows Avenue Trust, 979 F.3d 1209 (2020), permitted HOAs to extinguish otherwise valid first liens without violating the United States Constitution. This time, in Bank of New York Mellon v. Enchantment at Sunset Bay Condominium Association,

The facts are what they seemingly always are in these cases. In 2005, a lender—this time, Bank of New York Mellon (the “Bank”)—loaned a borrower $185,400 to purchase a home located in the Sunset Bay Condominium Association (the “Sunset Bay HOA”), with the property subject to all of Sunset Bay’s covenants and conditions. In 2014, the borrower fell behind on his HOA dues. Within two months, the Sunset Bay HOA had issued a notice of default and intent to sell the property at a foreclosure sale. Before the HOA could conclude the foreclosure sale, the borrower filed a Chapter 13, and the automatic stay under Section 362 of the Bankruptcy Code went into effect. However, the HOA continued with the foreclosure process while the bankruptcy case was pending, eventually purporting to sell the property at a nonjudicial foreclosure sale and extinguishing the Bank’s lien.

The Bank brought a diversity action to quiet title under Nevada law, which gave the Bank standing, seeking an injunction to prevent the property from being further transferred and a declaration that the Bank was still in first position and could foreclose its lien. The district court granted the HOA summary judgment and dismissed the Bank’s remaining claims, holding that the foreclosure sale had successfully extinguished the Bank’s deed of trust and the Bank lacked standing to raise the automatic stay voidability issue under Tilley v. Vucurevich (In re Pecan Groves), 951 F.2d 242, 245 (9th Cir. 1991). Tilley held that only a party, a debtor, or a trustee in the underlying bankruptcy matter had standing to assert Section 362 violations.

Judge VanDyke’s majority opinion first held that the Bank had Article III and prudential standing because Nevada Revised Statute 40.010 (controlling quiet title actions) allows suit “by any person against another who claims an estate or interest in real property, adverse to the person bringing the action, for the purpose of determining such adverse claim.” Sunset Bay Condo, 2 F.4th at 8. The panel distinguished In re Pecan Groves because there was Nevada case law applying Section 40.010 that squarely held the Bank had standing and invalidating HOA foreclosure sales that violated the automatic bankruptcy stay. Id. The panel continued by holding that the HOA’s foreclosure sale had in fact violated the automatic stay and was thus void—rather than voidable—under federal and Nevada law. As the panel explained in response to a criticism from Judge Forrest’s dissent:

[T]he factual voidness of the Property’s transfer is a result of federal bankruptcy law. But the consequences of such a void transaction for purposes of a Nevada quiet title action are controlled by Nevada’s property laws. Nevada courts may determine that violations of federal bankruptcy laws—particularly violations that result in ‘void’ transactions—have state law consequences for Nevada property, which was exactly what the Nevada Supreme Court did in LN Mgmt. LLC Series 5105 Portraits Place v. Green Tree Loan Servicing, LLC (Portraits Place), 133 Nev. 394, 399 P.3d 359, 360 (Nev. 2017) (concluding in a Nevada quiet title action that because ‘the HOA foreclosure sale was an act in violation of the automatic stay … the violation of the automatic stay invalidated the HOA foreclosure sale.’).” Id. at 13-14.

The Ninth Circuit, therefore, reversed and remanded with instructions to grant the Bank judgment on its quiet title action.

Writing separately in a concurrence that Judge Rawlinson did not join, Judge VanDyke further engaged with Judge Forrest’s dissent, criticizing it for its “peculiar” conclusion that “yes, the HOA foreclosure sale at issue in this case was void as a matter of federal bankruptcy law, but Nevada property law must turn a blind eye to that fact. That approach would force Nevada to ignore a reality that our own court has recognized again and again: that violations of a bankruptcy stay are void, not merely voidable.” Id. at 14-15.

He further argued that Judge Forrest is attempting to “reconcile the irreconcilable” by asserting that a transaction can be void only as to certain entities, but that the Ninth Circuit has repeatedly and unequivocally held that violations of the automatic stay are void “full stop.” Id. at 15.

For her part, Judge Forrest’s dissent agreed that the Bank had prudential standing under the Nevada quiet title statute. However, Judge Forrest would have held that the Bank lacked standing to seek the relief in its complaint because the Bank is not acting as a “creditor” within the meaning of Bankruptcy Code Section 101(10) (defining “creditor” as an “entity that has a [right to payment] against the debtor” or “against the estate”), and therefore, is not entitled to enforce or seek relief under the Code’s automatic stay. Id. at 26.

Judge Forrest acknowledged that the automatic stay has a dual purpose of giving debtors breathing space while protecting creditors for an orderly distribution of assets. However, she argued that a creditor is not protected by the stay when it is not acting as a creditor in pursuing claims that are adverse or unrelated to the distribution of the debtor’s estate under Magnoni v. Globe Investment & Loan Co., Inc. (In re Globe), 867 F.2d 556, 558–60 (9th Cir. 1989) (where several parties who co-owned real property with the debtor sought to set aside the foreclosure of the debtor’s interest in the co-owned property as violative of the automatic stay and the parties had filed proofs of claim, the court held the parties could not invoke automatic stay protection because they were not acting in their roles as creditors, but in their roles as owners of the property). Id. at 27.

Judge VanDyke’s position carried the day, perhaps because it was a way for the panel to avoid the relatively draconian consequences of the Nevada HOA superpriority lien statute. We see both sides of the argument and recognize that it was a very difficult decision. The Ninth Circuit’s case law in some of these more arcane bankruptcy rabbit holes can often feel conflicting, with panels doing what they can to navigate the law and reach a just result. Regardless of the outcome, it is heartening to see two of the newer appointees to the Ninth Circuit meaningfully and respectfully engaging with one another in public on important issues for the debtor-creditor bar. The panel demonstrated a willingness to get into the weeds and think through these issues with refreshing vigor and openness. It is all we can ever ask for as lawyers—for ourselves and for our clients—that the judges take the time to understand the issues, take them seriously, and do their best to reach the right result, whatever they decide that result is. The Sunset Bay panel performed that service admirably.

Debtors in Chapter 13 Bankruptcy Have Absolute Right to Dismiss Their Case Regardless of Bad Faith or Abuse, Subject to Bankruptcy Code Exception

In re Nichols, 10 F.4th 956 (2021)

In early September, the Ninth Circuit considered anew whether debtors in a Chapter 13 bankruptcy have the right to dismiss their case, regardless of whether they engaged in an abuse of the bankruptcy process, and determined that prior case law creating an implied exception in cases of bad faith or abuse had been effectively overruled by the Supreme Court.

Husband and wife Donald and Jane Nichols (the “Nichols”) sought to restructure their debts through a Chapter 13 bankruptcy. After filing the petition, the Nichols were indicted on federal criminal charges for their alleged participation in a former bookkeeper’s scheme to defraud the appellee, Marana Stockyard and Livestock Market, Inc. (“Marana”). Seeking to avoid disclosure of information that might compromise their position in the criminal proceedings, the Nichols declined to complete any of the steps required by the Bankruptcy Code to advance their case. They did not participate in the meeting of the creditors; they did not file outstanding tax returns, and they did not propose a repayment plan. Marana filed a claim seeking to recover losses from the alleged fraud, and after the case sat for months without resolution, Marana moved pursuant to 11 U.S.C. § 1307(c) for conversion to a liquidation under Chapter 7. The bankruptcy court granted conversion of the case to a Chapter 7 liquidation on the primary basis that the conversion was justified “for cause” under § 1307(c) due to the Nichols’ failure to participate in the bankruptcy.

The Nichols subsequently moved to voluntarily dismiss their bankruptcy case pursuant to § 1307(b), which states that the court “shall” dismiss a Chapter 13 on “request of the debtor at any time.” Relying on the Ninth Circuit decision in In re Rosson, 545 F.3d 764 (9th Cir. 2008), the bankruptcy court determined that § 1307(b) contains an implied exception in cases where the debtor has engaged in bad faith or abuse of the bankruptcy process. The bankruptcy court concluded that the Nichols had engaged in bad faith and abuse and converted the case to a liquidation under Chapter 7. The Bankruptcy Appellate Panel affirmed the bankruptcy court’s order.

On appeal to the Ninth Circuit, the Nichols argued that the bankruptcy court erred by relying upon Rosson’s implied “bad faith or abuse of process” exception to § 1307(b) on the grounds that the case had been effectively overruled by the Supreme Court’s subsequent decision in Law v. Siegel, 571 U.S. 415, 134 S.Ct. 1188 (2014), which they argued prohibited a bankruptcy court from invoking equitable considerations to contravene § 1307(b)’s express language giving a Chapter 13 debtor an absolute right to dismiss their case.

The Ninth Circuit agreed. Judge O’Scannlain authored the decision and noted that the Law case (decided six years after Rosson) concerned a Chapter 7 debtor who perpetrated a fraud on the bankruptcy court by falsely reporting that a lien existed on his primary residence. After the bankruptcy court removed the sham lien, it granted the trustee’s motion to have the trustee’s related fees paid from the debtor’s exempt property, despite 11 U.S.C. § 522(k)’s prohibition on covering expenses from exempt property. The Ninth Circuit affirmed, but the Supreme Court disagreed, making clear that a bankruptcy court may not use its equitable powers under § 105(a) to contravene express provisions of the Bankruptcy Code, even based on bad faith. Judge O’Scannlain held that the reasoning in the Law case undercut Rosson and held that the case was no longer binding precedent.

Returning to the Nichols, the court reasoned that “Section 1307(b)’s text plainly requires the bankruptcy court to dismiss the case upon the debtor’s request. There is no textual indication that the bankruptcy court has any discretion whatsoever” beyond the single express exception when the debtor has already exercised their right to convert the case to Chapter 13 from a Chapter 7, 11, or 12. In re Nichols, 10 F.4th at 963. Given that there had been no prior conversion the court held that the bankruptcy court had no authority to refuse the motion to dismiss, even in light of the Nichols’s abuse and bad faith.

In so holding, the court was untroubled by the argument that an “absolute right” reading of § 1307(b) would effectively render § 1307(c) a nullity by depriving the bankruptcy court of discretion to convert a case to Chapter 7 for cause. Id. at 964. The court responded that in the event of competing motions under (b) and (c), one subsection would inevitably prevail at the expense of the other. The court ended with an expression of confidence that the Bankruptcy Code provides ample alternative tools for bankruptcy courts to address debtor misconduct. Id.

Stipulated Facts that Support State Court Finding of Fraud Likewise Support Judgment for Nondischargeability Based on Collateral Estoppel

Yang v. Fund Mgmt. Int’l, LLC, 847 Fed. Appx. 419 (2021)(unpublished)

In an unpublished decision, the Ninth Circuit ruled that stipulated facts supporting a state court finding of fraud and a stipulated judgment for the same will give rise to collateral estoppel and support judgment of nondischargeability under 11 U.S.C. § 523(a)(2) when the state law’s elements of fraud mirrored those of the fraud-based dischargeability exception.

Jun Ho Yang and his wife Ho Soon Hwang Yang (the “Yangs”) operated a company that claimed to use investment funds to make auto title loans, but allegedly used some of the funds for other purposes.3 the lenders got a notch in the win column against the HOAs in a hotly contested dispute that resulted in an opinion from Judge VanDyke, a separate concurrence from Judge VanDyke, and a dissent from Oregon’s Judge Forrest. The Sunset Bay majority held that because the lender has standing under Nevada’s quiet title statute, and that HOA foreclosure sales in violation of the bankruptcy stay are void (not just voidable), the lender can raise the HOA’s violation of the automatic stay provision and quiet title in its favor.

The bankruptcy court (on remand from a prior appeal in the case) applied California law under which a stipulated judgment is given collateral estoppel effect when the parties manifest an intent to be collaterally bound by its terms. Id. (quoting Cal. State Auto. Ass’n Inter-Ins. Bureau v. Superior Court, 50 Cal. 3d 658, 664 (1990)). The bankruptcy court thus determined that Mr. Yang intended that to be the case. The bankruptcy court’s order bound Ms. Yang as well.

On appeal to the Ninth Circuit, the Yangs argued that the bankruptcy court erred in finding an intent to be bound and entering the judgment against Ms. Yang, who did not sign the settlement agreement. They argued that the settlement agreement was an unenforceable prepetition waiver of the protections of the bankruptcy code.

In a concise opinion, the Ninth Circuit pointed out that the elements in the state court action mirrored those at issue in the adversary proceeding and agreed that Mr. Yang manifested an intent to be bound in future proceedings. The Ninth Circuit also rejected the argument that Ms. Yang should not be bound by the judgment by explaining that the spouses were in privity with each other in the state court litigation. Finally, the court held that collateral estoppel is an exception to the rule against prepetition waivers of bankruptcy protections.

The case, while unpublished, underscores the importance for debtor’s and creditor’s counsel alike to consider the precise wording of settlement agreements that might preempt a bankruptcy filing. Generally speaking, the more specific the factual admissions, the easier the estoppel argument.

Issue Preclusion Applies Even When Creditor Purchased Debtor’s Pending State Court Appellate Rights, Then Dismissed Appeal Before Decision

In re Delannoy, 852 Fed. Appx. 279 (2021)(unpublished)

In another case addressing the topic of issue preclusion—this one unpublished—the Ninth Circuit upheld the bankruptcy court’s application of California’s issue preclusion doctrine in a case where the creditor purchased, and then dismissed, the debtor’s pending appeal of a state court judgment against the debtor under which the creditor sought to utilize for issue preclusion in the bankruptcy.

Chad Paul Delannoy pled guilty to criminal charges of grand theft from his employer. In re Delannoy, 615 B.R. 572, 578 (B.A.P. 9th Cir. 2020).4 Mr. Delannoy was later subject to a state court judgment in an action for conversion, and money had been received based on the same conduct. Id. Mr. Delannoy appealed the state court judgment. While the appeal was pending, Mr. Delannoy filed bankruptcy. The employer’s assignee (Woodlawn Colonial, L.P.) purchased the appeal rights through the trustee, then dismissed the appeal after having been substituted for Mr. Delannoy as appellant. In re Delannoy 852 Fed. Appx. at 281. Woodlawn subsequently moved for summary judgment in the bankruptcy on its claim that the debt was non-dischargeable under 11 U.S.C § 523(a)(6), which excepts from discharge debts arising from “willful and malicious injury.” Id. at 282. The bankruptcy court applied issue preclusion and granted the motion.

On appeal to the Ninth Circuit, Mr. Delannoy primarily argued that: (1) the decision was not final on the merits because the state appellate court did not hear and decide the merits of Mr. Delannoy’s state court appeal; (2) the party against whom preclusion was sought was not in privity with the party in the prior proceeding given the substitution of the creditor for Mr. Delannoy; and (3) the bankruptcy court erred in failing to consider California’s required fairness and public policy analysis when assessing the propriety of issue preclusion. Id.

The Ninth Circuit rejected each argument. As to whether the decision was final on the merits given the sale and dismissal of the appeal, the Ninth Circuit stated that Mr. Delannoy “chose to file a Chapter 7 petition, which voluntarily relinquished to the trustee the right to pursue any appeal from the state court judgment,” then held that Mr. Delannoy had effectively waived his right to this argument in doing so. Id. On the privity issue, the Ninth Circuit similarly determined that “Delannoy set the sale of his appeal rights in motion by voluntarily filing for bankruptcy before he could litigate his appeal to completion.” Id. Finally, the Ninth Circuit held that the failure to conduct the requisite fairness and public policy analysis was not reversible error because a complete understanding of the issues could be gleaned from the record on appeal, and upon review, the bankruptcy court did not abuse its discretion in allowing the sale of the appellate rights. Id. at 282-83. The unpublished decision is another reminder of the many crucial factors at play when considering the timing of a petition for relief under the bankruptcy code.

This article was originally published in the Fall 2021 issue of the Oregon State Bar Debtor-Creditor Newsletter.

1 Because California has opted out of the federal exemptions and promulgated its own, California’s exemptions apply to California resi­dents. See 11 U.S.C. § 522(b)(2); Cal. Code Civ. Proc. § 703.130; see also Gladstone v. U.S. Bancorp, 811 F.3d 1133, 1142 (9th Cir. 2016). Section 704.140 allows debtors to keep awards arising from personal injury suits, provided the money is needed to support the debtor or their dependents. Section 704.210 automatically exempts “[p]roperty that is not subject to enforcement of a money judgment.”

2 Note the change to F.4th or the Fourth Federal Reporter. That is not a typo; apparently F.3d ran out of pages and the Federal Circuit Courts have all moved on to F.4th! the lenders got a notch in the win column against the HOAs in a hotly contested dispute that resulted in an opinion from Judge VanDyke, a separate concurrence from Judge VanDyke, and a dissent from Oregon’s Judge Forrest. The Sunset Bay majority held that because the lender has standing under Nevada’s quiet title statute, and that HOA foreclosure sales in violation of the bankruptcy stay are void (not just voidable), the lender can raise the HOA’s violation of the automatic stay provision and quiet title in its favor.

3 The original B.A.P. case was also unpublished and includes the facts of this case. In re Yang is available 2016 WL 639039, 75 Collier Bankr. Cas.2d 153 (B.A.P. 9th Cir. 2016).One of the Yangs’s investors sued the couple for fraud in California state court, and Mr. Yang subsequently entered into a settlement agreement wherein he stipulated to “the ‘facts supporting the claims made against him’” and expressly admitted that the claims in the state court action were “within the meaning of 11 U.S.C. § 523.” Yang, 847 Fed. Appx. at 421. When the Yangs filed bankruptcy, the investor filed an adversary proceeding to except the debt from discharge under § 523(a)(2)(A).

4 The B.A.P. In re Delannoy was appealed to the current case, the B.A.P. opinion summarized the facts.

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