Ninth Circ. Curbs Power of Bankruptcy Stays

(CN) - A bankruptcy court improperly found that illegally occupying a foreclosed-upon duplex entitled a Los Angelino to stay his eviction, the Ninth Circuit ruled.

Ronald Richards, an attorney for the buyer of the foreclosure property, called Friday's ruling pivotal in establishing a much-needed precedent on automatic-stay provisions of federal bankruptcy law.

"This case was one of the most important opinions I have ever had a court render on behalf of a client," Richards said in an email. "The opinion is the first circuit court precedential opinion overruling 34 years of conflicting bankruptcy court nonbinding authority."

"It also eliminates thousands of abusive Chapter 7 and 13 bankruptcy petitions and saves millions of dollars in legal fees for landlords, purchasers at foreclosure sales, and victims of squatters and trespassers," Richards added.

Richards' client, Eden Place, required court relief after buying a single-family duplex in a March 20, 2013, foreclosure sale.

With previous owner Sholem Perl refusing to vacate the Los Angeles property, Eden Place filed unlawful detainer complaints in state court for possession and restitution.

Though the court ruled for Eden Place on June 11, Perl petitioned for chapter 13 bankruptcy.

Perl's pro se filing was "skeletal," the Ninth Circuit said, but it posed a quandary for Eden Place since Section 362 of the bankruptcy code carries an automatic-stay provision.

Eden sought relief from the automatic stay, but the Los Angeles County Sheriff posted the lockout notice and evicted Perl before the bankruptcy court held its June 19 hearing on the issue.

Perl complained that the eviction kept him from removing some of his personal belongings from the property, and the bankruptcy court agreed that Eden Place had violated the stay.

Eden Place appealed to the Ninth Circuit after the Bankruptcy Appellate affirmed, saying Perl's illegal occupancy of the property did not give him a recognizable equitable interest in it.

The Ninth Circuit reversed Friday, with one member of the three-judge panel complained in dissent that the court should have dismissed the case for lack of jurisdiction.

Of critical importance to the federal appeals court was that Eden Place's purchase of the duplex in March 2013 took the property out of Perl's bankruptcy estate and meant that the automatic stay did not apply to it.

The ruling flows from Section 1161a of California Code of Civil Procedure, which governs the right of possession by a party initiating an unlawful detainer proceeding after obtaining title at a nonjudicial foreclosure sale.

"Because Perl had no remaining interest in the property, legal or equitable, when the bankruptcy petition was filed, the bankruptcy court erred in concluding that Eden Place violated the automatic stay by executing the writ of possession," Judge Johnnie B. Rawlinson wrote for the majority.

Eden Place won "legal title and all rights of possession" with its unlawful-detainer judgment and writ of possession, the court found.

Rawlinson said the entry of such judgments and writs "extinguishes all other legal and possessory interests in the real property at issue."

"Thus, at the time of the filing of the bankruptcy petition, Perl had been completely divested of all legal and equitable possessory rights that would otherwise be protected by the automatic stay," the opinion concludes. "Consequently, the sheriff's lockout did not violate the automatic stay because no legal or equitable interests in the property remained to become part of the bankruptcy estate."

Though the majority deemed the underlying ruling final for the purposes of Ninth Circuit jurisdiction, Judge Paul Watford argued otherwise in his dissent.

"The appeal is taken from a bankruptcy court order that cannot by any stretch be deemed final, even under the more relaxed standard for finality that we apply in bankruptcy appeals," Watford wrote.

Perl represented himself on the appeal but did not appear at the hearing in Pasadena this past Aug. 31.

He could not be located for comment.

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