Dear constituency list members of the Insolvency Law Committee, the following is a case update analyzing a recent case of interest written by Meredith King, Attorney at Franklin, Soto, Leeds, LLP analyzing In re Censo, LLC, 638 B.R. 416 (B.A.P. 9th Cir. 2022).
In In re Censo, LLC, the U.S. Bankruptcy Appellate Panel for the Ninth Circuit held an order entered by United States District Court for the District of Nevada was entitled to preclusive effect as several exceptions applied to prevent the order from being considered void for violation of the automatic stay under 11 U.S.C. § 362(a)(1), (a)(3), (a)(4), or (a)(5). Under the logic of City of Chicago, Illinois v. Fulton, 141 S. Ct. 585 (2021), the post-petition order of the District Court: (a) was not an act to create, perfect, or enforce a lien; (b) sought only to maintain the status quo; and (c) was not an act against the debtor. Censo is currently on appeal to the United States Court of Appeals for the Ninth Circuit as Case No. 21-1125.
To read the full published decision, click here.
After the owner of a piece of real property (the “Property”) initiated a state court action to quiet title, the purchaser of the Property at a foreclosure sale (the “Foreclosure Purchaser”) filed crossclaims (the “Crossclaims”) for declaratory relief and quiet title against the original owner’s senior lender, Bank of America (the “Senior Lender”) and its servicer, Ditech Financial, LLC f/k/a Green Tree Servicing, LLC (“Ditech”). In its Crossclaims, the Foreclosure Purchaser alleged that the foreclosure sale had extinguished the Senior Lender’s interests in the Property.
In response, Ditech filed counterclaims (the “Counterclaims”) against the Foreclosure Purchaser for quiet title and declaratory relief—claiming that the Senior Lender’s lien (the “Senior Lien”) was not affected by the foreclosure. Ditech then filed a motion for summary judgment (the “MSJ”) seeking summary judgment on its Counterclaims. The District Court granted the MSJ and declared in the resulting order (the “DC Order”) that the Foreclosure Purchaser took the Property subject to the Senior Lien.
Just before the DC Order was entered, however, the Foreclosure Purchaser’s transferee (the “Debtor”) filed a Chapter 11 bankruptcy petition. The Debtor then filed an adversary proceeding (the “Adversary”) seeking a judgment finding that the Senior Lien was unperfected and the Senior Lender was unsecured. The Debtor asserted the Senior Lender’s DOT was defective, including because it contained the incorrect address. Another servicer of the Senior Lender’s deed of trust, Shellpoint Mortgage Servicing (the “Shellpoint”), however, filed a motion to dismiss the Adversary, arguing that the DC Order precluded the Debtor’s claims. The Debtor opposed, arguing the issues involved in the Adversary differed from the issues resolved by the DC Order and involved different parties as Greenpoint was the servicer in District Court and Shellpoint was the servicer in the Adversary. The bankruptcy court rejected the debtor’s arguments and dismissed the Adversary without leave to amend.
On appeal, the Debtor asserted a new argument against preclusion. The Debtor argued, “with virtually no analysis,” that its claims were not precluded by the DC Order because the DC Order was not “final” as it was entered in violation of the automatic stay under 11 U.S.C. § 362(a)(1), (a)(3), (a)(4), and (a)(5).
In its unpublished decision, the BAP rejected the Debtor’s contentions and, relying on Fulton, 141 S. Ct. 585, held that the DC Order did not violate any subsection of § 362(a). The DC Order did not violate § 362(a)(4) and (a)(5) because it was not an act to create, perfect, or enforce a lien as it simply declared that the Foreclosure Purchaser held the property subject to the Senior Lien. The DC Order was not an act to exercise control over property of the estate and did not violate § 362(a)(3) because it only maintained the status quo since the Senior Lien existed on the petition date and, notwithstanding the DC Order, the debtor remained in possession and control of the Property. Finally, the DC Order was not a continuation of an action against the Debtor and did not violate § 362(a)(1) because the MSJ it resolved was not an action against the Debtor. The Counterclaims were the “mirror image” of the Foreclosure Purchaser’s (the debtor’s predecessor-in-interest) Crossclaims and were asserted in a solely defensive posture. The BAP noted that under Fed. R. Civ. 8(c)(2) it did not matter that the MSJ sought to resolve Counterclaims rather than an affirmative defense because the District Court had authority to treat the Counterclaim as an affirmative defense “if justice require[d].”
Interestingly, in finding that the DC Order did not violate § 362(a), the BAP noted that “none of the policy reasons for § 362(a)’s stay of litigation against a debtor” were “implicated” by the order as it “did not diminish the estate” or “unfairly benefit one creditor over another.”
The debtor timely appealed the BAP’s decision to the Ninth Circuit as case no. 22-60010; however, on May 13, 2022, the United States Bankruptcy Court for the District of Nevada dismissed the underlying bankruptcy—finding the Debtor had failed to fulfill its obligations as a Chapter 11 debtor in possession. On July 6, 2022, the Debtor refiled its Chapter 11 bankruptcy as United States Bankruptcy Court for the District of Nevada Case No. 22-12369. However, on September 27, 2022 the Bankruptcy Court granted the United States Trustee’s motion to dismiss the second case. The debtor’s motion to reconsider or set aside the dismissal of the second case is scheduled to be heard on November 14, 2022, the same day the Debtor’s opening appellate brief is due to the Ninth Circuit.
Censo is a good example of the continuing implications of Fulton. In Fulton, the Supreme Court held that § 362(a)(3) was limited to affirmative acts that affected the status quo (and did not apply to the mere retention of property). Although in Censo the BAP stated its analysis was limited to the “unique facts of the case,” the BAP continued the logic of Fulton and applied it to other subsections of § 362(a)—stating that there was a lesson to be learned from Fulton— “not every post-petition act or omission that could conceivably affect property” is a violation of the automatic stay. Censo may also indicate a post-Fulton willingness to consider whether application of the automatic stay serves the “policy” of § 362(a). This seems a long way from the Ninth Circuit’s 2018 statement that the subsections of § 362(a) are duplicative “to ensure that virtually all acts to collect pre-bankruptcy claims and all actions that would affect property of the estate are stayed.” In re Swintek, 906 F.3d 1100, 1104 (2018). In any event, it seems one post-Fulton lesson to be learned from Censo is clear: If you are a debtor asserting a creditor’s actions violate the automatic stay, be specific as to which subsection is being violated and why. Allegations “with virtually no analysis” are not as likely to be effective.
These materials were written by Meredith King, an Attorney at Franklin, Soto, Leeds, LP in San Diego, California (email@example.com). Editorial contributions were provided by Summer Shaw of Shaw & Hanover, PC, in Palm Desert, California (firstname.lastname@example.org) and Kathleen A. Cashman-Kramer of Sullivan Hill in San Diego, California.
Thank you for your continued support of the Committee.