Business Law

In re Svacina (Bankr. C.D. Cal.)

The following is a case update written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, analyzing a recent decision of interest:

SUMMARY

In In re Svacina, ___ B.R. ___, 2020 WL 2769036 (Bankr. C.D. Cal. May 27, 2020) (“Svacina”), the United States Bankruptcy Court for the Central District of California (the “Bankruptcy Court”) held that a foreclosure trustee’s postpetition issuance and recordation of a deed within 15 days of a trustee’s foreclosure sale of the debtor’s residence did not violate the automatic stay because of the combined relation-back provisions of the Bankruptcy Code and California law. It further held that in any event the creditor was entitled to retroactive annulment of the automatic stay because of the debtor’s abusive pattern of filing bankruptcy cases to forestall the foreclosure.

The Svacina opinion can be found here.

FACTS

When debtor Svacina failed to pay his California home mortgage for a year, the lender commenced foreclosure proceedings. A day before the scheduled sale, Svacina filed a Chapter 13 bankruptcy. At a status conference a month and a half later, after what appears to have been something of a tortured course in the case, the Bankruptcy Court summarily ordered the case dismissed without prejudice. The lender thereupon rescheduled the foreclosure for 10 days after the dismissal. At the foreclosure, a third party purchased the property. An hour later, Svacina filed another Chapter 13 bankruptcy petition pro se before the same judge who had been assigned to his first case. His filing was materially incomplete. About a week after the foreclosure (and bankruptcy filing), the foreclosure trustee issued and recorded a foreclosure deed vesting title in the buyer. In the meantime, the clerk of the Bankruptcy Court issued an order of dismissal should Svacina fail to perfect his defective filing. When Svacina did not act, the Bankruptcy Court dismissed the case nine days after the issuance and recording of the deed.

The buyer began an unlawful detainer action in California Superior Court to gain possession of the property. Svacina defended the action by claiming that the issuance and recordation of the foreclosure deed violated the automatic stay of his second bankruptcy case because they occurred before it was dismissed. The buyer then moved to reopen the bankruptcy case to make a stay relief motion, in which the buyer argued that the stay did not apply per Bankruptcy Code sections 362(b)(3) (“section 362(b)(3)”) and 546(b) (“section 546(b)”) or that under In re Fjeldsted, 295 B.R. 12 (9th Cir. BAP 2003) or that the stay should be annulled (retroactively). Svacina joined in the motion to reopen, but opposed the stay relief motion. The Bankruptcy Court found both that the sale did not violate the stay and that in any event the buyer was entitled to annulment of the say retroactively.

REASONING

The Bankruptcy Court first concluded that the stay did not apply per sections 362(b)(3) and 546(b) and California Civil Code section 2924h(c) (“section 2924h(c)”). Section 362(b)(3) excludes from the automatic stay acts that come within the provisions of section 546(b). That section, the Bankruptcy Court explained, in essence permits perfect postpetition perfection of rights if under applicable nonbankruptcy law the act of perfection relates back to a prepetition date. Section 2924h(c), in turn, provides that if a creditor records a foreclosure deed within 15 days of the sale, the deed is “deemed perfected” at 8 a.m. on the date of the sale. Thus, the Bankruptcy Court readily concluded, since postpetition recordation in Svacina occurred well within section 2924h(c)’s 15 days, it related back to a moment (actually about an hour) before Svacina filed his second bankruptcy petition. The Bankruptcy Court noted that other bankruptcy statutes recognize relation back application, for example Bankruptcy Code section 547(e)(2) regarding the timing of transfers for preference analysis. In support of its ruling, the Bankruptcy Court cited a number of cases in the Ninth Circuit and elsewhere permitting such relation back acts as the majority rule.

In reaching this result, the Bankruptcy Court rejected Svacina’s only cited authority because it not only was contrary to the “majority rule,” but it was reversed on appeal. See In re Gonzalez, 456 B.R. 429 (Bankr. C.D. Cal. 2011, reversed, 2012 WL 8262445 (C.D. Cal., June 14, 2012). The court also disagreed with Svacina’s contention that the cited cases and section 2924h(c) did not apply because in this instance the deed was not only recorded postpetition, but first issued postpetition. It said that the language of section 2924h(c) was consistent with both acts, as was the policy underlying the statute. In addition, the Bankruptcy Court noted, there are cases holding that postpetition perfection of a prepetition deed is permissible even in the absence of a state law enabling statute such as section 2924h(c) because the creditor already has equitable title when the sale occurs, so stay relief is appropriate to repair the record. E.g., Davisson v. Engles (In re Engles), 193 B.R. 23 (Bankr. S.D. Cal.) (citing other cases).

Next, the Bankruptcy Court, relying on In re Stork, 212 B.R. 970 (Bankr. N.D. Cal. 1997), ruled in the alternative that the buyer was entitled to retroactive “annulment” of the stay even if the stay otherwise applied. Stork turned on the debtor’s attempt to manipulate the use of the bankruptcy court system to forestall a foreclosure without any genuine intention of prosecuting his bankruptcy case. The Bankruptcy Court found Svacina’s conduct fit this pattern comfortably. (The Bankruptcy Court did not discuss the Supreme Court’s opinion in the then-new decision of Roman Catholic Archdiocese of San Juan v. Acevedo, ___ U.S. ___, 140 S. Ct. 696 (2020) (holding that the federal district court’s purported nunc pro tunc order could not sanction state court’s order entered after removal to district court because after removal state court lack jurisdiction over the matter); but see Merriman v. Fattorini (In re Merriman), 616 B.R. 381 (9th Cir. BAP 2020) (holding that Acevedo inapplicable to a bankruptcy court’s permissible nunc pro tunc annulment of stay when order at issue was entered while state court had jurisdiction of case, even if it was subject to the automatic stay), nor is this report the place to do that).

AUTHOR’S COMMENT

Svacina is remarkable only for Svacina’s having elected to swim upstream against a strong current of statutory and case law, not to mention his brazen abuse of bankruptcy. By the same token, it is a useful compendium by the Bankruptcy Court of applicable law. Finally, as noted above, it grazes the potential Acevedo issue without realizing it, some cases and commentators having suggested Acevedo means that bankruptcy courts cannot annul the stay retroactively, but Merriman appears to be an intelligent response to the problem had it been addressed.

These materials were authored by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, a member of the ad hoc group, with editorial assistance by Meredith Jury, (bankruptcy judge, C.D. Cal. (Ret.)), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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