Business Law

Merriman v. Fattorini (In re Merriman)

The following is a case update written by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, analyzing a recent decision of interest:

The Ninth Circuit Bankruptcy Appellate Panel has ruled that the Supreme Court’s decision in Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, 140 S.Ct. 696 (Feb. 24, 2020) (“Acevedo”), does not prevent the bankruptcy court from retroactively lifting the automatic stay. Merriman v. Fattorini (In re Merriman), 616 B.R. 381 (9th Cir. BAP 7/13/20).

To view the opinion, click here.

FACTS

Former NFL star Shawne Merriman (“Debtor”) filed a chapter 13 bankruptcy case in November 2018. Several months later, with no knowledge of the bankruptcy, Ferdinand and Deann Fattorini (together, the “Fattorinis”) filed a wrongful death lawsuit against Mr. Merriman and others in the Los Angeles County Superior Court in connection with the July 2017 death of their daughter Kimberly (the “State Court Action”). A few days later, after learning of Debtor’s bankruptcy filing through his counsel, they filed a motion for relief from stay (the “Stay Motion”). The Fattorinis asked the court to annul the automatic stay to permit them to continue litigating the State Court Action, which was set for trial in January 2021.

Debtor opposed the Stay Motion, arguing that it was not supported by sufficient evidence and did not demonstrate that “cause” existed to lift the stay pursuant to § 362(d)(1) in light of the relevant factors. He also objected to the admissibility of the Fattorinis’ evidence regarding their lack of notice of the bankruptcy filing. At the hearing on the Stay Motion, the court sustained several of Debtor’s evidentiary objections, but nevertheless found that cause existed to annul the stay. Accordingly, the court ruled that it would lift the stay retroactively to permit the Fattorinis to liquidate their damages in state court and potentially obtain findings and conclusions from the state court that could be applied preclusively in a nondischargeability proceeding. Debtor timely appealed the bankruptcy court’s ruling to the Bankruptcy Appellate Panel (“BAP” or “Panel”).

REASONING

Citing to its holding in Kronemyer v. Am. Contractors Indem. Co. (In re Kronemyer), 405 B.R. 915, 921 (9th Cir. BAP 2009), the BAP noted that the bankruptcy court should consider the following factors in assessing whether relief from stay should be granted to allow state court proceedings to continue in that forum: (1) judicial economy, (2) the expertise of the state court, (3) prejudice to the parties, and (4) whether exclusively bankruptcy issues are involved. The Panel then articulated the two main factors courts should focus on in determining whether retroactive annulment of the stay is appropriate as: (1) whether the creditor was aware of the bankruptcy petition; and (2) whether the debtor engaged in unreasonable or inequitable conduct or prejudice would result to the creditor.

The BAP concluded that the Stay Motion was supported by sufficient evidence. The Panel also determined that the bankruptcy court had applied the correct legal standard, observing that it was not necessary for the bankruptcy court to make findings as to every stay relief factor initially articulated in In re Kronemyer or In re Curtis, 40 B.R. 795, 799-800 (Bankr. D. Utah 1984), later adopted by the California bankruptcy courts. Similarly, the BAP opined that the bankruptcy court was not required to analyze each and every factor articulated in Fjeldsted v. Lien (In re Fjeldsted), 293 B.R. 12, 24-25 (9th Cir. BAP 2003) to determine whether retroactive relief was appropriate. Instead, the Panel held that the bankruptcy court was required to, and actually did, balance the equities by considering whether the Fattorinis were aware of the bankruptcy petition and whether prejudice would result to them by not granting retroactive relief. On these grounds, the BAP concluded that the bankruptcy court had not abused its discretion in retroactively annulling the automatic stay.

The BAP also acknowledged that the Supreme Court issued its decision in Acevedo during the pendency of Debtor’s appeal, in which the Court held that a district court’s nunc pro tunc order remanding a removed lawsuit to state court was not effective to retroactively confer jurisdiction so as to validate the state court’s orders entered before remand. Examining the holding in the Acevedo—”that nunc pro tunc orders may not create jurisdiction where none exists”—the Panel observed that the ruling is consistent with other Supreme Court opinions holding that jurisdiction in the federal courts must emanate from the United States Constitution or a statute and cannot be created by the actions of a court.

In contrast, the BAP noted that Bankruptcy Code section 362(d) does not purport to deprive the bankruptcy court of jurisdiction. Instead, as the BAP recognized, section 362(d) explicitly grants the bankruptcy court the power to terminate, annul, modify, or condition the stay to permit another court or entity to exercise control over an asset or claim. After careful consideration of the scope and reach of the ruling in Acevedo, the BAP ultimately concluded the Supreme Court’s opinion does not prohibit a bankruptcy court’s exercise of its power to retroactively annul the automatic stay pursuant to 11 U.S.C. §362(d) precisely because “it is absolutely clear that Congress expressly gave such power, including the power retroactively to grant relief, to bankruptcy courts.”

AUTHOR’S COMMENTS

In its opinion, the Panel observed that at least one bankruptcy court had interpreted Acevedo as prohibiting a grant of retroactive or nunc pro tunc relief from stay. In In re Telles, No. 8-20-70325-reg, 2020 WL 2121254 (Bankr. E.D.N.Y. Apr. 30, 2020), the bankruptcy court ruled that, under Acevedo, it lacked authority to grant retroactive relief from stay to validate a post-petition foreclosure sale because after the bankruptcy case was filed, the state court lost jurisdiction over estate property, and jurisdiction could not be retroactively restored. Analyzing the ruling in Telles, the BAP clarified that although the bankruptcy court obtains jurisdiction over estate assets once a bankruptcy petition is filed, see 11 U.S.C. § 541(a), the stay does not transfer jurisdiction from one court to another and granting relief from stay does not remove an asset from the bankruptcy estate. See Catalano v. Comm’r of Internal Revenue, 279 F.3d 682, 686-87 (9th Cir. 2002). As relief from stay usually permits another (frequently state law based) process to go forward, and bankruptcy court jurisdiction is no impediment to that result, the BAP concluded that the bankruptcy court’s effective use of the stay remedy must occasionally include the option of granting retroactive relief and correctly held that the ruling in Acevedo did not dictate otherwise.

For discussion of similar issues, see:

  • 2014-33 Comm. Fin. News NL 66: “In Rem” Order Granting Retroactive Relief from Stay is Binding on Original Owner’s Tenants, Even Though Lease Was Executed Long Before Issuance of Order. [In re Black (Bankr. E.D. Cal.).]
  • 2010 Comm. Fin. News 53: Multiple Bankruptcy Filings Followed by Gratuitous Transfer of Property May Justify In Rem Relief from Automatic Stay. [In re Wilke (N.D. Ill.).]

These materials were authored by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, a member of the ad hoc group and the 2018-19 Chair of the CLA Business Law Section, with editorial contributions by the Hon. Meredith A. Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), also 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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