JRG Properties, LLC a California Limited Liability

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re
JRG PROPERTIES, LLC,
Debtor.
Case No. 2:12-bk-35303-RK
Chapter 11
STATEMENT OF DECISION RE MOTION
FOR ANNULMENT OF AUTOMATIC
STAY BY DAYCO FUNDING
CORPORATION
Hearing: May 7, 2013
Time: 10:30 a.m.
Courtroom: 1675
By separate order, the court has denied the motion by Dayco Funding Corporation
(“Dayco”) for annulment of the automatic stay in relation to the debtor’s property located
at 401-403 South Sultana Avenue, Ontario, California (the “Property”), filed with the court
on April 10, 2013. In this statement of decision, the court explains its reasons for denying
the motion.
Pursuant to an order to show cause issued by this court, the court conducted a
hearing on October 9, 2012 why the bankruptcy case should not be dismissed for failure
to timely provide information reasonably requested by the United States Trustee, i.e.,
monthly operating reports. See, 11 U.S.C. § 1112(b)(4)(H); 28 U.S.C. § 586(a)(3)(D).
Debtor, the United States Trustee, movant Dayco, and other interested parties attended
FILED & ENTERED
MAY 28 2013
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	tatum
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this hearing through counsel. After hearing from counsel, the court orally ruled at the
hearing on October 9, 2012 that the case would be dismissed for failure to timely file
United States Trustee monthly operating reports and directed the United States Trustee
to submit a proposed order for dismissal of the case. On October 18, 2012, the United
States Trustee submitted a proposed order for dismissal (this date is indicated on the
proof of service of the proposed order). The order dismissing debtor’s bankruptcy case
was not signed and entered on the case docket until October 18, 2012 (the “dismissal
order”). The bankruptcy case was closed on November 13, 2012.
However, prior to entry of the dismissal order in this case, on October 10, 2012,
Dayco proceeded with a foreclosure sale of the property, which apparently was noticed
before the hearing on October 9, 2012. But for the automatic stay which remained in
effect until the bankruptcy case was dismissed pursuant to 11 U.S.C. § 362(c)(2),
pursuant to nonbankruptcy state law, Dayco became the owner of the property by credit
bid, and obtained a trustee’s deed upon sale.
On March 1, 2013, Dayco brought a motion to reopen the bankruptcy case in order
to file the instant motion for retroactive relief from the automatic stay, or annulment of the
automatic stay to validate its foreclosure sale. The court granted the motion to reopen
the case by order entered March 20, 2013. On April 10, 2013, Dayco filed this motion for
annulment of the automatic stay, so that the trustee’s deed upon sale would be valid and
enforceable on grounds that the sale took place after the court’s oral ruling to dismiss the
case, though before the actual written order of dismissal was signed and entered.
A motion for relief from stay requesting annulment of the stay operates to validate
acts taken while the automatic stay was in effect. The purpose of annulment of the stay
is to protect “creditors and third parties who have, innocently and without knowledge of
the case, taken actions or detrimentally changed their positions in pursuit of their state or
federal remedies.” In re Williams, 124 B.R. 311, 316 (Bankr. C.D. Cal. 1991). Courts are
reluctant to validate actions taken in violation of the automatic stay. See In re Shamblin,
890 F.2d 123, 126 (9th Cir. 1989); In re Williams, 124 B.R. at 316. As the court stated in
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Williams, such power to annul the stay should be exercised “sparingly,” noting the
admonishment of the Ninth Circuit in Shamblin that “[a]ny equitable exception to the
automatic stay should be narrow and applied only in extreme circumstances. Id., citing In
re Shamblin, 890 F.2d at 126.
Dayco argues that annulment should be granted because that this is a bad faith
filing because “[t]his was a Debtor that entered the bankruptcy with virtually no business,
acted in bad faith during the bankruptcy, and has continued to do so.” Memorandum of
Points and Authorities in Support of Motion at 10. According to Dayco, the court should
allow stay annulment because “[i]n this case, the Debtor ‘lucked out’ because Dayco
foreclosed on the Property after the Court announced dismissal of the case but before
the Order for Dismissal was entered” and, “[h]ad Dayco waited until October 19, 2012—9
days after its foreclosure sale was conducted—to conduct the sale, the Debtor would not
have bought itself additional months of time to use and possess the Property which it has
now obtained by its ‘I got you moment’.” Id. According to Dayco’s president, Mr. Dayani,
he was advised on October 9, 2012 by Dayco’s counsel that the case was dismissed, so
Dayco credit-bidded the amount owed on the property at the foreclosure sale on the
property, which had been continued to October 10, 2012. See Declaration of H. Sean
Dayani in Support of Motion at 7-8.
Apparently, Dayco’s president was under the erroneous impression that the
foreclosure sale could be held because the bankruptcy case was dismissed, but this
indicates that he may not have been properly advised of the effect of the court’s oral
ruling. The general rule is that a judgment is effective when docketed by the clerk. See
Fed. R. Civ. P. 58; Fed. R. Bankr. P. 5003, 9021; In re Beatty, 162 B.R. 853, 857-858
(9th Cir. BAP 1994) (conversion of case is effective when written and docketed),
overruled on other grounds by Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764 (9th
Cir. 2008); In re Rebeor, 89 B.R. 314, 320 (Bankr. N.D. N.Y. 1988) (oral ruling converting
case is not operative upon utterance). Thus, the order dismissing the case was not
effective until entered or docketed by the clerk.
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As a matter of law, Dayco was on notice of the pendency of debtor’s bankruptcy
case and the case was not formally dismissed until the order for dismissal was entered
on the court’s case docket, and thus, is not an “innocent” creditor because Dayco
appeared at the dismissal hearing on October 9, 2012 and is charged with knowledge of
the proceedings at the hearing. The circumstances here include that Dayco’s
counsel was present at the hearing when the court directed the United States
Trustee to submit a proposed order for dismissal for review and approval of the
court after the oral ruling and that the applicable law is that a judgment or final
order is not effective until officially entered by the court on the docket of the case.
At least, counsel knew or should have known that the dismissal was not final until
the actual order was approved and entered on the docket. Dayco does not
explain in its papers why this information did not get across to its president and
management. Thus, Dayco should have known that the automatic stay was in effect
until the court signed and entered the dismissal order.
The equities favor the debtor in this case, because the debtor did not deceive
Dayco with respect to what happened at the hearing on the order to show cause, and the
action taken by Dayco cannot easily be undone. See In re Shamblin, 890 F.2d at 126;
Fjeldsted v. Lien (In re Fjeldsted), 293 B.R. 12, 21-24 (9th Cir. BAP 2003). Even
considering the problems with the bankruptcy case discussed at the dismissal hearing on
October 9, 2012, this court is reluctant to retroactively validate Dayco’s action of
foreclosing on Debtor’s property before the written order for dismissal was properly
entered unless a good reason for deviating from the normal rules exists. Some courts
have held that, in emergency situations, an oral ruling can be effective. See In re Sewell,
345 B.R. 174, 181 (9th Cir. BAP 2006); In re Brown, 290 B.R. 415, 419 (Bankr. M.D. Fla.
2003). However, the matter is within the discretion of the bankruptcy court. In re Sewell,
345 B.R. at 182. This court does not find such emergency circumstances exist here to
warrant the exercise of discretion to grant stay annulment. Id. Dayco “jumped the gun”
and should have properly waited for entry of the final order of dismissal by the court.
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These are not emergency circumstances, nor are they are extreme circumstances to
warrant the requested equitable relief. Id.; In re Shamblin, 890 F.2d at 126.
The Ninth Circuit Bankruptcy Appellate Panel concluded that the proper standard
for the courts in this circuit for determining “cause” under 11 U.S.C. § 362(d) to grant
retroactive relief from the automatic stay is a “balancing of the equities.” In re Fjeldsted,
293 B.R. at 24, citing, National Environmental Waste Corp. v. City of Riverside (In re
National Environmental Waste Corp.), 129 F.3d 1052, 1055 (9th Cir. 2007). Despite the
stringent language of the Ninth Circuit’s opinion in Shamblin that retroactive relief from
stay should be granted only in “extreme circumstances,” the Bankruptcy Appellate Panel
analyzed the actual cases decided by the Ninth Circuit on retroactive relief from stay,
including Shamblin, which actually applied a “balancing of the equities” standard. In re
Fjeldsted, 293 B.R. at 24, citing inter alia, In re Shamblin, 890 F.2d at 126, Schwartz v.
United States (In re Schwartz), 954 F.2d 569, 573 (9th Cir. 1992) and In re National
Environmental Waste Corp., 129 F.3d at 1055. The BAP in Fjeldsted observed that the
courts generally focused on two factors: (1) whether the creditor was aware of the
bankruptcy petition; and (2) whether the debtor engaged in unreasonable conduct, or
prejudice would result to the creditor, but also looked at many other factors bearing on
the good faith of the debtor and the creditor, the prejudice to the parties, and the judicial
or practical efficacy of annulling the stay. 293 B.R. at 24-25.
The BAP in Fjeldsted suggested that a court consider the following factors in
deciding whether to annul the stay: (1) number of filings; (2) whether, in a repeat filing
case, the circumstances indicate an intention to delay and hinder creditors; (3) a
weighing of the extent of prejudice to creditors or third parties if the stay relief is not made
retroactive, including whether harm exists to a bona fide creditor; (4) the debtor’s overall
good faith (totality of the circumstances); (5) whether the creditor knew of the stay but
nonetheless took action, thus compounding the program; (6) whether the debtor has
complied and is otherwise complying with the Bankruptcy Code and rules; (7) the relative
ease of restoring the parties to the status quo ante; (8) the costs of annulment to the
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debtor and to the creditor; (9) how quickly the creditor moved for annulment, or how
quickly the debtor moved to set aside the sale of violative conduct; (10) whether, after
learning of the bankruptcy, the creditor proceeded to take steps in continued violation of
the stay, or whether the creditor moved expeditiously to gain relief; (11) whether
annulment of the stay will cause irreparable injury to the debtor; and (12) whether stay
relief will promote judicial economy or other efficiencies. 293 B.R. at 25. After
enumerating these twelve factors, the BAP cautioned against mechanical application of
these factors: “Mindful that such lists are capable of being misconstrued as inviting
arithmetic reasoning, we emphasize that these items are merely a framework for analysis
and not a scorecard.” Id. at 25. The BAP then added the following comment: “In any
given case, one factor may so outweigh the others as to be dispositive.” Id.
This court agrees with the BAP’s analysis and conclusion in Fjeldsted, relying
upon In re National Environmental Waste Corp., supra, that the proper standard for
courts in this circuit in determining whether to annul the stay is “balancing of the equities.”
Id. at 24-25. The court also finds the enumerated stay annulment factors listed in
Fjeldsted to be helpful and instructive. Id. Although the Fjeldsted factors appear to be
mixed in this case, the court concludes that the dispositive factors are that the creditor,
Dayco, knew that the stay remained in place until the written order for dismissal was
entered, but took action to credit-bid at the noticed foreclosure sale before the stay was
lifted from the dismissal of the case, meaning the sale was void without retroactive relief
from stay, thus compounding the problem, and did not move quickly for annulment. The
creditor, Dayco, only moved for annulment five months later after encountering difficulties
with enforcement of its foreclosure purchase from resistance by the debtor. While the
debtor is not completely blameless under the Fjeldsted factors—since the bankruptcy
case was dismissed for lack of compliance with the Bankruptcy Code and rules and
debtor was not barred from refilling for bankruptcy relief, and arguably, there is no
prejudice to the debtor if retroactive stay relief is granted—the problem here is that the
creditor who presumably had control of the noticed foreclosure sale as the beneficiary of
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the trust deed and the credit bidder at the foreclosure sale, took advantage of the
situation and could have complied with the proper legal procedures by delaying the
foreclosure sale until the stay was properly lifted when the case was formally dismissed.
The creditor was aware of the noticed foreclosure sale for the day after the hearing on
the motion to dismiss, if not had caused it to be so scheduled as the beneficiary of the
trust deed, and was also aware that the bankruptcy case was not formally dismissed,
lifting the stay, until the court entered the dismissal order after directing submittal of a
proposed order by counsel for the United States Trustee. It is apparent to the court that
despite the rules, the creditor felt it did not have to wait until the formal dismissal process
was completed. Granting stay annulment here would reward the creditor for “jumping
the gun” and would condone a lack of respect for the judicial process and the rule of law,
and thus, stay annulment should not be granted under the circumstances.
For the foregoing reasons, the court denies the motion to annul the stay.
###
Date: May 28, 2013
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NOTICE OF ENTERED ORDER AND SERVICE LIST
Notice is given by the court that a judgment or order entitled (specify) STATEMENT OF DECISION RE
MOTION FOR ANNULMENT OF AUTOMATIC STAY BY DAYCO FUNDING CORPORATION was
entered on the date indicated as “Entered” on the first page of this judgment or order and will be served in
the manner indicated below:
I. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (“NEF”) – Pursuant to controlling
General Order(s) and Local Bankruptcy Rule(s), the foregoing document was served on the following
person(s) by the court via NEF and hyperlink to the judgment or order. As of May 28, 2013, the following
person(s) are currently on the Electronic Mail Notice List for this bankruptcy case or adversary proceeding
to receive NEF transmission at the email address(es) indicated below:
Andrew K Alper aalper@frandzel.com, efiling@frandzel.com;ekidder@frandzel.com
Andrew P Altholz andrewpaltholz@msn.com
Elan S Levey elan.levey@usdoj.gov, louisa.lin@usdoj.gov
Alvin Mar alvin.mar@usdoj.gov
Dace Pavlovskis Dace.Pavlovskis@sba.gov
Martha E Romero Romero@mromerolawfirm.com
United States Trustee (LA) ustpregion16.la.ecf@usdoj.gov
Benjamin A Yrungaray attorney@denovofirm.com
Service information continued on attached page
II. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this judgment or
order was sent by U.S. Mail, first class, postage prepaid, to the following person(s) and/or entity(ies) at the
address(es) indicated below:
JRG Properties, LLC
626 E 62nd St
Los Angeles, CA 90001
Service information continued on attached page
III. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment or
order which bears an “Entered” stamp, the party lodging the judgment or order will serve a complete copy
bearing an “Entered” stamp by U.S. Mail, overnight mail, facsimile transmission or email and file a proof of
service of the entered order on the following person(s) and/or entity(ies) at the address(es), facsimile
transmission number(s) and/or email address(es) indicated below:
Service information continued on attached page
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