Kathleen Kellogg-Taxe

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re
KATHLEEN KELLOGG-TAXE,
Debtor.
Case No.: 2:12-bk-51208-RN
Chapter 7
MEMORANDUM OF DECISION REGARDING
CHAPTER 7 TRUSTEE’S “MOTION FOR
ORDER AUTHORIZING SALE OF REAL
PROPERTY OF THE ESTATE [10535
Vestone Way, Los Angeles, California
90077] FREE AND CLEAR OF LIENS AND
INTERESTS, SUBJECT TO HIGHER AND
BETTER OFFERS, AND APPROVING
OVERBIDDING PROCEDURES”
I. INTRODUCTION
This matter came before this Court on December 19, 2013, on a
motion by the Chapter 7 Trustee, Carolyn A. Dye (the “Trustee”), for
an order approving the sale of Kathleen Kellogg-Taxe’s (the
“Debtor”) real property located at 10535 Vestone Way, Los Angeles,
FILED & ENTERED
MAR 17 2014
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	gae
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California 90077 (the “Vestone Way Property”) pursuant to 11 U.S.C.
§§ 363(b)(1), (f), (h) and (m), subject to a higher and better
offer, and approving overbid procedures (the “Sale Motion”). The
Debtor; Richard Taxe, the Debtor’s husband; and Kellspin, Inc., a
Nevada corporation (“Kellspin, Inc.”), one of the alleged secured
creditors of the Vestone Way Property, opposed the sale. This
memorandum of decision addresses the Sale Motion based on the
pleadings, evidentiary record, and arguments of counsel.1
II. BACKGROUND
On December 18, 2012, the Debtor filed her voluntary chapter 11
petition. See Docket No. 1. This was the Debtor’s fifth bankruptcy
filing. The Debtor had commenced four prior chapter 13 cases, all
of which were dismissed shortly after they were filed. Three of the
four prior bankruptcies were filed and dismissed within the year
prior to the commencement of this case.2
After filing this case, the Debtor failed to timely file any
schedules and other required documents. The Court scheduled a
status conference for January 22, 2013. See Docket No. 11. No
appearance was made by or on behalf of the Debtor at the status
conference. On January 24, 2013, the Court entered its “Order
1 Unless otherwise indicated, all “Code,” “chapter” and “section” references are to the Bankruptcy Code, 11 U.S.C. §§
101-1330. “Rule” references are to the Federal Rules of Bankruptcy Procedure (“FRBP”), which make applicable certain
Federal Rules of Civil Procedure (“F.R.Civ.P.”). “LBR” references are to the Local Bankruptcy Rules of the United States
Bankruptcy Court for the Central District of California (“LBR”).
2 The Debtor’s four prior bankruptcy filings include:
Case No. Date Filed Date Dismissed
2:09-bk-29787-EC July 30, 2009 October 16, 2009
2:12-bk-33767-NB July 10, 2012 August 20, 2012
2:12-bk-40808-SK September 10, 2012 October 1, 2012
2:12-bk-44947-WB October 17, 2012 November 29, 2012
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Converting Case to a Case Under Chapter 7.” See Docket No. 18.
Thereafter Chapter 7 Trustee (the “ was appointed on or about
January 29, 2013. See Docket No. 20.
On February 20, 2013, the Trustee filed a “Notice of [the]
Trustee’s Intent to Administer Case and Request that the Clerk of
the Court Not Dismiss [the] Debtor’s Case for Her Failure to Timely
File Her Schedules and Other Required Documents to Complete Her
Filing.” See Docket No. 23. The Trustee sought such relief on the
following grounds: (i) the Debtor is a chronic filer; (ii) the
Trustee was investigating the Debtor’s financial affairs; and (iii)
there may be potential equity in the Debtor’s primary residence,
located at 10535 Vestone Way, Los Angeles, CA 90077 (the “Vestone
Way Property”). See id.
In light of there being no automatic stay pursuant to
§ 362(c)(4)(A)(i) because of the Debtor’s prior bankruptcy filings,
the Trustee sought to impose a stay under § 362(c)(4)(B). See
Docket No. 28. However, due to the untimeliness of the Trustee’s
motion, and other cause appearing, the Court entered an “Order
Denying Motion in Individual Case for Order Imposing a Stay or
Continuing the Automatic Stay as the Court Deems Appropriate” on
April 25, 2013. See Docket No. 53. As a result, there is no stay
in the Debtor’s pending chapter 7 case.
The Trustee then filed schedules in the Debtor’s case on April
12, 2013 based on the Debtor’s schedules that had been filed in her
previous bankruptcy cases and the Trustee’s ongoing investigation.
See Docket Nos. 39-50. The Debtor then filed her own schedules as
amended through her counsel on May 13, 2013. See Docket Nos. 57-65.
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Per the Claims Register, thirteen proofs of claim have been
filed in this case, two of which have been withdrawn (Claim Nos. 3
and 4). One of the claims was disallowed by an Order of this Court
as to the Debtor’s separate property, subject to a motion being
filed by the claimant to have the claim (Claim No. 9) against the
Debtor’s community property allowed. That motion has not yet been
filed.3 The Debtor’s general unsecured claims as filed total
$836,221.57 (Claim Nos. 2 and 10-13).4 The United States Trustee
also filed an administrative claim against the estate in the amount
of $650.00 (Claim No. 5). The remaining proofs of claim were filed
by the Debtor’s alleged secured creditors whose claims are allegedly
secured by liens against the Vestone Way Property (Claim Nos. 1 and
6-8). In addition, the Trustee and her counsel have indicated that
they assert administrative claims for services rendered that so far
total $235,646.00.5
3 On February 27, 2014, the Court entered an “Order on [the] Debtor’s Objection to Claim No. 9-1 of Daniel A. Seigel,”
the Claimant (the “Seigel Order”), in which the Court sustained the Debtor’s objection “to the extent that the Claimant’s
Proof of Claim No. 9-1 (the ‘Claim [No. 9]’) is disallowed as a secured claim against the separate property of the Debtor.”
See Docket No. 264. The Court further ordered that “[t]he Claimant is not precluded from filing a motion to have the
Claim allowed against any community property of this estate should there be community property that is collected and
liquidated in the event of the entry of a renewal of the underlying judgment, nor does it preclude the Trustee from
objecting to such a motion.” See id. Per the Docket, the Claimant has not brought a motion to have Claim No. 9 allowed
as against the Debtor’s community property. Accordingly, pursuant to the Seigel Order, the Claimant currently does not
have an allowed claim against the Debtor’s separate or community property.
4 The Trustee sought to extend the claims bar date for filing proofs of claim. See Docket No. 89. On January 30, 2013, a
“Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, & Deadlines” setting the deadline for filing proofs of claim
at June 10, 2013 was filed. It was served on all creditors known to the Trustee at the time. See Docket Nos. 21–22.
However, the Debtor’s schedules as amended identified additional creditors. On October 18, 2013, the Court entered an
Order denying the Trustee’s request to extend the claims bar deadline. The Court found that the Trustee had failed to show
that one of the five exceptions for extending the deadline under FRBP 3002(c) applied. The Court expressly noted that,
“as provided for in 11 U.S.C. § 726(a)(2)(C), unsecured creditors who filed late claims will be paid at the same time as
unsecured creditors who file[d] timely claims as long as (1) the creditors did not have ‘notice or actual knowledge of the
case’ in time to file a timely claim and (2) proof of the claim is filed before distribution occurs.” See Docket No. 136.
5 The Trustee declares that she has spent “56.5 hours in connection with the Debtor’s bankruptcy case [so far] and
associated adversary proceedings.” At her normal hourly rate of $450.00, the Trustee declares that her fees would total
approximately $25,425.00. Trustee’s Decl., ¶ 2 (attached to Opp’n of the Debtor’s Dismissal Motion). The Trustee’s
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On October 18, 2013, the Court entered an Order granting the
Trustee’s application to employ Coldwell Banker as her real estate
broker (the “Broker”) to market and sell the Vestone Way Property.
See Docket No. 135. On November 5, 2013, the Trustee filed the Sale
Motion. The Sale Motion prompted the filing of the Debtor’s motion
to dismiss her case on an emergency basis (the “Dismissal Motion”).
See Docket No. 182. The Sale Motion was initially scheduled to be
heard on November 26, 2013, but was continued to December 19, 2013
to coincide with the hearing on the Debtor’s Dismissal Motion. See
Docket No. 196. The Sale Motion and Dismissal Motion were heard on
December 19, 2013 and taken under submission. The Dismissal Motion
was denied in a separate memorandum of decision, dated February 18,
2014. See Docket No. 256. The Sale Motion is addressed in this
memorandum of decision.
The Vestone Way Property is comprised of four parcels, the
largest of which is improved with an approximate 6,000 sq. ft.
house, two of which are drive-way easements, and one of which is
unimproved. Mot. at 3; Sahakian Decl., ¶ 8 (attached to Mot.). The
Trustee and Debtor agree that the Property is the Debtor’s separate
property and not community property.6
counsel also submitted a declaration in which her counsel declares that, to date, it has incurred in excess of $210,221.00 in
legal fees in this case. Trustee’s Counsel’s Decl., ¶ 2 (attached to Opp’n of the Debtor’s Dismissal Motion).
6 The Debtor and Richard Taxe were married in 1984. Dumas Decl., at Exh. A (p. 50, lns.11–15) (filed as Docket No.
152). In 1989, David and Rose Taxe, the parents of Richard Taxe, owned the Vestone Way Property as “joint tenants” and
“husband and wife,” and they transferred their interest in the Property by Grant Deed to the Debtor, as her separate
property, and Richard Taxe’s brother, Ronald Taxe, as his separate property. The Debtor and Ronald Taxe each received
an “undivided one-half interest” in the Property. Mot. at 3; see JN Req., at Exhs. 2 & 3 (filed as Docket No. 153); see also
Salvato Decl., at Exh. 4 (Grant Deed) (attached to the Debtor’s Objection to Claim No. 9 filed as Docket No. 115). On
May 25, 1998, Ronald Taxe transferred his ownership interest in the Property to the Debtor as “a married woman as her
sole and separate property.” See JN Req., at Exh. 4 (filed as Docket No. 153). Thus, without any evidence to the contrary,
the Debtor appears to own the Property as her sole and separate property.
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According to the Trustee, based on a “Covenant and Agreement to
Hold Property as One Parcel” (the “Covenant”), recorded on September
26, 1983, the Property cannot be sold as separate parcels. See JN
Req., at Exh. 6 (filed as Docket No. 153). The Covenant, which runs
with the land, was signed and executed by David Taxe, Richard Taxe’s
father, as the former owner of the Property prior to the transfer of
the Property to the Debtor. See id.; see also supra, at n.7.
Five Star Global Resources, LLC (“Five Star”), which is
controlled by Bruce Taylor (“Taylor”), claims a 50% ownership
interest in the unimproved parcel that is subject to the Covenant.
Taylor Decl., ¶ 4 (attached to Mot.). Taylor declares that the
transfer was intended as security for numerous loans, totaling
$148,986.00, made by Taylor to Debtor and Richard Taxe between
September 2011 through April 2012. Id., ¶¶ 3-4. On July 31, 2013,
the Trustee commenced an adversary proceeding against Five Star and
other parties to quiet title in the Property, entitled Carolyn A.
Dye, Chapter 7 Trustee v. Kellspin, Inc. et al. (Case No. 2:13-ap-
01781-RN) (the “Quiet Title Action”), which is currently pending
before this Court.
On November 25, 2013, the Trustee and Five Star executed a
stipulation in which the Trustee agreed to pay Five Star $35,000.00
from the sales proceeds of the Vestone Way Property “on account of
its ownership interest.” See Docket No. 179. In exchange, Five
Star agreed to the sale of the Property free and clear of its
ownership interest and any lien it may have in the Property. Id.
The Trustee further agreed to dismiss her Quiet Title Action against
Five Star with prejudice. Id. Counsel for the Trustee also filed a
declaration attaching a “Settlement Agreement and Mutual Release”
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(the “Settlement Agreement”) reiterating the above terms. See
Docket No. 180. The Settlement Agreement additionally provided that
“Taylor shall have an unsecured general claim against the Estate in
the amount of $113,986.00.” Id. The Trustee agreed to submit a
motion for approval of the compromise upon receipt of proof
supporting Taylor’s claim. Id.
The Trustee recently filed and served the compromise motion on
February 20, 2014 pursuant to FRBP 9019 and LBR 9013-1(o). See
Docket Nos. 258 & 259. On March 6, 2014, the Debtor and her husband
Richard Taxe filed separate oppositions to the Trustee’s compromise
motion. See Docket Nos. 266 & 267. In light of Five Star’s
potential interest in the Property, and the pending compromise
motion, the Trustee seeks approval of the sale pursuant to § 363(h).
Several liens encumber the Vestone Way Property. The Los
Angeles County Tax Assessor holds two tax liens: the first for the
year 2012-2013, in the amount of $8,507.38 (Claim No. 6-2, amended);
and the second for the year 2013-2014, in an amount to be determined
at the sale’s closing. Astoria Federal Savings (“Astoria”) holds a
deed of trust in the amount of $1,209,118.91 (Claim No. 7-1).7
These liens are undisputed, and the Trustee intends to pay them in
full through an escrow to be opened to facilitate the closing of the
7 Debtor was also able to obtain a $1 million loan from Astoria Bank in 2007, which the Bank understood to be secured by
a first DOT in its favor, and a further $200,000 loan from Countrywide (now Bank of America) on July 29, 2007, which
was presumably secured by a second DOT. Mot. at 4; Exh. D, at 12–13. Bank of America’s loan has since been
reconveyed as part of the bank’s loan forgiveness program. Mot. at 4; Exh. D, at 13. When Astoria Bank became aware
that Morrison was seeking to enforce its lien, Astoria intervened in a lawsuit between the Taxes and Morrison
Management, obtaining a judgment establishing Astoria’s priority. Mot. at 4; see also JN Req., Exh. 11, at 3. Astoria
sought to foreclose on its secured interest in the Property following Debtor’s default, but the Trustee alleges that Debtor’s
bankruptcy filings have frustrated the foreclosure process. Mot. at 5. After negotiations, the Trustee and Astoria
stipulated that the Trustee would agree to the allowance of Astoria’s claim in the amount of $1,209,118.91 through the
date of the bankruptcy filing, and Astoria would forego recommencing its foreclosure procedure for at least four months.
Mot. at 6–7; see Docket No. 71. The Stipulation was approved over the Debtor’s objection by an order entered on August
9, 2013. See Docket No. 95.
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sale. In addition, Morrison Management, S.A. (“Morrison”) holds a
lien in the amount of $3,830,158.68 (Claim No. 1-1). This lien
originated in 1984, when a deed of trust was recorded to secure a
purported loan of $750,000 to David and Rose Taxe, Richard Taxe’s
parents (“Euramex lien”).8 See JN Req., at Ex. 9. Finally,
Kellspin, Inc. (“Kellspin”) holds a judgment lien in the amount of
$1,519,696.94 (Claim No. 8-2).9 Morrison and Kellspin are also
defendants in the Quiet Title Action discussed above.
The Trustee’s terms of sale are summarized as follows:
Buyer John Levin and/or Assignee (subject to overbid)
Purchase
Price
$2,500,000 on an “as is, where is” basis and
not subject to any contingencies
Deposit $75,000 (already paid into escrow)
Broker’s
Commission
$150,000 (6% of sales proceeds) (per Order
approving application to employ Broker) (to be
split equally between Trustee’s Broker and
Buyer’s broker or any broker for the successful
bidder)
Closing costs $50,000 (estimated at 2%)
Closing date Escrow scheduled to close within 14 days of the
date on which the order is entered approving
sale
Failure to
perform
Deposit forfeited
Court
approval
Required
See Mot., Exhs. A (Counter-Offer) & B (Escrow Instructions).
8 The beneficiary of the Euramex lien was Euramex Services, Ltd., a Nevada corporation. See JN Req., at Exh. 9 (filed as
Docket No. 153). Morrison is the latest assignee of the Euramex Lien. See Claim No. 1, Declaration of Aleksandr
Blyumkin, Exh. 16.
9 Kellspin is a Nevada corporation whose registered entity address is Vestone Way Property address. Richard Taxe is the
registered agent for service of process, and the agent’s address is also the Vestone Way Property address. See JN Req., at
Exh. 7. Kellspin’s lien arises from a 1984 abstract of judgment in favor of an entity known as Omni Group and against
David and Rose Taxe, Debtor’s husband’s parents. See JN Req., at Exh. 8, p. 3.
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The Trustee also proposed the following overbid procedures:
Initial
overbid
$2,510,000 ($10,000 above present offer)
Subsequent
overbids
Minimum increments of at least $5,000
Deposit $85,000 ($75,000 plus the initial overbid of
$10,000)
Failure to
perform
Deposit forfeited
Deadline to
overbid
48 hrs before Hearing Date (requires evidence
of ability to perform)
All Overbids On an “as is, where is” basis and not subject
to any contingencies
Closing Date Escrow scheduled to close within 14-days of
the date on which the order is entered
approving sale
Back Up
Bidder
Trustee requests approval of Back-up Bidder
See Mot. at 12–14.
Furthermore, the Trustee proposes the following treatment of
the Debtor’s homestead exemption.
Trustee to pay $30,000 of buyer’s $75,000 deposit to
Debtor within 24 hours of entry of order approving sale;
Debtor will have until January 3, 2013 to vacate the
Property, but will be charged rent $750 per day which will
be credited against the balance of the homestead;
Any moving, cleaning, or repair expenses incurred by the
Trustee, in addition to rent and forcible eviction costs,
will be charged against Debtor’s homestead exemption;10 and
10 Such surcharge may not be permitted in view of the Supreme Court’s recent ruling in the case of Law v. Siegel, Case
No. 12-5196, 2014 WL 813702 (U.S. Mar. 4, 2014).
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The balance of Debtor’s homestead exemption shall be paid
once the occupants of the Property have vacated.
See Mot. at 11.
The Trustee estimates that, after deductions are made for the
Brokers’ commission (at 6%), closing costs, and Debtor’s homestead
exemption, as well as the LA County’s Property Tax ($8,270.94) and
Astoria Bank’s lien, approximately $907,610.15 of the sales proceeds
will remain (not accounting for the Los Angeles County property
taxes for 2013-2014 which amount was currently unknown when this
Motion was prepared). When Five Star’s secured claim is paid, there
will be less than $872,610.15 sales proceeds remaining for the
estate. See Mot., Exh. D. As explained above, the secured
interests of Morrison Management and Kellspin are currently disputed
and are not included in the Trustee’s calculations.11 Neither are
the 2013-2014 taxes.
III. DISCUSSION
The Court has jurisdiction over this contested matter pursuant
to 28 U.S.C. §§ 157(b) and 1334(b) and 11 U.S.C. § 363. This is a
core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (O). Venue is
proper in this Court pursuant to 28 U.S.C. § 1409(a).
A. 11 U.S.C. § 363(b)(1)
The Trustee contends that the sale of the Vestone Way Property
satisfies the requirements of § 363(b)(1). The Court agrees.
A trustee may sell property of the estate other than in the
ordinary course of business after notice and a hearing. 11 U.S.C.
§ 363(b)(1). The requirements of § 363(b) are designed to protect
11 However, if either or both the Morrison Management and Kellspin liens are found to be valid, there will be no equity left
over in the estate.
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creditors’ interests in the assets of the estate. In re 240 N.
Brand Partners, Ltd., 200 B.R. 653, 659 (9th Cir. B.A.P. 1996). A
bankruptcy court can authorize the sale of substantially all of the
assets of the estate under § 363(b) upon a proper showing that the
sale is in the best interests of the estate, that there is a sound
business purpose for the sale, and that it was proposed in good
faith. See id. at 659; In re Wilde Horse Enters., Inc., 136 B.R.
830, 841 (Bankr. C.D. Cal 1991); In re Lionel, 722 F.2d 1063, 1070
(2nd Cir. 1983).
Here, the Court finds that the Trustee’s sale is proposed in
good faith for a sound business purpose and is in the best interests
of the estate. The Trustee declares that she has marketed the
Property at arms-length through her real estate broker in order to
create a fund from which to pay general unsecured creditors and
administrative expenses. Trustee Decl., ¶ 10. The Property was
listed on the Multi-Regional Multiple Listing Service, on Coldwell
Banker’s website, Californiamoves.com and on Itech.com. See
Sahakian Decl., ¶ 4. The Trustee further declares that the sale to
Buyer and/or overbidder is the highest and best available price for
the Property, and the proposed sale is an arms-length transaction.
Trustee Decl., ¶ 5. In addition, if Morrison’s and Kellspin’s
disputed liens are found to be invalid, the estate will reap
significant proceeds from the sale of the Vestone Way Property.
In her Opposition, Debtor raises several arguments against
selling the Vestone Way Property, none of which have merit.
First, Debtor argues that it would be unjust to sell the
Property to satisfy Astoria’s lien, even though Kellspin’s lien has
priority. Nevertheless, Debtor appears to concede that Kellspin’s
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lien is disputed by vigorously disputing the lien’s validity and
priority in opposing the Trustee’s Sale Motion. Because Kellspin’s
lien is the subject of a bona fide dispute, the Trustee may sell the
Vestone Way Property free and clear of Kellspin’s lien. See infra,
at III.B.
Second, Debtor contends that she has less than $37,000 in
general unsecured debts and an administrative claim by the United
States Trustee in the amount of $650 that can be paid off with the
sale of her other assets. However, as the Court noted in denying
the Debtor’s motion to dismiss her chapter 7 case, Debtor failed to
show “that she can raise sufficient funds to pay all her allowed
general unsecured creditors and administrative expenses prior to
dismissal.” Docket No. 256, at p. 7.
Third, with respect to Astoria’s secured claim, Debtor asserts
that she will bring the loan current by selling off the small parcel
adjacent to the main parcel. However, selling the small parcel does
not appear possible in light of the Covenant that runs with the
land. See JN Req., at Ex. 6. Debtor fails to provide any legal
argument or evidence challenging the validity of the recorded
Covenant.12
Fourth, Debtor argues that the Trustee has accepted a purchase
offer substantially below fair market value. Debtor notes that the
12 Debtor concedes that she is “not opposed to permitting Astoria to exercise its rights to foreclose on the parcels subject to
its lien” (Debtor’s Opp’n at 9); and that Kellspin, Inc., which she alleges is controlled by Ronald Taxe, is willing to wait
until the Property is “voluntarily sold” (id. at 2, n.4). Despite this concession, Debtor argues that Astoria’s lien only
attaches to one of the parcels, APN 4370-016-029, and she does not understand why the other parcels are being sold to
satisfy Astoria’s lien. She argues that the adjacent parcel can be sold separately from the residence with a tax assessed
value in excess of $250,000; however, per the Covenant neither parcel can be sold separately. See JN Req., at Exh. 6.
Furthermore, Debtor argues that “it is not clear that the agreement to which the Trustee has referred even applies to the
fourth, unencumbered parcel.” Debtor’s Opp’n at 9. Debtor is incorrect. The Covenant clearly provides the legal
descriptions of the two parcels subject to the restriction on sale. See JN Req., Exh. 6 at p. 2.
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Property was initially listed at $2.85 million by the Trustee’s
Broker. Docket No. 93 at Exh. E of Applicant to Employ Broker.
Debtor argues that there is “no need to force a sale to resolve the
lender Astoria Federal Savings’ problematic title issues [as Astoria
is not prejudiced by the delay and has not taken efforts to commence
foreclosure], or before the dispute among the competing senior liens
on the Property are resolved.” Debtor’s Opp’n at 2-4. However, the
Sale Motion is subject to overbid, and Debtor provides no persuasive
evidence that the proposed purchase price is below market value.
Fifth, Debtor argues that her case is fundamentally a two-party
dispute between her and Morrison. Debtor’s Opp’n at 5. Debtor
notes that she has objected to Morrison’s proof of claim, arguing
that the “remaining claims are de minimus unsecured claims, or
disputed encumbrances on the Property arising from judgments against
Richard Taxe for which neither the Debtor nor the Property are
liable.” Id. Nevertheless, based on the evidence proffered thus
far, Debtor’s case appears to involve multiple claims and parties
(such as Kellspin and Astoria).
Based on the foregoing, it appears that the sale is in the best
interest of creditors at this time.
B. 11 U.S.C. §§ 363(f)(2) and (4)
The Trustee also seeks to sell the Property free and clear of
Morrison Management and Kellspin, Inc.’s disputed liens pursuant to
sections 363(f)(2) and (4). See Mot. at 18-23. Subsection 363(f)
provides that a trustee may sell property “free and clear” of third
party interests under certain enumerated conditions. 11 U.S.C. §
363(f).
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1. 11 U.S.C. § 363(f)(2)
Subsection 363(f)(2) permits a sale free and clear of an
interest if that interest holder consents. 11 U.S.C. ¶ 363(f)(2).
Here, Morrison has filed a Joinder to the Sale Motion, and thus is
deemed to have consented to the sale pursuant to § 363(f)(2). See
Docket No. 202.
2. 11 U.S.C. § 363(f)(4)
In addition, a trustee may sell estate property free and clear
of a nondebtor’s interest that is in “bona fide dispute.” 11 U.S.C.
§ 363(f)(4); see also In re Gerwer, 898 F.2d 730, 733 (9th Cir.
1990). In ruling on a motion to sell estate property free and clear
under § 363(f)(4), “a court need not determine the probable outcome
of the dispute, but merely whether one exists.” In re Octagon
Roofing, 123 B.R. 583, 590 (Bankr. N.D. Ill. 1991). The parties
must provide some factual grounds to show some objective basis for
the dispute. In re Gaylord Grain L.L.C., 306 B.R. 624, 627 (8th
Cir. B.A.P. 2004). To qualify as a bona fide dispute under
§ 363(f)(4), the disputed lien need not be the subject of an
immediate or concurrent adversary proceeding. Id. (collecting
cases).
Here, the Court finds that Kellspin’s lien is the subject of a
bona fide dispute for purposes of § 363(f)(4). Kellspin claims to
have a valid judgment lien against the Property in the amount of
$1.5 million. As noted above, the Trustee is currently challenging
the validity of this lien in a pending adversary proceeding before
this Court. In its Opposition, Kellspin attempts to show that no
bona dispute exists by recounting at length the tortuous history of
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its lien against the Vestone Way Property.13 Yet in doing so,
Kellspin undermines its own argument and provides a sufficient
objective basis to support a finding that a bona fide dispute
exists.14 The Court need not decide the ultimate question of the
validity of Kellspin’s lien here. It is enough for purposes of
§ 363(f)(4) that the record shows the objective existence of a bona
fide dispute. Because Kellspin’s lien is the subject of a bona fide
dispute, the Court will approve the Trustee’s proposed sale free and
clear of Kellspin’s lien. However, the Court will stay the payment
of Astoria’s and Kellspin’s liens from the proceeds of the sale
until the Quiet Title Action resolves the validity and priority of
these liens on the Property.15
C. 11 U.S.C. § 363(h)
Five Star has stipulated with the Trustee to forego its
interest in the small parcel for $35,000. The Trustee’s motion to
approve this compromise is currently pending. See supra, at p. 6.
Even absent such compromise, however, the Court holds that the
13 In 1984, Kellspin admits that Omni Group, Inc., a Washington corporation (“Omni”) obtained a judgment against David
and Rose Taxe and others, from which Kellspin’s lien arose. This appears to be the same judgment that was found to be
fraudulent by the state appellate court in Ralph Fernandez v. G.J. Siegel & Associates Inc., and Ronald Taxe (Case No.
BC045545) (the “Fraud Action”), see JN Req. at Ex. 8, and the basis for the Trustee’s argument that Kellspin’s lien is
disputed. However, Kellspin contends that the parties settled the case after it was remanded and thus there was no finality
to the judgment. See Kellspin Opp’n at 8. In support, Kellspin submits a declaration from Herber Papenfuss, attorney for
Ralph Fernandez, in support of its argument that the Fraud Action was ultimately dismissed as a result of settlement. The
Court sustains the Trustee’s evidentiary objection on the grounds that Mr. Papenfuss never gave his consent to sign the
declaration. See Docket No. 198. The Court also sustains the Trustee’s objection to Ronald Taxe’s assertion that
Fernandez was obligated to vacate the Judgment as hearsay. See Docket No. 173.
14 In his declaration, Kellspin’s counsel declares that during the pendency of the Trustee’s Sale Motion, several defects
were cured: (1) Kellspin reinstated its corporate charter; (2) the Declaration of Laurason T. Hunt establishes that the Taxes
never had control of Omni Group, Inc.; and (3) an order setting aside the judgment in Fernandez v. Taxe was entered on
December 11, 2013. Grantham Decl., ¶ 8, Docket No. 227. These facts further establish the objective existence of a bona
fide dispute regarding the Kellspin lien. Whether these facts actually resolve the dispute is not before the Court on the
Trustee’s Sale Motion. Such a determination is more properly the subject of the pending Quiet Title Action.
15 “Typically, the proceeds of sale are held subject to the disputed interest and then distributed as dictated by the resolution
of the dispute; such procedure preserves all parties' rights by simply transferring interests from property to dollars that
represent its value.” Moldo v. Clark (In re Clark), 266 B.R. at 171; In re Dewey Ranch Hockey, LLC, 414 B.R. at 590–91
(citing In re Clark, 266 B.R. 163 (9th Cir. B.A.P. 2001)).
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Trustee may sell the Vestone Way Property pursuant to § 363(h),
despite Five Star’s 50% ownership interest in the small parcel
adjacent to the main parcel of the Property.
Subsection 363(h) provides that the trustee may sell both the
estate’s interest, and the interest of any co-owner in property in
which the debtor had, at the time of the commencement of the case,
an undivided interest as a tenant in common, joint tenant, or tenant
by the entirety, only if:
(1) partition in kind of such property is
impracticable;
(2) the sale of the estate’s interest in such
property would realize significantly less for the
estate than sale of such property free of the
interests of co-owners;
(3) the benefit to the estate of such sale
outweighs the detriment, if any, to such co-
owners; and
(4) such property is not used in the production,
transmission, or distribution, for sale, of
electric energy or of natural or synthetic gas
for heat, light, or power.
11 U.S.C. § 363(h)(1)–(4).
The statute also gives the non-debtor co-owner certain
protections. That is, the co-owner has the right to purchase the
property at the trustee’s sale price and the co-owner is entitled to
the proceeds of the sale according to his interest. 11 U.S.C.
§ 363(i); In re Addario, 53 B.R. 335, 338 (Bankr. D. Mass. 1985).
Here, the Trustee satisfies all four requirements of § 363(h).
First, partition in kind of the Vestone Way Property is
impracticable. Five Star has an interest in only one of the sale
parcels, which is small, unimproved, and unimproveable. See
Sahakian Decl., ¶ 8. In addition, pursuant to the Covenant and
Agreement to Hold Property as One Parcel, recorded on September 26,
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1983, neither this parcel nor the improved parcel can be sold
separately. See JN Req., at Exh. 6. Next, selling the estate’s
interest in this small parcel co-owned with Five Star would realize
significantly less for the Estate than the sale of such property
free of Five Star’s interest. Because of the restrictive covenant
above, the Trustee is barred from selling the estate’s 50% interest
in the small parcel.16 For similar reasons, the benefit to the
estate of such sale free of Five Star’s interest outweighs the
detriment since the parcels cannot be sold separately. Finally, the
small parcel does not appear to be used for electric energy or
natural/synthetic gas purposes.
Thus, Five Star’s 50% interest in the small parcel does not bar
the Trustee’s proposed sale of the entirety of the Vestone Way
Property.
D. 11 U.S.C. § 363(m)
Subsection 363(m) moots most appeals of sale orders. A sale to
a good faith purchaser may not be reversed or modified unless the
sale was stayed pending appeal. 11 U.S.C. § 363(m); In re
Filtercorp, Inc., 163 F.3d 570, 576 (9th Cir. 1998). “A good faith
purchaser is one who buys in good faith and for value.” In re
Ewell, 958 F.2d 276, 281 (9th Cir. 1992) (internal quotations
omitted). “[L]ack of good faith is shown by fraud, collusion
between the purchaser and other bidders or the trustee, or an
attempt to take grossly unfair advantage of other bidders.” Id.
16 The Covenant instrument clearly indicates that the restriction “shall run with all of the above described land and shall be
binding upon ourselves, and future owners, encumbrancers, their successors, heirs or assignees.” See JN Req., at Exh. 6.
This language is consistent with California law. See Cal. Civ. Code § 1468. That the Covenant was previously breached
when a 50% interest was sold to Five Star does not invalidate the Covenant and permit the Trustee to sell the small parcel.
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Here, the Trustee’s proposed buyer, John Levin, appears to
satisfy this good faith requirement. Mr. Levin has filed a
declaration stating that:
He has no connection or relationship with the Trustee, the
Trustee’s brokers, or the Trustee’s counsel;
He does not know the Debtor or any of her family members;
He has no connection or relationship with any creditor in
this case;
He learned about the sale from his broker and by seeing an
advertisment of the Property for sale;
He has not been contacted by anyone involved in the case
except through his broker regarding his interest in the
Property; and
No one attempted to influence his bidding and he is ready
and willing to pay the agreed-upon sale price upon Court
approval.
See Levin Decl., ¶¶ 3–8 (Docket No. 226).
Based on these facts, the Court finds that Mr. Levin is a good
faith purchaser under § 363(m).
E. Debtor’s Homestead Exemption
Pursuant to Schedule C as amended, the Debtor claimed a
homestead exemption in the Vestone Way Property in the amount of
$175,000.00 pursuant to California Code of Civil Procedure (“Cal.
Code Civ. Pro.”) § 704.730. See Docket No. 61. The Trustee did not
file an objection to the Debtor’s claimed homestead exemption per
the Docket, and she did not challenge the Debtor’s claimed homestead
exemption in the Motion. However, the Trustee requests that this
Court impose certain terms and conditions on the distribution of the
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Debtor’s exempt proceeds without citing to any authority in support
thereof. Mot. at 10-12. Such terms and conditions may be
impermissible in light of the Supreme Court’s recent decision in Law
v. Siegel, supra note 10.
The Court, therefore, denies the Trustee’s request with respect
to the treatment of the Debtor’s homestead exemption without
prejudice to the Trustee seeking to recover the proceeds pursuant to
California Code of Civil Procecure § 704.720(b).17
IV. CONCLUSION
In light of the foregoing, the Court grants in part and denies
in part the Trustee’s Sale Motion. The Trustee’s proposed sale of
the Vestone Way Property satisfies the requirements of §§ 363(b)(1),
363(f)(2), 363(f)(4), and 363(h). As such, the Court approves the
terms of the sale and overbid procedures. Proceeds of the sale
shall be held in escrow pending the resolution of the Quiet Title
Action unless this Court orders otherwise following a noticed motion
and an opportunity to be heard. The Court further finds that the
Trustee’s proposed Buyer, John Levin, is a good faith purchaser
under § 363(m).
However, the Court denies without prejudice the Trustee’s
proposed treatment of Debtor’s homestead exemption.
17 Under Cal. Code Civ. Pro. § 704.720(b), “[i]f the debtor does not reinvest his[/her] proceeds in a new homestead within
six months of receipt, they lose their exempt status.” Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193, 1198 (9th Cir.
2012).
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The foregoing constitutes the Findings of Fact and Conclusions
of Law and based thereon Trustee’s counsel is directed to prepare
and submit an order consistent with this Memorandum of Decision.
Date: March 17, 2014
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