Domum Locis LLC

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1
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re:
DOMUN LOCIS LLC,
Debtor.
Case No. 2:14-bk-23301-RK
Chapter 11
Adversary No. 2:14-ap-01594-RK
MEMORANDUM DECISION ON
VARIOUS MOTIONS OF DEBTOR AND
CREDITOR LLOYDS TSB BANK PLC
Pending before the court are various motions by Debtor Domun Locis LLC
(“Debtor”) and Creditor Lloyds TSB Bank plc (“Lloyds”) in the main bankruptcy case and
in the adversary proceeding brought by Debtor against Lloyds, which were set for
hearing on October 22, 2014. The court has found that because the material facts
necessary to resolve these motions are not in dispute, there is no need to proceed with
the evidentiary hearings for these matters and that further hearings are no longer
necessary because the parties have fully briefed these matters and the court has fully
heard the oral arguments of the parties at prior hearings and additional argument would
not be helpful. Accordingly, the court dispenses with the evidentiary hearings and
further oral argument on these matters and takes the matters under submission, and
issues this decision resolving these matters.
FILED & ENTERED
NOV 17 2014
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	tatum
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These motions are: (1) Debtor’s Motion for the Entry of an Order: (I) Authorizing
Debtor to Utilize Cash Collateral Pursuant to 11 U.S.C. § 363; and (II) Granting
Adequate Protection to Pre-Petition Secured Parties Pursuant to 11 U.S.C. §§ 361 and
363, 2:14-bk-23301-RK, ECF 3; (2) Debtor’s Motion to Approve Residential Lease
Agreements, 2:14-bk-23301-RK, ECF 2; (3) Lloyds’s Motion for (A) Relief From the
Automatic Stay Under 11 U.S.C. Section 362 (Real Property), and (B) Relief from
Turnover Under 11 U.S.C. Section 543 by Prepetition Receiver or Other Custodian
(“First Motion for Relief from Stay”), 2:14-bk-23301-RK, ECF 11; (4) Lloyds’s Motion for
Protective Order Limiting the Scope of Discovery, 2:14-bk-23301-RK, ECF 46; (5)
Lloyds’s Motion for Relief From The Automatic Stay Under 11 U.S.C. Section 362
(Action in Nonbankruptcy Forum) (“Second Motion for Relief from Stay”), 2:14-bk-
23301-RK, ECF 57; and (6) Lloyds’s Motion to Dismiss Adversary Proceeding number
2:14-ap-01594-RK, brought by Debtor (“Motion to Dismiss”).
1. Procedural and Factual History
a. The Facts
The relevant facts material to the motions before the court are undisputed and
straightforward. At issue are three parcels of real property listed by Debtor on its
bankruptcy schedules as assets of its bankruptcy estate: (1) the “Strand Property”
located at 1614-1618 The Strand, Hermosa Beach, California 90254; (2) the “North
Flores Property,” located at 1308 North Flores Street, West Hollywood, California
90069; and (3) the “Vista Chino Property,” located at 424 West Vista Chino, Palm
Springs, California 92262 (the three properties are collectively known as “the
Properties”). Adversary Complaint, 2:14-ap-01594-RK, ECF 1 at ¶ 8; Debtor’s
Opposition to Lloyds Motion for Relief from Stay, 2:14-bk-23301-RK, ECF 34 at 7:14-
18. Debtor claims ownership of the Properties. Id.; Debtor’s Opposition to Lloyds
Motion to Dismiss Adversary Proceeding, 2:14-ap-01594-RK, ECF 15 at 3:26-4:3.
The Strand Property and the North Flores Property are located in Los Angeles
County, and the Vista Chino Property is located in Riverside County. Debtor is a
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California limited liability company which was formed on June 13, 2012, and is owned
100 percent by Michael Kilroy (“Kilroy”). Adversary Complaint, 2:14-ap-01594-RK, ECF
1 at ¶ 6; Debtor’s Opposition to Lloyds Motion to Dismiss Adversary Proceeding, 2:14-
ap-01594-RK, ECF 15 at 3:24-25. Kilroy is the principal of Debtor. Adversary
Complaint, 2:14-ap-01594-RK, ECF 1 at ¶ 10; Debtor’s Opposition to Lloyds Motion for
Relief from Stay, 2:14-bk-23301-RK, ECF 34 at 8:9-10.
In or around December 2006 to May 2007, Kilroy took out loans from Lloyds,
borrowing an aggregate amount of about $9 million, and then as the owner of the
Properties, gave trust deeds on the Properties to secure repayment of the loans (the
“Loans”). Adversary Complaint, 2:14-ap-01594-RK, ECF 1 at ¶ 12; Debtor’s Opposition
to Lloyds Motion for Relief From Stay, 2:14-bk-23301-RK, ECF 34 at 8:26-27. Kilroy
stopped making interest payments on the Loans in April 2009. Adversary Complaint,
2:14-ap-01594-RK, ECF 1 at ¶ 20; Debtor’s Opposition to Lloyds Motion for Relief From
Stay, 2:14-bk-23301-RK, ECF 34 at 10:26-27. Kilroy contends that Lloyds has charged
him significantly more interest than permitted under the loan documents. Id.; Debtor’s
Opposition to Lloyds Motion to Dismiss Adversary Proceeding, 2:14-ap-01594-RK, ECF
15 at 4:7-6:7.
On November 12, 2011, Lloyds filed complaints for injunctive relief and
appointment of a receiver against Michael Kilroy regarding the loans on the Strand and
North Flores Properties in the Superior Court of California, County of Los Angeles (“Los
Angeles Superior Court”). Adversary Complaint, 2:14-ap-01594-RK, ECF 1 at ¶ 21;
Debtor’s Opposition to Lloyds Motion for Relief From Stay, 2:14-bk-23301-RK, ECF 34
at 11:2-9; Debtor’s Opposition to Lloyds Motion to Dismiss Adversary Proceeding, 2:14-
ap-01594-RK, ECF 15 at 6:9-23. On December 1, 2011, the Los Angeles Superior
Court entered an order granting Lloyds’s ex parte application for appointment of a rents
and profits receiver and related relief, including a temporary restraining order. Id.
Since that time, Robert C. Warren III, the receiver, has had possession of the Strand
Property and the North Flores Property and has been collecting rent from both
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properties. Id. By order entered on January 6, 2012, the Los Angeles Superior Court
confirmed the appointment of the receiver. Id.
On May 21, 2014, Lloyds filed amended complaints in these actions in the Los
Angeles Superior Court to, among other things, add Debtor as a defendant and further
add a judicial foreclosure cause of action against Kilroy and Debtor. Debtor’s
Opposition to Lloyds Motion to Dismiss Adversary Proceeding, 2:14-ap-01594-RK, ECF
15 at 6:24-28. The amended complaints in these actions alleged causes of action for
appointment of a receiver, accounting and specific performance of the rents and profits
clause, injunctive relief, breach of contract and judicial foreclosure. Id. Kilroy filed
amended cross-complaints against Lloyds for fraud and deceit, negligent
misrepresentation, tortious breach of the implied covenant of good faith and fair
dealing, breach of contract, violation of the California unfair competition law, violation of
Hong Kong law, Section 108 of the Securities and Futures Ordinance Cap 571, and
declaratory and injunctive relief. Id. at 7:1-6.
In or about April 2012, Lloyds filed a complaint for the appointment of a receiver,
accounting and specific performance of the rents and profits clause, injunctive relief,
and judicial foreclosure and deficiency against Kilroy regarding the loans on the Vista
Chino Property in Superior Court of California, County of Riverside (“Riverside Superior
Court”). Adversary Complaint, 2:14-ap-01594-RK, ECF 1 at ¶ 25; Debtor’s Opposition
to Lloyds Motion for Relief From Stay, 2:14-bk-23301-RK, ECF 34 at 11:10-16; Debtor’s
Opposition to Lloyds Motion to Dismiss Adversary Proceeding, 2:14-ap-01594-RK, ECF
15 at 7:9-19. On May 1, 2012, the Riverside Superior Court entered an order granting
Lloyds’s ex parte application for a rents and profits receiver and related relief. Id.
Since that time, the receiver, Mr. Warren, has had possession of the Vista Chino
Property. Id. The Riverside Superior Court confirmed the appointment of the receiver
in or about June 2012. Id. Debtor is not a party to the Riverside Superior Court action.
Id.
On July 13, 2012, Kilroy transferred his interests in the Properties to Debtor.
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Adversary Complaint, 2:14-ap-01594-RK, ECF 1 at ¶ 28; Debtor’s Opposition to Lloyds
Motion to Dismiss Adversary Proceeding, 2:14-ap-01594-RK, ECF 15 at 7:24-8:2. As
alleged by Debtor, it is the owner of the Properties, apparently based on these transfers
from Kilroy to it. Id. at ¶¶ 8 and 28 and Exhibit C attached thereto (copies of grant
deeds transferring Strand and North Flores Properties from Kilroy to Debtor); Debtor’s
Opposition to Lloyds Motion to Dismiss Adversary Proceeding, 2:14-ap-01594-RK, ECF
15 at 7:23-8:2.
b. Procedural History in This Case
On July 11, 2014, Debtor filed its voluntary petition for relief under Chapter 11 of
the Bankruptcy Code. Petition, 2:14-bk-23301-RK, ECF 1. On July 25, 2014, Debtor
filed its Summary of Schedules and Schedules, listing the Properties as assets of the
bankruptcy estate, and valuing the Properties at $14,470,000. Summary of Schedules
and Schedules, 2:14-bk-23301-RK, ECF 23 at 2.
On July 14, 2014, Debtor filed a Motion for Cash Collateral and Adequate
Protection. Motion for the Entry of an Order: (I) Authorizing Debtor to Utilize Cash
Collateral Pursuant to 11 U.S.C. § 363; and (II) Granting Adequate Protection to Pre-
Petition Secured Parties Pursuant to 11 U.S.C. §§ 361 and 363, 2:14-bk-23301-RK,
ECF 3. On July 14, 2014, Debtor filed a Motion to Approve Residential Lease
Agreements. Motion to Approve Residential Lease Agreements, 2:14-bk-23301-RK,
ECF 2. Lloyds filed an opposition to both the Motion for Cash Collateral and the Motion
to Approve Residential Lease Agreements on July 22, 2014. 2:14-bk-23301-RK, ECF
15.
On July 18, 2014, Lloyds filed a Motion for Relief from Stay on grounds that
Debtor’s Chapter 11 bankruptcy case was filed in bad faith. Motion for (A) Relief from
the Automatic Stay under 11 U.S.C. § 362 (Real Property) and (B) Relief from Turnover
under 11 U.S.C. § 543 by Prepetition Receiver or Other Custodian, 2:14-bk-23301-RK,
ECF 11.
On August 18, 2014, Lloyds filed a Motion for Protective Order Limiting the
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Scope of Discovery in response to discovery requests propounded by Debtor in relation
to Lloyds Motion for Relief from Stay (Real Property), the Motion for Cash Collateral,
and the Motion to Approve Residential Lease Agreements. Motion for Protective Order
Limiting the Scope of Discovery, 2:14-bk-23301-RK, ECF 46.
On August 26, 2014, Lloyds filed a Second Motion for Relief from Stay. Motion
for Relief from the Automatic Stay under 11 U.S.C. § 362 (with supporting declarations)
(Action in Nonbankruptcy Forum), 2:14-bk-23301-RK, ECF 57.
On September 10, 2014, Debtor initiated an adversary proceeding, number 2:14-
ap-01594-RK. The adversary complaint named Lloyds as a defendant and pleaded two
claims for relief: (1) Declaratory Relief that the Real Properties are Property of the
Estate Pursuant to 11 U.S.C. § 541; and (2) Objection to Claim Pursuant to Federal
Rule of Bankruptcy Procedure 3007. Adversary Complaint, 2:14-ap-01594-RK, ECF 1.
Lloyds filed a Motion to Dismiss the Adversary Proceeding on September 19, 2014.
Motion to Dismiss Adversary Proceeding, 2:14-ap-01594-RK, ECF 9.
1. Under California Law the Properties Are Not Property of the Bankruptcy Estate
a. State Law Determines Whether a Debtor Has Interest in Property
State law determines whether a particular right, power, or interest is “property”
and the nature and extent of the debtor's interest therein. Butner v. United States, 440
U.S. 48, 54 (1979). Based on the Butner principle, the Ninth Circuit in In re Pettit, 217
F.3d 1072, 1078 (9th Cir. 2000) described the applicable law governing the bankruptcy
court’s determination whether a property interest was included in a bankruptcy estate of
a debtor subject to administration under the Bankruptcy Code: “Although the question
whether an interest claimed by the debtor is ‘property of the estate’ is a federal question
to be decided by federal law, bankruptcy courts must look to state law to determine
whether and to what extent the debtor has any legal or equitable interests in property
as of the commencement of the case.” 217 F.3d at 1078, citing Butner v. United
States, 440 U.S. at 54-55; accord, In re First Protection, Inc., 440 B.R. 821 (9th Cir.
BAP 2010). Thus, the court is to look to state law, here, California law, to determine
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whether Debtor had any interest in the Properties, real property situated in California, at
the commencement of the bankruptcy case to be considered property of the bankruptcy
estate under 11 U.S.C. § 541.
As the Ninth Circuit also noted in In re Pettit, “[u]nder California law, property is
defined as “the thing of which there may be ownership.” In re Pettit, 217 F.3d at 1078,
citing, California Civil Code § 654. The Ninth Circuit further noted in Pettit: “The
ownership is the right of one or more persons to possess and use it to the exclusion of
others.” Id. Under California law, property includes real or immovable property,
consisting of land, that which is affixed to land, that which is incidental or appurtenant to
land and that which is immovable by law. California Civil Code, §§ 657-662. There is
no dispute that the Properties are real or immovable property within the meaning of
California Civil Code § 658.
Ownership of property in California is also defined in provisions of the California
Civil Code. California Civil Code §§ 669 et seq. California Civil Code § 678 provides
that the ownership of property is either “absolute” or “qualified.” California Civil Code
§679 defines “absolute ownership” as follows: “The ownership of property is absolute
when a single person has the absolute dominion over it, and may use it or dispose of it
according to his pleasure, subject only to general laws.” California Civil Code § 680
defines “qualified or base ownership” as follows: “The ownership of property is qualified:
1. When it is shared with one or more persons; When the time of enjoyment is deferred
or limited; 3. When the use is restricted.” California Civil Code § 681 defines “sole or
several ownership” as follows: “The ownership of property by a single person is
designated as a sole or several ownership.” It is undisputed that Kilroy had “sole or
several ownership” of the Properties when he purportedly transferred the Properties.
The dispute here is whether Kilroy, as the sole owner, still had the power to transfer the
Properties under California law once the court-appointed receiver took over possession
of the Properties pursuant to the orders of the Los Angeles and Riverside Superior
Courts.
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b. California Law Recognizes that Property Subject to a Court-Appointed
Receivership Is In Custodia Legis
As discussed above, the undisputed facts indicate that at the request of Lloyds,
the Los Angeles and Riverside Superior Courts appointed Mr. Warren as the receiver
for the Properties and had possession of the Properties before Kilroy transferred his
interests in the Properties to Debtor and before Debtor filed its Chapter 11 bankruptcy
case. The issue before the court which has been the subject of briefing and oral
argument on these matters is whether or not Kilroy’s transfers of his interests in the
Properties, which are in the possession of the court-appointed receiver, validly
conveyed ownership of the Properties to Debtor and are therefore property of the
bankruptcy estate under 11 U.S.C. § 541 when Debtor filed its bankruptcy petition. To
resolve this issue of whether Debtor had any legal or equitable interests in the
Properties as of the petition date, the court must also consider the California law of
receiverships.
In Kreling v. Kreling, 118 Cal. 421 (1897), the California Supreme Court
observed: “A receiver is an officer or representative of the court, appointed to take the
charge and management of property which is the subject of litigation before it, for the
purpose of its preservation and ultimate disposition according to the final judgment
therein.” 118 Cal. at 422, 50 P. at 550, cited in, 6 Witkin, California Procedure,
Provisional Remedies, Receivers, § 419 at 357 (5th ed. 2008). The appointment of a
receiver is an equitable remedy. 55 Cal.Jur.3d, Receivers, § 1 at 8 (2012), citing,
McLane v. Placerville & S.V.R. Co., 66 Cal. 606 (1885).
The statutory provisions governing the appointment of receivers and defining
their functions and powers are set forth in California Code of Civil Procedure §§ 564
through 570. Pursuant to California Code of Civil Procedure § 564(a), a receiver may
be appointed by the court in which an action or proceeding is pending, in any case in
which the court is empowered by law to appoint a receiver. See also, 6 Witkin,
California Procedure, Provisional Remedies, Receivers, § 419 at 358. “Generally, the
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functions and powers of a receiver are controlled by statute, by order of appointment,
and by the court’s subsequent orders.” City of Santa Monica v. Gonzalez, 43 Cal.4th
905, 930, 76 Cal.Rptr.3d 483, 502 (2008)(citations omitted). California Code of Civil
Procedure § 568 provides:
The receiver has, under the control of the Court, power to
bring and defend actions in his own name, as receiver; to
take and keep possession of the property, to receive rents,
collect debts, to compound for and compromise the same, to
make transfers, and generally to do such acts respecting the
property as the Court may authorize.
California Code of Civil Procedure § 568.5 further provides: “A receiver may, pursuant
to an order of the court, sell real or personal property in the receiver's possession. . .
The sale is not final until confirmed by the court.”
“It has been long recognized that a receiver is an agent and officer of the
appointing court.” City of Santa Monica v. Gonzalez, 43 Cal.4th at 930, 76 Cal.Rptr.3d
at 502, citing inter alia, Lesser & Son v. Seymour, 131 Cal.2d 494, 499, 218 P.2d 536
(1950). “As an officer of the court, a receiver is not an agent of any particular party to
the action, but represents all persons interested in the property.” City of Santa Monica
v. Gonzalez, 43 Cal.4th at 930, 76 Cal.Rptr.3d at 502 (citation omitted). “Property in
receivership remains under the court’s control and continuous supervision, and the
importance of such supervision cannot be overstated.” Id. (citation omitted). Id.
(citation omitted); see also, Lesser & Son v. Seymour, 131 Cal.2d at 499, 218 P.2d 536
(citations omitted). Thus, California jurisprudence has long recognized that property
subject to a court-appointed receivership is in custodia legis, that is, it is in the custody
of the court itself. Id.; Pacific Railway Co. v. Wade, 91 Cal. 449, 455, 27 P. 768 (1891);
Tapscott v. Lyon, 103 Cal. 297, 305-306 (1894); 1 Ahart, California Practice Guide:
Enforcing Judgments and Debts, ¶ 4:937 at 4-170.11 (2014).
In Pacific Railway Co. v. Wade, the California Supreme Court held that a party
seeking relief as to property of an insolvent debtor held by a receiver must petition the
court in which the receiver is acting because the property held by the receiver is held
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under court supervision in custodia legis. 91 Cal. at 455-456. The facts involved the
Pacific Railway Co., a railway company running a street railroad operated by wire
cables (“cable car company”), which was an insolvent debtor whose assets were in
possession of a receiver appointed by the superior court upon the petition of a
judgment creditor. Id. at 450-451. Another railway company, the Los Angeles
Consolidated Electric Railway Company (“electric car company”), petitioned the court to
allow it to operate over and on some of the cable car company’s tracks pursuant to
provisions of the California Civil Code which governed the joint use of railroad tracks on
city streets and the proper method of determining compensation when tracks are jointly
used or are intersected. Id. at 451-453. One provision of the Civil Code required
railway companies that jointly use a street to pay equal shares for the construction of
the track while another provision required any railway company building track
intersecting with another company’s track to try to come to an equitable agreement as
to compensation. Id. at 452-453. At the hearing on the electric car company’s petition,
the petitioners, apparently creditors of the cable car company, objected to the
proceedings by the superior court on grounds that the court had no authority to grant
the relief requested. Id. at 451. The superior court overruled the objection, deciding
that it had jurisdiction to determine the amount of the compensation for the joint use of
the cable car company’s tracks by the electric car company and setting the petition for
further hearing. Id. Thereupon, the petitioners filed an application for an alternative writ
of prohibition, which was granted by the California Supreme Court. Id. As stated by the
California Supreme Court, “[t]he question to be determined is, simply, whether the
court, which, through its receiver has the custody and control of the insolvent
corporation’s property, has the power to determine the compensation….or whether the
electric [car] company must treat with the cable [car] company, and upon failure to
agree as to the amount to be paid, bring an action therefor against the receiver with the
permission of the court.” Id. at 453.
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The California Supreme Court in Pacific Railway Co. first determined that the
electric car company had the absolute right under state law to use the cable car
company’s track upon payment of the applicable compensation. Id. at 454. The
California Supreme Court then observed that “the question before us whether the
[superior court] has the right to fix the amount of damages or compensation to be paid
by the electric [car] company is a simple one.” Id. In answering this specific question of
the superior court’s jurisdiction in a receivership action, the California Supreme Court
discussed the general principles of receivership law in California as follows:
The property of the cable [car] company is in custodia legis.
The receiver is indifferent between the parties. His possession
is the possession of the court, for the benefit of all persons
interested, whether named as parties in the action or not, and
it cannot be disturbed without the consent of the court. No
one claiming a right paramount to that of the receiver can
assert it in any action without the permission of the court. No
sale can take place, no debt can be paid, no contract can be
made, which does not receive the sanction of the court. The
receiver, with permission of the court, can do anything the
corporation might have done to make the most out of the assets in
his hands; it has been held that in a proper case he may settle
disputed claims, and compromise with debtors of the corporation;
he may lease other lines of railways, and operate them; he may
complete construction of unfinished lines of railroad, and negotiate
loans for the payment of the cost thereof; he may enter into
contracts by the terms of which the owners of other roads may use
the road under his control at given rates; and he may charge the
rates agreed upon prior to his appointment, between the company
he represents and another railroad corporation.
Id. at 455 (emphasis added), citing inter alia, California Code of Civil Procedure § 568
and Wiswall v. Sampson, 55 U.S. 65 (1852). As to the specific merits of the case, the
California Supreme Court in Pacific Railway Co. concluded:
In the case before us, the electric [car] company has the right,
under the statute and its franchise, to use the tracks of the cable
[car] company upon payment of one half of the cost of the
construction thereof. The only question to be determined is, What
is the amount due the cable [car] company? It is like any other
claim for damages or compensation in favor of a corporation whose
property is in the hands of a receiver, and is to be determined in the
same way. As to the manner of determining such question, there
has been some discordance of opinion among the judges, but so
far as we have investigated the subject, there has been no conflict
of decision, the cases all hold that while it is, under certain
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circumstances, proper to direct the prosecution of an action at law
against the receiver to be paid, the better and more common
recognized practice is to apply for relief by petition to the court in
which the receiver is acting. The rule applies to all cases of
damages to person or property, whether occasioned prior or
subsequent to the appointment of the receiver. Any party deeming
himself aggrieved by the judgment of the court has the right of
appeal.
Id. at 455-456 (citations omitted). The California Supreme Court in Pacific Railway Co.
further rejected the petitioner’s argument that the receivership court’s determination of
compensation or damages to be paid as to property of the debtor would deprive them of
the right to jury trial because a receivership action is a case of equity jurisdiction for
which there is no common law right to a jury trial. Id. at 456. Accordingly, the California
Supreme Court denied the application for a writ of prohibition and discharged the
alternative writ. Id. at 457.
In Tapscott v. Lyon, 103 Cal. 297 (1894), the California Supreme Court held that
a court appointed receiver could not be sued for conversion of assets he transferred in
his capacity as a receiver because he was holding the property in custodia legis. 203
Cal. at 305-306. The facts involved two debtors who were operating a general
merchandise business but were insolvent, having debts of $15,000 and assets worth
only $8,000. Id. at 301-302. The debtors transferred all of their assets to a buyer who
was fully aware of their insolvency for $2,000. Id. The creditors of the debtors
instituted state law insolvency proceedings under the Insolvent Act of 1880 in the
superior court, which appointed a receiver to take charge of the assets of the debtors.
Id. at 302. The receiver then took possession of the assets after he demanded them
from the buyer, who voluntarily relinquished the assets to the receiver. Id. at 302-303.
The buyer then filed an application in the superior court against the receiver for turnover
of the assets to him, which application was denied by the superior court. Id. at 303.
Pursuant to court order, the receiver sold the assets and turned over the proceeds to a
court appointed assignee, who distributed the sales proceeds to creditors in payment of
the debts owed by the debtors. Id. at 304. The buyer then brought an action in the
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superior court against the receiver for wrongful taking and conversion, alleging
trespass, which action was tried to a jury, which rendered a verdict in favor of the buyer
and against the receiver. Id. at 304-305. The California Supreme Court held that the
receiver “did not take the goods as a trespasser, and has disposed of them under
express direction of this court.” Id. at 307. In so holding, the court distinguished
between a sheriff seizing property in the possession of a judgment debtor on behalf of a
creditor pursuant to a writ of attachment and a receiver taking property pursuant to
court order. Id. at 307-308. The sheriff is the agent of the judgment creditor, and the
property remains presumptively the debtor’s, and third parties claiming title can sue the
sheriff and recover the property if they can show title. Id. at 397. In contrast, the
receiver is the agent of the court, holding property for the court, and cannot release
property to a third party without leave of court. Id. at 307-308.
In drawing this contrast between the sheriff acting as the agent of creditors and
the receiver acting as the agent of the court, the California Supreme Court observed in
Tapscott:
The sheriff is the agent of the creditor. He commits no contempt if
he refuses to levy upon which he has reason to believe do not
belong to the debtor. He may release them to a claimant without
being guilty of a contempt. He simply takes the responsibility. The
receiver has no such discretion. If the goods are described, and
are in possession of the party whose property he is directed to take
into possession, or are voluntarily delivered to him by the person
having them, he must take them on pain of incurring a contempt,
and, having thus taken them, he cannot surrender them to an
adverse claimant without leave of the court, which is the real
custodian.
Id. 307-308. (citations omitted) In describing the role and powers of a court appointed
receiver, the court also stated:
But if [the receiver] is lawfully in possession of property claimed to
belong to the insolvent, he will be regarded as the servant of the
court, and even adverse claimants will not be justified in disturbing
his possession without leave of the court. Nor can be he made
responsible in an action for the value of such property by such
person. The custody is that of the court. The receiver has no right
to deliver such property to an adverse claimant without leave of the
court, and, therefore, cannot be held responsible for not doing so.
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Id. at 306.
Citing Pacific Railway Co. v. Wade and Tapscott v. Lyon, one California treatise
on enforcement of judgments and debts has stated: “The appointing court has custody
over all property in the receiver’s possession and has plenary jurisdiction to resolve
disputes concerning such property. Thus, only the court may authorize a transfer or
encumbrance of the property.” 1 Ahart, California Practice Guide: Enforcing Judgments
and Debts, ¶ 4:937 at 4-170.11, citing, Pacific Railway Co. v. Wade, 91 Cal. at 455, 27
P. 768; Tapscott v. Lyon, 103 Cal. at 305-306.
The California case law following Pacific Railway Co. v. Wade and Tapscott v.
Lyon is consistent. For example, in Withington v. Shay, 47 Cal. App. 2d 68 (1941), the
district court of appeal held that a judgment creditor could not execute a judgment levy
on surplus proceeds of a sale of property in the hands of the sheriff under court
supervision in an action for judicial foreclosure of a mechanics lien. Id. at 73-75. The
surplus proceeds were not subject to a judgment levy because the sheriff held the
funds on behalf of the court to determine entitlement to the proceeds after the sale, and
thus, the funds were held in custodia legis and immune from attachment. Id. at 74-75.
The court stated:
The funds, therefore, in the sheriff’s hands were in his hands as
agent of the court in the foreclosure proceeding. They were in
custodia legis. Being in custodia legis, they were not subject to
attachment or writ of execution.
Id. at 74, citing inter alia, Clymer v. Willis, 3 Cal. 363 (1853). Thus, under the above-
discussed authorities, California law vests the power to dispose of property subject to a
receivership in the receiver alone, and that power is subject to prior authorization from
the appointing court.
The case law in the federal courts reflects the common law doctrine of in
custodia legis as represented in the California jurisprudence of receiverships discussed
above that the property is held by a court-appointed receiver under court supervision in
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custodia legis.1 In Wiswall v. Sampson, 55 U.S. 52, 14 L.Ed. 322 (1852)(interpreting
Alabama law), the United States Supreme Court rejected a claim that the possession of
property by a court-appointed receiver does not invalidate an execution sale because
the sale did not disturb the receiver’s possession. See also, In re Technical Land, Inc.,
172 B.R. 429, 432 (Bankr. D.D.C.), affirmed, 175 B.R. 792 (D.D.C. 1994). The
Supreme Court in Wiswall, in rejecting this claim, stated:
It has been argued, that a sale of the premises on execution and
purchase, occasioned no interference with the possession of the
receiver, and hence no contempt of the authority of the court, and
that the sale therefore, in such a case should be upheld. But,
conceding the proceedings did not disturb the possession of the
receiver, the argument does not meet the objection. The property
is a fund in court, to abide the event of the litigation, and to be
applied in the payment of the judgment creditor, who has filed
his bill to remove any impediments in the way of his execution.
And, in order to effectuate this, the court must administer it
independently of any rights acquired by third persons,
pending the litigation.
55 U.S. at 66 (emphasis added); see also, In re Technical Land, Inc., 172 B.R. at 432.
Similarly, in Hitz v. Jenks, 185 U.S., 22 S.Ct. 598 (1902)(interpreting District of
Columbia law), the United States Supreme Court held that a sale of property in
receivership pursuant to a deed of trust by a court-appointed receiver who was also
trustee under the deed of trust was invalid and conferred no title because the property
was in custodia legis and the receivership court had not granted permission for the
sale. Id.; see also, In re Technical Land, Inc., 172 B.R. at 431.
In North American Broadcasting, LLC v. United States, 306 Fed. Appx. 371 (9th
Cir. 2008),2 the plaintiff sued the Federal Trade Commission (FTC) to recover damages
1 Federal case law is not dispositive here, as the Debtor’s property interests are defined by California
state law under Butner v. United States, 440 U.S. at 54. See Grayned v. City of Rockford, 408 U.S.
104, 110, 92 S.Ct. 2294 (1972)((“[I]t is not within our power to construe and narrow state laws.”). The
purpose of the citation and discussion of federal case law on the doctrine of in custodia legis is to
show that its principles are well-established in the general case law.
2 The Ninth Circuit’s unpublished disposition in this case is not precedent except as provided in Ninth
Circuit Rule 36-3, which provides that it is not restricted or prohibited from being cited since it is a
post-2006 disposition pursuant to Fed. R. App. P. 32.1. 306 Fed. Appx. at 372 n. ***.
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suffered as a result of actions of a court-appointed receiver. The Ninth Circuit affirmed
the grant of summary judgment by the district court in favor of the FTC in part on
grounds that the FTC is not liable for the actions of the receiver as one of its employees
because a court-appointed receiver is not an employee of the FTC, but an officer of the
court. Id. at 373. In explaining the court–appointed receiver’s role as an officer of the
court, the Ninth Circuit stated:
The FTC argues that a court-appointed receiver is not an employee
of the FTC. We agree. A court-appointed receiver is an officer of
the court, appointed on behalf and for the benefit of all the parties
having an interest in the property, not for the plaintiff or defendant
alone. The property in his hands is in custodia legis; it is the court
itself that has the care of the property in dispute. The receiver is
but the creature of the court having no powers except such as are
conferred upon him by the order of his appointment and the course
and practice of the court.
Id., citing inter alia, Booth v. Clark, 58 U.S. 322 (1854).
In Matter of The Rubicon, Ltd., 331 F. Supp. 1307 (N.D. Cal. 1971), the district
court held that funds of a debtor in the possession of a bankruptcy trustee in a Chapter
XII arrangement proceeding under the Bankruptcy Act of 1898 were held under the
supervision of the bankruptcy court in custodia legis and could not be subjected to
garnishment pursuant to a writ of attachment issued by a state court against a debtor.
Id. at 1309. The facts were that the debtor was a real estate investment business,
which was sued by a creditor in state court. Id. at 1307. Soon afterwards, the debtor
filed a petition for arrangement (reorganization) under Chapter XII of the Bankruptcy Act
in the bankruptcy court. Id. The bankruptcy referee appointed a trustee to manage the
assets of the debtor, including the collection of rents. Id. However, after the debtor
conceded at a hearing before the bankruptcy referee that it was unable to obtain
postpetition financing necessary to an effective plan of arrangement, the bankruptcy
referee ordered that the bankruptcy case be dismissed, that the trustee file his final
account, and that jurisdiction be retained until the trustee’s final account was filed and
heard before the district court. Id. at 1307-1308 After dismissal of the bankruptcy
case, the creditor obtained a writ of attachment from the state court and requested the
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bankruptcy referee to honor the state court garnishment under the writ of attachment,
but the bankruptcy referee refused and ordered the funds be paid to administrative
expenses and then to the holder of the senior trust deed on one of the debtor’s
properties. Id. The creditor petitioned the district court for review, which affirmed the
bankruptcy referee’s ruling. Id. at 1308-1310. The district court held that the funds in
possession of a bankruptcy trustee pursuant to a Chapter XII bankruptcy proceeding
are held under bankruptcy court supervision in custodia legis and are not garnishable
until the funds are disbursed by the trustee. Id. at 1308, citing, In re Argonaut Shoe
Co., 187 F. 784 (9th Cir. 1911) and Gilbert v. Quimby, 1 F. 111 (C.C.N.Y. 1880). Since
the funds had not yet been disbursed by the trustee, they remained held by the trustee
in custodia legis, that is, under the custody of the bankruptcy court, and thus, not
attachable by process from a state court without consent of the bankruptcy court. Id. at
1309. In so holding, the district court in The Rubicon cited In re Argonaut Shoe Co.,
which in turn cited Gilbert v. Quimby, which stated regarding the holding that
bankruptcy dividends in the hands of a bankruptcy trustee are not attachable by state
court process until distribution:
That the dividend was not attachable on process from the state courts
would seem to be quite clear. While in the hands of the assignee [in
bankruptcy], it would be part of the estate of the bankrupt in the
custody of the court. It would not be held the property of the debtor,
but would only be property that would become his when he should get
it. He could not maintain any suit against the assignee for it, nor obtain
it by any legal process other than application to the District Court
having control of the fund as a party to the proceedings in that court.
Money in the hands of a disbursing officer of the United States, due to
a private person, cannot be attached on process against such person
out of a state court, because the money will not be his, but will remain
the property of the United States until it is paid to him.
Id. at 1308, quoting, Gilbert v. Quimby, 1 F. at 113. Then, the court in The Rubicon
quoted the statement of the Ninth Circuit in In re Argonaut Shoe Co.:
The reason of this doctrine seems to be that the court having the
money or property in its custody under the law holds it for some
purpose, of which that court is exclusive judge. To permit property or
money thus held to be seized, attached, or garnisheed, would
therefore defeat the very purpose for which it is held, and in many
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cases enable some other court to dispose of property or money, and
wholly divert it from the end or purpose for which possession has been
taken. A conflict of jurisdiction and decision would in many cases
ensue.
Id. at 1308-1309, quoting, In re Argonaut Shoe Co., 187 F. at 785-786, quoting, In re
Cunningham, Fed. Cas. No. 3,478, 6 F. Cas. 958 (D. Iowa 1879). The holdings in The
Rubicon and Argonaut Shoe Co. were that state court attachment orders were
ineffective to attach to property held by a bankruptcy trustee under the supervision of
the bankruptcy court in custodia legis. Id.
In In re Keller, 185 B.R. 796 (9th Cir. BAP 1995), the Bankruptcy Appellate Panel
of the Ninth Circuit held that the debtor in a pending Chapter 7 bankruptcy case had no
interest in the proceeds from the sale of a home ordered by a state family law court
which retained jurisdiction to adjust the distribution of those proceeds between the
spouses, including the debtor. Id. at 802. The facts were that a California family law
court entered a judgment dissolving the marriage of the debtor and his wife, and
ordered that the family residence be sold, with each spouse to receive an equal share
of the proceeds, subject to future adjustments by the family law court. Id. at 797-798.
When the family residence was sold, the debtor’s share of the sales proceeds was
insufficient to cover various support payments and attorneys’ fees imposed by the
family law court on him, which reduced his share to zero. Id. at 798. The debtor filed a
Chapter 7 bankruptcy petition soon afterwards, and the Chapter 7 trustee then filed a
preference avoidance action pursuant to 11 U.S.C. §§ 547 and 550 to recover the
debtor’s half of the family residence sale proceeds. Id. The bankruptcy court held that
the payments and penalties imposed by the family law court’s orders against the
debtor’s one-half share were avoidable preferences. Id. The Bankruptcy Appellate
Panel reversed, agreeing with the wife and her counsel that the debtor’s “rights in the
proceeds were subject to adjustment and determination by the Family Law Court
pursuant to the final judgment of dissolution, and his rights in the proceeds therefore
could not vest until the court so decreed.” Id. at 799. The Bankruptcy Appellate Panel
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stated: “We agree with the appellants' essential premise that the debtor never
possessed a vested right to one half of the net sale proceeds [and c]onsequently,
adjustments made prior to distribution were not a transfer of ‘an interest of the debtor in
property.’” Id. The family law court’s judgment of dissolution dividing the marital
property and retaining jurisdiction over adjustments and distribution of sales proceeds
was res judicata and binding on the bankruptcy trustee as the successor-in-interest to
the debtor. Id. at 800, citing, Matter of Paderewski, 564 F.2d 1353, 1356 (9th Cir.
1977). Citing Butner, the Bankruptcy Appellate Panel stated that “[p]roperty interests
are created and defined by state law” and that in looking to state law to determine the
nature of the bankruptcy estate’s property rights, “those rights were defined and
circumscribed by the judgment of the Family Law Court.” Id., quoting, Butner v. United
States, 440 U.S. at 55. The Panel further stated in Keller: “Once the Family Court
ordered the residence sold and retained jurisdiction to approve disbursement of the
proceeds, those proceeds were for all practical purposes held in custodia legis by that
court.” Id., citing, Rosenthal v. Rosenthal, 197 Cal.App.2d 289, 315 (1961). The Panel
finally stated: “As such they were at all times subject to distribution pursuant to the
court’s direction, beyond the reach of the debtor, alienation by his creditors, and were
not part of the bankruptcy estate.” Id. at 800.
c. Any Transfer of Property In Custodia Legis Is Void
i. Applicable California Law Recognizes that Transfers of Property
In Custodia Legis are Void
The case law as discussed above has recognized that attempts to sell or transfer
interests in property held under court supervision in custodia legis are ineffective.
Pacific Railway Co. v. Wade, 91 Cal. at 455; Tapscott v. Lyon, 103 Cal. at 305-306;
Withington v. Shay, 47 Cal. App. 2d at 75; North v. Evans, 1 Cal. App. 2d 64, 68-69, 36
P.2d 133 (1934) (“It follows, from the premises that defendant has given us, that the
possession by the clerk was the possession of the law and that the subsequent
execution sales were of no effect.”); see also, Wiswall v. Sampson, 55 U.S. at 66; Hitz
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v. Jenks, 185 U.S. at 166; North American Broadcasting, LLC v. United States, 306
Fed. Appx. at 373; In the Matter of The Rubicon, Ltd., 331 F. Supp. at 1309-1310; In re
Keller, 185 B.R. at 800 (“Once the Family Court ordered the residence sold and
retained jurisdiction to approve disbursement of the proceeds, those proceeds were for
all practical purposes held in custodia legis by that court. As such, they were at all
times subject to distribution pursuant to the court's direction, beyond the reach of the
debtor, alienation by his creditors, and were not part of the bankruptcy estate.”)(citation
omitted); In re Technical Land, Inc., 172 B.R. at 432; 1 Ahart, California Practice Guide:
Enforcing Judgments and Debts, ¶ 4:937 at 4-170.11. Thus, under these authorities,
any attempt to transfer an interest in property held in custodia legis is void and
ineffective, though none of these cases involved property held by a court-appointed
receiver, but other court-supervised parties or agents (e.g., clerk of the Superior Court.
the family law department of the Superior Court, the sheriff as the agent of the Superior
Court).
ii. Cases Holding that Transfers In Violation of a Receivership Order
Are Not Void Are Distinguishable or Were Wrongly Decided
Debtor cites the majority opinion by Presiding Justice Langdon in Mercantile
Trust Co. of San Francisco v. Sunset Rd. Oil Co., 50 Cal. App. 485, 494-495 (1920) for
the proposition that California law distinguishes between receiverships that are for the
sole benefit of one creditor and receiverships that are for the benefit of all creditors, and
that transfers without leave of court would only be void if the receivership was one for
the benefit of all creditors. Debtor’s Opposition to Lloyds Motion to Dismiss Adversary
Proceeding, 2:14-ap-01594-RK, ECF 15 at 13:13-14:17. In Mercantile Trust, the facts
were that a lender, Mercantile Trust Co. of San Francisco, brought an action against the
borrower, Sunset Road Oil Co., for judicial foreclosure of a mortgage given to the
lender on certain real property and obtained the appointment of a receiver. 50 Cal.
App. at 486. Several years later, the receiver filed a petition in the foreclosure to hold
the purchaser of the property at an execution sale, who had been an attorney for other
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creditors of the borrower in a separate partition action, in contempt of court of the
receivership order for executing a sale of that property to collect a judgment in the
partition action. Id. at 487-489. The receiver also sought an order permanently
enjoining the attorney from interfering or attempting to interfere with the receiver’s
possession of the property or disposing or attempting to dispose of the property. Id.
The superior court made findings and entered an order in a summary proceeding
annulling, vacating and setting aside the execution sale and permanently enjoined the
purchaser from selling, encumbering or otherwise disposing of the property and
interfering, or attempting to interfere, with the receiver’s possession of the property. Id.
at 490. The district court of appeal reversed with two justices concurring in the decision
in a separate opinion. Id. at 486-507. In the majority opinion, Presiding Justice Landon
stated:
We are, therefore, of the opinion that, both upon reason and authority,
there is a clear distinction between a receivership in a llquidation
proceeding, and one which is but a provisional remedy for the sole and
exclusive benefit of the plaintiff, and we are also of the opinion that the
receivership in the present case falls within the latter class. This being
true, and a sale under execution not being an interference with the
possession of the receiver in the foreclosure action, the order of the
court in that action annulling the deed to appellant and enjoining him
from selling, mortgage, pledging, or hypothecating or in any other way
disposing of, or attempting to dispose of, attempting to dispose or, the
said real property was erroneous.
Id. at 498.
The distinction made by the majority in Mercantile Trust between one creditor
and multiple creditor receiverships has not been accepted by other courts. Mercantile
Trust has never been cited by a California court and has apparently been cited only
once by a court outside the state in In re Technical Land, Inc., 172 B.R. at 432, which
declined to follow it.3 The court in Technical Land concluded that although Mercantile
was not the law of its jurisdiction, the District of Columbia, the reasoning was “not
3 This observation was based on a search on Westlaw’s KeyCite case citation program for cases citing
Mercantile as of the date of this memorandum decision.
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persuasive” in drawing a distinction between receiverships for the benefit of one
creditor and for all creditors, and held that the common law doctrine of in custodia legis
applied, including the United States Supreme Court’s opinions in Hitz v. Jenks, 185
U.S. 155 (1902) and Wiswall v. Sampson, 55 U.S. 52 (1852). Accordingly, the
Technical Land court held that a marshal’s sale of receivership property in custodia
legis was “illegal and void, and passed no title.” Id. at 437.
Debtor argues that based on the majority opinion in Mercantile Trust, the transfer
of property in the possession of a receiver in a “one creditor” receivership is only
voidable rather than being void ab initio. Debtor’s Opposition to Lloyds Motion to
Dismiss Adversary Proceeding, 2:14-ap-01594-RK, ECF 15 at 14:18-18:28. Thus,
according to Debtor, even though Kilroy may have violated injunction orders issued by
the state courts presiding over the receiverships prohibiting him from transferring the
Properties, his transfers of his ownership interests in the Properties to Debtor were
legally effective because the injunction orders only had in personam effect as to Kilroy
and had no effect on his power to transfer the Properties in rem, and thus, Debtor now
owns the Properties from Kilroy’s transfers, which are now part of its bankruptcy estate.
Debtor’s Opposition to Lloyds Motion to Dismiss Adversary Proceeding, 2:14-ap-01594-
RK, ECF 15 at 21:11-24:28, citing inter alia, In re Demis, 191 B.R. 851, 858 (Bankr. D.
Mont. 1996). In this regard, the court concludes that Debtor’s reliance on Mercantile
Trust is misplaced because to accept its premise based on an artificial distinction
between receiverships for the benefit of one creditor and for the benefit of all creditors
is flatly inconsistent with the California law of property and California law of
receiverships. The reasoning of Mercantile Trust is unsound in drawing an artificial
distinction between receiverships for one creditor versus those for multiple creditors
because the fundamental purpose of a receivership is to determine the rights of all
parties to the property, including the rights of creditors and the debtor who is claiming a
title interest in the property. See, e.g., Pacific Railway Co. v. Wade, 91 Cal. at 455
(“The property of the cable [car] company is in custodia legis. The receiver is indifferent
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between the parties. His possession is the possession of the court, for the benefit of all
persons interested, whether named as parties in the action or not, and it cannot be
disturbed without the consent of the court. No one claiming a right paramount to that of
the receiver can assert it in any action without the permission of the court. No sale can
take place, no debt can be paid, no contract can be made, which does not receive
the sanction of the court.”)(emphasis added). The majority opinion in Mercantile
Trust is inconsistent with the doctrine of in custodia legis well-established in the
California case law. Id.; Tapscott v. Lyon, 103 Cal. at 305-306; City of Santa Monica v.
Gonzalez, 43 Cal.4th at 930, 76 Cal.Rptr.3d at 502; 1 Ahart, California Practice Guide:
Enforcing Judgments and Debts, ¶ 4:937 at 4-170.11.
Debtor argues that Lloyds’s motion to dismiss the first claim for relief of the
adversary complaint for declaratory relief that the Properties are property of its
bankruptcy estate is incorrect because Kilroy effectively transferred title to the
Properties under California law. Debtor’s Opposition to Lloyds Motion to Dismiss
Adversary Proceeding, 2:14-ap-01594-RK, ECF 15 at 20:14-26. Debtor contends:
Under California law, a receiver has possession only; title remains in
those who had it at the time of appointment. Witkin, California
Procedure, Provisional Remedies, Receivers, § 454 (Possession and
Control of Property)(5th ed. 2012)(citing North v. Cecil B. De Mille
Productions, 2 Cal.2d 55, 57, 39 P.2d 199 (1934); see also, 75 C.J.S.
Receivers § 89.
As a consequence, the Receiver only had possession of the
Properties, and Kilroy held valid legal title in the Properties at the time
he transferred the Properties to the Debtor. Kilroy effectively
transferred his interest in the Properties to the Debtor through Grant
Deeds that were recorded at the appropriate county recorder’s office,
and the conveyance of the Properties was completed on June 15,
2012. See, Cal. Civ. Code, § 1039, 1091. As such, the Properties are
property of the estate under section 541.
Id. As discussed above, Kilroy, as the sole owner of the Properties, attempted to
transfer them to Debtor after the receiver took possession pursuant to the state court
receivership orders. While Kilroy may have had absolute ownership of the Properties
within the meaning of California Civil Code § 679 to “to dispose of [them] according to
his pleasure” before the court-ordered imposition of the receiverships on the Properties,
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his ownership of the Properties became restricted by the receivership orders, which
included injunctions prohibiting transfers of the Properties and orders for the receiver to
assume possession of the Properties, so that his ownership under California law was
no longer absolute, but qualified within the meaning of California Civil Code § 680. The
restrictions on Kilroy’s ownership rights were authorized pursuant to the California law
of receiverships, including the statutory provisions in the California Code of Civil
Procedure §§ 564 et seq., and the California common law of receiverships, including
the doctrine of in custodia legis. Kilroy’s absolute ownership of the Properties was also
subject to the general laws of California as set forth in California Civil Code § 679,
including the statutory receivership provisions in California Code of Civil Procedure §§
564 et seq., so it cannot be said that Kilroy had the absolute right to transfer ownership
of the Properties, regardless of the California law of receiverships, including the
statutory receivership provisions which are part of the general laws. Thus, it does not
necessarily follow as argued by Debtor that because Kilroy had title at the time the
receiver was appointed does not mean that he had the power to transfer title; as
discussed herein, he did not because once the Properties were in the receiver’s
possession, they were under the control and supervision of the receivership courts
under the doctrine of in custodia legis and could not be transferred without the
permission of the receivership courts. The court further concludes that Debtor’s
reliance on the majority opinion in Mercantile Trust does not support its argument that
the transferor, Kilroy, could transfer the Properties to it legally and effectively,
regardless of possession of the Properties by the court-appointed receiver. That case
is an aberration and does not square with the California common law governing
property held in custodia legis, including the California Supreme Court opinions in
Pacific Railway Co. v. Wade and Tapscott v. Lyon and general common law authority
such as the Supreme Court opinions in Wiswall and Hitz, holding that property under
court supervision may not be transferred without court authorization.
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The concurring opinion in Mercantile Trust by Justice Brittain, concurring in the
decision, discussed some of the problems with the reasoning of the majority opinion in
Mercantile Trust. 50 Cal. App. at 500-506. Although Justice Brittain concurred with the
decision “in so far as it declared the execution sale to be void and in so far as it
restrained the appellant from hypothecating or disposing of the property involved,” he
identified three objectionable aspects in the decision. Mercantile Trust Co., 50 Cal.
App. at 500. The first objection noted by Justice Brittain is particularly relevant to the
issues in this case. Justice Brittain said that the proposition “that a receivership in a
mortgage foreclosure case ‘is but a provisional remedy for the sole and exclusive
benefit of the plaintiff’. . . is revolutionary in character and opens the door to vexatious
litigation.” Id. at 500-501. Although Justice Brittain does not explicitly say so, this
“vexatious litigation” would likely result from the majority opinion’s departure from the
general rules that “not only permit but require a court to protect the possession of its
receiver.” Id. at 501. Justice Brittain’s concern was prescient, as evidenced by the
facts here, as Kilroy and Debtor have attempted to circumvent the state-court receiver’s
possession of the Properties. This scenario is similar to the situation first offered by
Justice Brittain when he said that allowing the sale of property in the hands of a
receiver
. . . would amount to an invitation for collusive sales pending
foreclosure by which a mortgagee entitled to satisfaction upon a
defaulted mortgage debt might be held in litigation for years during
the pendency of appeals involving the determination of whether or
not buyers at such sales acquired title. The effect of the rule stated in
the opinion of the presiding justice amounts to an adjudication that
the appellant in the present case acquired title under the execution
sale. If the trial court on this proceeding had no power to adjudicate
that the appellant did acquire title by the sale, this court is without
power to adjudicate that the sale was good. Such an adjudication
amounts to a determination of the question of title.
Id. at 502.
The notion that a debtor can transfer property in the possession of a court-
appointed receiver holding it under court supervision in custodia legis to a wholly
controlled entity to remove it from court supervision in a receivership is a remarkable
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proposition because it flatly inconsistent with the California law of receiverships and is,
in this court’s opinion, ultimately erroneous. To paraphrase the observations of the
Ninth Circuit in Argonaut Shoe Co., the reason for the doctrine of in custodia legis
seems to be that the court having the property in its custody under the law holds it for
some purpose, of which that court is exclusive judge. See Matter of The Rubicon, Ltd.,
331 F. Supp. at 1308-1309, quoting, In re Argonaut Shoe Co., 187 F. at 785-786,
quoting, In re Cunningham, Fed. Cas. No. 3,478, 6 F. Cas. 958 (D. Iowa 1879). To
permit property thus held to be transferred, encumbered, or otherwise alienated would
therefore defeat the very purpose for which it is held, and in many cases enable some
other court to dispose of property or money, and wholly divert it from the end or
purpose for which possession has been taken. Id. A conflict of jurisdiction and
decision would in many cases ensue. Id.
Debtor argues that the doctrine of in custodia legis should not be applied
because there is no jurisdictional conflict. Debtor’s Opposition to Lloyds Motion to
Dismiss Adversary Proceeding, 2:14-ap-01594-RK, ECF 15 at 19:1-20:13. Debtor
contends:
While the Debtor does not dispute the general doctrine that property in
the possession of a receiver appointed by a court is in custodia legis,
the Debtor disputes that this doctrine is applicable to this case. The
primary purpose of the doctrine of in custodia legis is to prevent
jurisdictional conflicts over the same property at the same time. As
held by the Ninth Circuit, “[t]he justification put for this doctrine of in
custodia legis is ‘the desirability of avoiding a clash between judicial
jurisdictions which would result from any attempt to use the process of
one to seize the assets in the control of another judicial authority.’”
U.S. v. Van Cauwenberghe, 934 F.2d 1048, 1062 (9th Cir. 1991).
Simply put, there is no jurisdictional conflict, and thus, the doctrine of in
custodia legis is inapplicable.
The Court has exclusive jurisdiction over property of the estate. 28
U.S.C. § 1334(e)(1). Moreover, it is black letter law that a bankruptcy
case supersedes a state court receivership proceeding and a state
court receiver would ordinarily be required to turn over the estate
assets to a debtor-in-possession or trustee. See, e.g., In re Corporate
and Leisure Event Productions, Inc., 351 B.R. 724, 728 (Bankr. D. Ariz.
2006)(citing Sturges v. Crowninshield, 17 U.S. (4 Wheat.) 122, 4 L.Ed.
529 (1819)(When Congress exercises its constitutional authority to
adopt bankruptcy laws, “it preempts and supersedes all state
bankruptcy and insolvency laws and other state law remedies that
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might interfere with the uniform federal bankruptcy system.”); see also
11 U.S.C. § 543.
Id.
The court disagrees with, and rejects, Debtor’s argument that the doctrine of in
custodia legis should not apply on grounds that there is no jurisdictional conflict. As
discussed herein, the issue before the court is whether the interests in the Properties
claimed by Debtor are property of its bankruptcy estate, and to resolve this issue, the
court must look to state law to determine whether and to what extent the Debtor had
any legal or equitable interests in property as of the commencement of the case. In re
Pettit, 217 F.3d at 1078, citing Butner v. United States, 440 U.S. at 54-55. If under
state law, Kilroy could not have transferred the Properties to Debtor while in the
possession of the court-appointed receiver, then there were no valid transfers of the
Properties to Debtor, which means that they are not property of the estate. There is no
need to consider in the abstract whether there are jurisdictional conflicts between the
state courts and the bankruptcy court regarding disposition of the Properties as argued
by Debtor. The black letter law cited by Debtor that a bankruptcy case supersedes a
state court receivership proceeding would only have applied to the situation of a debtor
like Kilroy filing a bankruptcy petition for himself while the property was held in the
possession of a receiver. But that situation is distinguishable from the one here, where
the property in the hands of a court-appointed receiver was transferred by a debtor to
another party. The first situation, where a debtor whose property is being held in the
possession of a court-appointed receiver files a federal bankruptcy petition, is not a
violation of state law whereas, the second situation, as here, where a debtor whose
property being held in the possession of a court-appointed receiver under the doctrine
of in custodia legis, attempts to transfer that property to another entity, is a violation of
state law, i.e., California Code of Civil Procedure § 568 as well as a court injunction
order.
///
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d. The Transfers of Property in the Possession of the Receiver from Kilroy
to Debtor Are Void
As discussed above, it is undisputed that Kilroy purported to transfer his interests
in the Properties to Debtor after the court-appointed receiver in the Los Angeles and
Riverside County receivership cases took possession of the Properties. Because the
receiver had taken possession of the Properties, under California law, the Properties
were under court supervision pursuant to the receivership orders pursuant to California
law of receiverships under the common law doctrine of in custodia legis and California
Code of Civil Procedure § 568. Thus, Kilroy did not have any legal authority to make
the purported transfers of his interests in the Properties to Debtor, the transfers were
therefore void ab initio, and Debtor never received any interest in the Properties.
Because Kilroy’s attempted to transfer property held in custodia legis to Debtor, the
Properties did not become property of Debtor and its bankruptcy estate as a matter of
state law governing property rights under the Butner principle.
Accordingly, because the Properties are not assets or property of Debtor’s
bankruptcy estate, Lloyds’s motion to dismiss the adversary proceeding under Fed. R.
Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted should be
granted. The facts as alleged in the adversary complaint are that Debtor purportedly
acquired its ownership interests in the Properties through transfers by Kilroy while the
Properties were being held by the court-appointed receiver in custodia legis. Those
transfers are legally ineffective under state law. The other cause of action pleaded in
the adversary complaint, the objection to the so-called informal proof of claim of Lloyds,
is premature as Lloyds has not filed a proof of claim in Debtor’s bankruptcy case (most
likely, given the court’s rulings, Lloyds would not do so because any claim would be
against the Properties which are determined not to be assets of Debtor’s bankruptcy
estate and there are no facts that indicate that Lloyds would have a claim against
Debtor since Kilroy was the obligor on the disputed loans). Moreover, Lloyds’s motion
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for relief from stay under 11 U.S.C. § 362(d)(1) should be granted to allow the
nonbankruptcy litigation in the actions before the Los Angeles and Riverside Superior
Courts with respect to the Properties to proceed since the automatic stay does not
apply to the Properties, which are not assets of Debtor’s bankruptcy estate. The state
courts may determine the rights of the parties to the Properties in the judicial
foreclosure actions. Debtor’s motions to use cash collateral (i.e., rental revenue from
the Properties) and to assume a lease on a unit of the North Flores Property should be
denied because the Properties are not assets of the bankruptcy estate. Lloyds’s motion
for protective order should be deemed moot because the proceedings to which the
discovery was being sought is resolved by the court’s rulings and there is no further
need for discovery and a protective order.
The court hereby directs that the Clerk of Court enter this memorandum decision
in both the main bankruptcy case and in the adversary proceeding brought by Debtor
against Lloyds.
Counsel for Lloyds is hereby ordered to submit proposed final orders consistent
with this memorandum decision within 14 days of entry of the decision.
IT IS SO ORDERED.
###
Date: November 17, 2014
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