Gary Steven Drocco

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 09-71696 TG
Chapter 13
GARY STEVEN DROCCO,
Debtor.
_______________________________/
MEMORANDUM OF DECISION
The motion of Edward and Trudy Ortega (the “Ortegas”) for relief
from the automatic stay in the above-captioned case came before the
Court 	for 	a 	final 	evidentiary 	hearing 	on 	February 	19, 	2010.
Appearances 	were 	stated 	on 	the 	record. 	At 	the 	conclusion 	of 	the
hearing, the Court took the motion under submission. 	For the reasons
stated below, the Court concludes that the motion should be granted.
SUMMARY OF FACTS
In 	May 	1995, 	the 	debtor 	(the 	“Debtor”) 	entered 	into 	a 	written
installment 	land 	sale 	contract 	(the 	“Contract”) 	with 	the 	Ortegas
concerning 	certain 	real 	property 	located 	in 	Lafayette, 	California
(the 	“Property”). 	The 	Contract 	provided 	for 	the 	lease 	of 	the
Property to the Debtor with an installment purchase option. 	In July
1996, 	the 	Debtor 	exercised 	the 	purchase 	option 	and 	began 	making
Signed: February 25, 2010
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
February 25, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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monthly payments on the purchase price. 	In the Contract, the Ortegas
agreed not to encumber the Property as long as the Debtor was current
in his monthly payments. 	The Contract prohibited its recordation.
In 2002, while the Debtor was current, the Ortegas breached the
Contract 	by 	placing 	two 	deeds 	of 	trust 	on 	the 	Property 	securing
loans. 	They did not obtain the Debtor’s consent to do so or inform
him 	of 	the 	loan 	transactions. 	In 	December 	2002, 	after 	learning 	of
the 	encumbrances, 	the 	Debtor 	stopped 	making 	his 	monthly 	payments.
He filed an action against the Ortegas in Contra Costa Superior Court
(the 	“Original 	Action”), 	seeking 	tort 	and 	contract 	damages 	and
requesting declaratory and injunctive relief.
A 	jury 	trial 	was 	conducted 	in 	the 	Original 	Action 	on 	March 	3,
2004. 	The jury found that the Ortegas had breached the Contract but
awarded 	the 	Debtor 	only 	$1 	in 	damages. 	In 	the 	judgment 	(the
“Judgment”), the Debtor was given the right to purchase the Property
by paying the purchase price in full. 	The Debtor was given one week
from entry of the Judgment to open an escrow and a relatively short
period 	of 	time 	within 	which 	to 	close 	it. 	The 	Ortegas 	were 	ordered
to 	cooperate 	with 	the 	sale 	transaction. 	The 	Debtor 	was 	given 	the
right 	to 	petition 	the 	state 	court 	for 	assistance 	in 	the 	event 	the
Ortegas failed to do so.
The 	Judgment 	provided 	that, 	in 	the 	event 	the 	Debtor 	failed 	to
complete 	the 	purchase 	within 	the 	time 	provided, 	he 	would 	be 	deemed
to have elected to continue purchasing the Property by making monthly
payments. 	However, the Contract was to be recorded, and the Ortegas
were ordered to cooperate in this process.
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The 	Debtor 	was 	unable 	to 	obtain 	the 	loan 	required 	to 	purchase
the Property within the time provided by the Judgment. 	He petitioned
the court for more time, but the petition was denied. 	Accordingly,
pursuant to the Judgment, he was deemed to have elected to continue
making 	installment 	payments. 	The 	Debtor 	was 	unable 	to 	record 	the
Contract 	because 	the 	Ortegas’ 	signatures 	were 	not 	notarized. 	The
Ortegas failed to cooperate in having the Contract recorded by having
their 	signatures 	notarized. 	It 	does 	not 	appear 	that 	the 	Debtor
petitioned 	the 	state 	court 	for 	assistance 	with 	this 	problem.
However, given the Ortegas’ lack of cooperation, the Debtor stopped
making the monthly payments under the Contract.
In 	March 	2008, 	the 	Debtor 	filed 	a 	second 	action 	against 	the
Ortegas 	(the 	“Title 	Action”) 	in 	state 	court. 	The 	complaint 	in 	the
Title 	Action 	sought 	specific 	performance. 	It 	also 	sought 	a
declaration that the secured creditor’s interest in the Property was
junior to the Debtor’s interest. 	The Ortegas filed a demurrer to the
complaint on the ground that the claims were barred by res judicata
as 	a 	result 	of 	the 	Judgment. 	The 	demurrer 	was 	sustained 	without
leave to amend. 	The Debtor appealed this ruling.
In 	December 	2008, 	while 	the 	appeal 	was 	pending, 	the 	Ortegas
filed an action against the Debtor (the “Ejectment Action”), seeking
to evict him from the Property. 	The Debtor filed a demurrer to the
Ejectment 	Action. 	When 	the 	demurrer 	was 	overruled, 	he 	filed 	an
answer 	and 	a 	cross-complaint, 	asserting 	his 	equitable 	ownership
rights 	to 	the 	Property. 	A 	trial 	was 	scheduled 	for 	July 	2009. 	The
Debtor 	was 	able 	to 	obtain 	a 	temporary 	stay 	of 	the 	trial 	from 	the
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1The Debtor is unemployed. 	His putative spouse was formerly
employed but was laid off before the bankruptcy filing. 	She is
currently receiving only $1,900 a month in unemployment
compensation. 	This is the only source of payments for the Plan.
The Debtor has represented that some years ago he assigned 75
percent of his interest in the Property to his putative spouse.
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appellate 	court 	where 	the 	Title 	Action 	was 	pending. 	However, 	the
stay was soon lifted, and a new trial date was set for December 2009.
Before 	this 	trial 	could 	take 	place, 	the 	appellate 	court 	made 	its
ruling in the Title Action. 	It affirmed the trial court’s order to
the 	extent 	that 	the 	order 	sustained 	the 	Ortegas’ 	demurrer. 	It
reversed 	the 	order 	to 	the 	extent 	the 	order 	denied 	the 	Debtor 	leave
to amend the complaint.
The 	Debtor 	sought 	to 	have 	the 	Title 	Action 	and 	the 	Ejectment
Action 	consolidated, 	but 	this 	effort 	was 	unsuccessful. 	He 	also
unsuccessfully challenged the state court judge to whom the Ejectment
Action 	had 	been 	assigned. 	Trial 	in 	the 	Ejectment 	Action 	was
scheduled 	for 	mid-December 	2009. 	The 	Debtor 	filed 	a 	chapter 	13
petition 	on 	December 	7, 	2009, 	approximately 	one 	week 	before 	the
trial. 	The Debtor testified at the final hearing on the motion for
relief 	from 	stay 	that 	he 	filed 	for 	bankruptcy 	because 	he 	could 	not
afford 	to 	pay 	his 	attorney 	to 	handle 	the 	trial 	in 	the 	Ejectment
Action. 	He 	expressed 	the 	belief 	that, 	in 	bankruptcy, 	his 	attorney
would 	be 	paid 	on 	a 	monthly 	basis 	from 	the 	payments 	he 	made 	to 	the
chapter 13 trustee.
The 	Debtor 	filed 	a 	chapter 	13 	plan 	(the 	“Plan”) 	with 	his
bankruptcy petition. 	The Plan provides that the Debtor will pay the
trustee $150 per month for 35 months. 1 	In the 36th month , the last
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The couple has a small child, and the Debtor is the caretaker of
the child when his putative spouse is employed.
2At the final hearing, the Ortegas’ counsel advised the Court
that he intended to seek a resetting of the trial on a priority
basis. 	He estimated that, on this basis, the trial would take
place in a couple of months. 	Otherwise, the trial would be
conducted in approximately six months.
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month 	of 	the 	Plan, 	the 	Debtor 	will 	make 	a 	$180,000 	balloon 	payment
to the chapter 13 trustee or as much as is necessary to pay off the
Plan. 	The Plan provides that the balloon payment will be funded with
the litigation proceeds of the Title Action and a legal malpractice
action 	filed 	against 	the 	Debtor’s 	attorney 	in 	the 	Original 	Action.
The 	Debtor’s 	debt 	to 	the 	Ortegas 	was 	to 	be 	paid 	from 	a 	sale 	or
refinance of the Property after resolution of the litigation against
them. 	Presumably, 	this 	would 	be 	accomplished 	during 	the 	36 	months
of the Plan.
On February 16, 2010, the Debtor filed an adversary proceeding
against 	the 	Ortegas 	and 	the 	secured 	creditor 	on 	the 	Property 	in
bankruptcy 	court. 	Like 	the 	pending 	actions 	in 	state 	court, 	the
adversary proceeding seeks a declaration of the nature, extent, and
priority of the various interests in the Property, restitution, and
specific performance. 	The complaint had not yet been served at the
time of the final hearing.
DISCUSSION
The Ortegas seek relief from the automatic stay to proceed with
the trial in the Ejectment Action as soon as it can be rescheduled. 2
They 	base 	their 	motion 	for 	relief 	on 	11 	U.S.C. 	§ 	362(d)(1), 	which
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3The Ortegas also ostensibly based their motion for relief on
11 U.S.C. § 362(d)(2). 	However, under this prong, they were
required to prove that the Debtor had no equity in the Property.
The Ortegas made no attempt to establish this prong at the final
hearing on their motion. 	Therefore, relief from stay will not be
granted on the basis of 11 U.S.C. § 362(d)(2).
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provides 	that 	relief 	from 	stay 	may 	be 	granted 	for 	“cause.” 3 	They
contend 	that 	“cause” 	for 	relief 	exists 	here 	because 	the 	bankruptcy
petition was filed in bad faith: i.e., to stop the state court trial
in 	the 	Ejectment 	Action. 	In 	support 	of 	this 	contention, 	they 	cite
In 	re 	Dixie 	Broadcasting, 	Inc., 	871 	F.2d 	1033 	(11th 	Cir. 	1989) 	and
In 	re 	Chinichian, 	784 	F.2d 	1440 	(9th 	Cir. 	1986). 	Both 	cases, 	like
this 	one, 	involvef 	bankruptcies 	filed 	after 	substantial 	litigation
had 	been 	conducted 	in 	state 	court 	to 	resolve 	disputes 	about 	sales
contracts.
In Dixie Broadcasting, the debtor, the owner of a radio station,
attempted to renege on an agreement to sell the station to the owner
of another radio station after receiving a better offer from a third
party. 	The debtor filed a chapter 11 petition during a recess in the
hearing 	on 	a 	motion 	for 	reconsideration, 	after 	the 	state 	court
indicated 	that 	it 	was 	about 	to 	issue 	a 	decision 	unfavorable 	to 	the
debtor. 	The bankruptcy court found that the petition had been filed
in bad faith and granted the would-be purchaser’s motion for relief.
The 	district 	court 	affirmed 	as 	did 	the 	Eleventh 	Circuit 	Court 	of
Appeals. 	871 F.2d at 1025-26.
In 	Chinichian, 	the 	debtors 	entered 	into 	a 	contract 	to 	sell 	a
house, 	which 	they 	later 	attempted 	to 	rescind. 	The 	buyer 	sued 	them
for 	specific 	performance 	in 	state 	court. 	Shortly 	before 	the
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scheduled trial, the debtors filed a bankruptcy petition. 	After some
months, the case was dismissed, and the state court trial reset. 	The
debtors 	filed 	a 	second 	bankruptcy 	petition 	on 	the 	eve 	of 	trial. 	In
their 	plan, 	they 	attempted 	to 	reject 	the 	sale 	contract. 	The
bankruptcy 	court 	ultimately 	declined 	to 	confirm 	the 	plan 	with 	this
provision 	in 	it, 	concluding 	that 	the 	plan 	had 	been 	filed 	in 	bad
faith. 	784 F.2d at 1441-42.
The 	bankruptcy 	court’s 	decision 	was 	affirmed 	by 	the 	district
court and the Ninth Circuit Court of Appeals. 	In its decision, the
Ninth 	Circuit 	noted 	that 	the 	district 	court 	found 	to 	be 	further
evidence 	of 	the 	debtors’ 	bad 	faith 	“the 	strategic 	timing 	of 	the
...[debtors’] 	bankruptcy 	petitions, 	which 	effectively 	frustrated
enforcement of the contract in state court....” 	784 F.2d at 1445.
This 	decision 	was 	affirmed 	by 	the 	district 	court 	and 	later 	by 	the
Ninth Circuit Court of Appeals.
Unlike 	the 	debtors 	in 	the 	two 	cases 	cited 	by 	the 	Ortegas, 	the
Debtor does not appear to have been a bad actor in his pre-petition
dealings 	with 	the 	Ortegas. 	To 	the 	contrary, 	the 	Ortegas 	appear 	to
have acted in bad faith, first by breaching the Contract by placing
secured debt on the Property and second by refusing to cooperate in
the 	recordation 	of 	the 	Contract 	after 	the 	Judgment 	ordered 	them 	to
do 	so. 	Nevertheless, 	the 	“strategic 	timing” 	of 	the 	Debtor’s
bankruptcy petition frustrated the resolution of his dispute with the
Ortegas 	in 	state 	court. 	Eve-of-trial 	bankruptcy 	filings 	are
universally disfavored.
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The 	Ortegas 	also 	contend 	that 	the 	Plan 	was 	filed 	in 	bad 	faith
and is not feasible. 	The Court agrees. 	The Debtor’s only income at
present 	is 	his 	putative 	spouse’s 	unemployment 	compensation. 	The
payments 	of 	$150 	per 	month 	to 	the 	chapter 	13 	trustee 	for 	35 	months
would serve only to pay the chapter 13 trustee’s fees and a minimal
amount of attorney’s fees to the Debtor’s counsel. 	The Plan does not
propose to make any payment to the unsecured creditors until the 36th
month 	from 	an 	uncertain 	source. 	It 	proposes 	no 	payments 	to 	the
Ortegas 	for 	the 	purchase 	of 	the 	Property 	until 	the 	Debtor’s
litigation with them is resolved. 	The Court is unlikely to confirm
such a plan.
The 	Debtor 	contends 	that, 	now 	that 	he 	has 	filed, 	his 	interest
in the Property is property of the estate. 	Accordingly, his disputes
with 	the 	Ortegas 	should 	be 	tried 	here. 	The 	Court 	disagrees. 	The
Debtor’s disputes with the Ortegas are governed by state law and can
be 	promptly 	litigated 	in 	state 	court. 	Congress 	has 	expressed 	a
strong preference that such claims be tried in state court. 	See 28
U.S.C. § 1334(c)(1),(2).
The 	Debtor 	also 	contends 	that 	he 	filed 	his 	bankruptcy 	case 	in
good faith. 	He notes that, in determining whether a bankruptcy case
has 	been 	filed 	in 	bad 	faith, 	the 	Court 	is 	required 	to 	consider 	the
totality of the circumstances. 	See Matter of Little Creek Dev. Co.,
779 F.2d 1068 (5th Cir. 1986); In re Thirtieth Place, Inc., 30 B.R.
503, 	505 	(Bankr. 	9th 	Cir. 	1983). 	He 	argues 	that 	the 	actions 	that
the Ortegas characterize as bad faith were simply his “increasingly
desperate attempts to preserve possession of the Property...” and to
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have the Title Action tried before the Ejectment Action. 	Bad faith
may 	be 	subjective 	or 	objective. 	The 	Court 	is 	persuaded 	that 	the
Debtor 	did 	not 	file 	for 	bankruptcy 	with 	subjective 	bad 	faith. 	His
desire 	to 	preserve 	possession 	of 	the 	Property 	is 	understandable.
However, the “strategic timing” of the filing renders it in bad faith
on 	an 	objective 	basis. 	Moreover, 	if 	the 	Debtor’s 	attorney 	was
willing to accept payment for handling litigation of these disputes
in bankruptcy court at the rate of less than $150 per month, he would
presumably 	be 	willing 	to 	do 	so 	if 	the 	litigation 	occurs 	in 	state
court.
Counsel 	for 	the 	Ortegas 	is 	directed 	to 	submit 	a 	proposed 	form
of 	order 	granting 	relief 	from 	the 	automatic 	stay 	to 	permit 	the
Ejectment Action to proceed to final judgment only.
END OF DOCUMENT
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COURT SERVICE LIST
Darya Sara Druch
Law Offices of Darya Sara Druch
1 Kaiser Plaza #480
Oakland, CA 94612
Samuel E. Goldstein
Samuel E. Goldstein and Assoc.
1777 Botelho Dr. #345
Walnut Creek, CA 94596
Joshua D. Brysk
Law Offices of James G. Schwartz
7901 Stoneridge Drive, Ste. 401
Pleasanton, CA 94588
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