In an April 2005 appeal to the U.S. Bankruptcy Appellate Panel, the Appellate Court retroactively annulled the debtor’s automatic stay, thus validating a foreclosure that had taken place while the stay was in effect. However, the Court left open the issue of whether damages could nonetheless be awarded to the debtor for the violation of the stay.1
Fremont Investment & Loan brought a successful demurrer and Wolski appealed. The Fourth Appellate District affirmed and issued an opinion published as “Wolski v. Fremont Inv. & Loan, 22 Cal.Rptr.3d 582, 2004 Daily Journal D.A.R. 15,056 (Cal.App. 4 Dist. Dec 02, 2004) (NO. G033169).”Debtor G. Gregory Williams, a self-described retired attorney 2, lived in a condo in Los Angeles with his girlfriend, in whose name he had titled the condo. He retained an unrecorded deed back to himself. When the homeowner’s association (HOA) commenced foreclosure on $11,000 in delinquent HOA dues, Mr. Williams filed the second of three close-in-time serial Chapter 13 bankruptcies. He filed a skeletal petition with no supporting schedules. Not only did this mean his filing was incomplete, but also his filing did not document his interest in the condo.
Two days after his filing the HOA, with actual notice of the bankruptcy filing, conducted its non-judicial foreclosure. The HOA took the position that Williams was not the record owner of the condo and therefore his bankruptcy did not prevent the foreclosure. The condo was purchased at the trustee’s sale by Mr. Eli Levi, who also was admittedly aware of the bankruptcy filing. A day following the trustee’s sale, Mr. Williams recorded the deed transferring the condo from his girlfriend to himself.
A short while later, Mr. Levi recorded the trustee’s deed and began eviction proceedings to recover possession from debtor Williams. After some additional legal maneuverings of no consequence here, Mr. Williams’s second bankruptcy was dismissed as a result of his incomplete filings, which of course terminated his automatic stay.
Less than two months later Mr. Williams filed his third Chapter 13, again in an attempt to defeat eviction. Mr. Levi filed a motion for relief from the automatic stay in order to proceed with the eviction. He argued that the automatic stay did not apply in either the second or third bankruptcy filings because in neither instance was Mr. Williams the record owner of the condo, and Mr. Williams’s possessory interest is not affected by a foreclosure. Alternatively, Mr. Levi requested a retroactive annulment of the automatic stay and validation of his purchase at the foreclosure that occurred during the second bankruptcy. Mr. Williams, in turn, argued that both the HOA and Mr. Levi had actual notice of his bankruptcy filing and of his equitable and possessory interests in the condo. Williams sought monetary stay-violation damages.
Under certain circumstances a bankruptcy court can retroactively grant relief from the automatic stay, and can grant such relief in a prior bankruptcy proceeding in the same court. The factors to be considered are primarily whether the creditor was aware of the bankruptcy, whether the debtor engaged in unreasonable or inequitable conduct, and the prejudice to the creditor. Other factors include the number of filings by the debtor, the extent of prejudice to a bona fide purchaser, the debtor’s good faith, the debtor’s compliance with the Code, how quickly the creditor moved for annulment, and how quickly the debtor moved to set aside the sale. These factors are not to be applied in a mechanistic way, and are not a “scorecard.” Any one factor may so outweigh the others as to be dispositive.
In this case the bankruptcy court annulled the automatic stay in the second bankruptcy retroactively. Williams had not commenced an appropriate adversary proceeding to declare the sale void.
Mr. Levi’s relief was not, however, triumphant. The appellate panel noted that at least until Mr. Williams’s third bankruptcy, “. . . Mr. Levi seemed unconcerned about the scope of the automatic stay, to the point of forgoing any attempts to obtain a ruling from the bankruptcy court blessing his efforts to evict Williams.” Accordingly, in a two-to-one split decision the appellate panel held that an action taken in violation of an automatic stay can be retroactively validated, but that the law is not settled as to whether that action can nonetheless be the basis for an award of money damages to the debtor for any harm the debtor suffered as a result of the violative action. The appellate court remanded the matter back to the trial court for further proceedings on this point.
The lessons to be learned are, do not violate the automatic stay. If in doubt, seek relief from the stay before taking any action against a debtor. Even unintentional violations (e.g., computer errors) can subject you to penalties. And if you do violate the stay inadvertently, seek retroactive relief promptly.
1 In Re G, Gregory Williams, Debtor. G. Gregory Williams, Appellant, v. Eli Levi, et al. Appellees (U.S. B.A.P., 9th Cir., April 15, 2005) B.A.P. No. CC-04-1033-BKPa; 2005 DJDAR 4271.
2 As it is sometimes jokingly said about attorneys, Mr. Williams may be among the 98% of attorneys who give the rest of them a bad name. Public records reveal that he was admitted to the bar in 1983, and resigned with discipline charges pending against him in 2001.
This article written and © Peter N. Brewer, Esq.
Brewer Offord & Pedersen LLP (www.BrewerFirm.com) serves the legal needs of homeowners, real estate and mortgage brokers, agents, brokerages, title companies, developers, investors, other real estate professionals and their clients. Mr. Brewer and his firm also represent clients in debt collection, breach of contract matters, and other litigation and transactional work. The firm’s client range from homeowners, brokers and lenders based in Santa Clara County, San Mateo County, San Francisco County, as well as throughout other counties in California.