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Ninth Circuit: Holdover Foreclosed Borrower Filing for Bankruptcy after Eviction Judgment and Writ of Possession Has No Equitable Possessory Interest

Posted By USFN, Thursday, March 31, 2016
by Kathy Shakibi
McCarthy & Holthus LLP - USFN Member (WA)

 

An unlawful detainer action is designed as a summary process limited in scope to a determination of the right of possession of property; however, unlawful detainer actions do not always proceed within their anticipated scope and timeline. In the case of post-foreclosure evictions, challenges to the foreclosure may be raised in the incorrect court, notices of removal may be filed with courts lacking jurisdiction, and bankruptcy protections may be improperly sought.

 

Recently, the U.S. Court of Appeals for the Ninth Circuit addressed a scenario where unlawful detainer proceedings had resulted in a judgment and writ of possession in the state court, and the holdover foreclosed borrower filed a bankruptcy petition prior to the lockout. Eden Place, LLC v. Perl (In re Perl), 2016 U.S. App. Lexis 246 (9th Cir. Jan. 8, 2016). The Court of Appeals held that the lockout was not a violation of the bankruptcy stay because the debtor’s continued physical possession did not amount to an equitable possessory interest. (The Ninth Circuit is comprised of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington.)

 

In Perl, the debtor owned a duplex that was foreclosed upon and purchased by a third party. The third party timely recorded a trustee’s deed upon sale, which perfected and transferred title. The purchaser then commenced an unlawful detainer action. After the purchaser had obtained a judgment and writ of possession, but before the lockout occurred, Perl filed a skeletal chapter 13 petition with no schedules, financial affairs statement, or proposed plan. The sheriff subsequently completed the lockout pursuant to state law, and Perl filed an emergency motion to enforce the automatic stay — asserting that the lockout interfered with his equitable interest based on his continued physical possession of the property.

 

The bankruptcy court determined that Perl had a bare possessory interest, which was a protected interest subject to the automatic stay, and ruled that the purchaser had violated the bankruptcy stay by proceeding with the lockout. No further determination regarding sanctions or damages was made because Perl failed to appear at the creditors’ meeting, and the bankruptcy case was dismissed. The purchaser appealed to the Bankruptcy Appellate Panel (BAP), which upheld the lower bankruptcy court’s ruling. The purchaser then appealed to the Ninth Circuit.

 

The Ninth Circuit started its analysis with the premise that filing a bankruptcy petition accomplishes the: (1) creation of a bankruptcy estate, which includes all legal or equitable interests of the debtor in property as of the date of filing, 11 U.S.C. § 541, and (2) imposition of a stay applicable to a number of acts, including any act to obtain possession of property of the estate. 11 U.S.C. § 362(a)(3). The Court of Appeals then examined whether the debtor had any legal or equitable interest in the property. Under the state law, title to the property had transferred to the purchaser and was perfected. The unlawful detainer court had further adjudicated the issue of possession and, by entering a judgment and writ of possession, had extinguished Perl’s possessory interest in the property. Where the BAP had held that the continued physical possession had conferred on the debtor a protectable equitable possessory interest in the property, the Ninth Circuit disagreed.

 

The Court of Appeals reasoned that concluding that an occupying resident retains an equitable possessory interest is inconsistent with the state eviction laws (specifically California Code of Civil Procedure § 1161a), which contemplate a final and binding adjudication of rights of immediate possession. The unlawful detainer judgment and writ of possession divested Perl of all legal and equitable possessory rights. Accordingly, the sheriff’s lockout did not violate the automatic stay.

 

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