Insolvency Law Committee E-Bulletin: In re Li =E2=80=93 Ninth Circ=

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Subject: Insolvency Law Committee E-Bulletin: In re Li Ninth Circuit BAP illustrates the different burdens and procedures for relief from the automatic stay and proceedings to avoid a judicial lien
Business Law Section
Insolvency Law Committee
June 25, 2018
Dear constituency list members of the Insolvency Law Committee, the following is a recent case update.
Summary
The Bankruptcy Appellate Panel for the United States Court of Appeals for the Ninth Circuit (BAP) held that in the context of granting relief from the automatic stay, a bankruptcy court need only determine that a creditors claims be colorable. In re Jin Qing Li, No. 17-1062, 2018 WL 1354548 (9th Cir. BAP Mar. 12, 2018). The BAPs opinion illustrated the different burdens and procedures for relief from the automatic stay and proceedings to avoid a judicial lien.
Facts
Creditor Mike Rosen filed a motion seeking relief from the automatic stay so that he could enforce a judgment lien against the chapter 7 debtorer 11 U.S.C. 362(d)(2), which authorizes a bankruptcy court to terminate the automatic stay with respect to a stay of an act against property if (A) the debtor does not have any equity in such property; and (B) such property is not necessary to an effective reorganization.
Rosen was assigned his interest in the judgment by the Spondulix Company, which had recorded a prepetition abstract of judgment in the amount of $872,304.95. The form for the abstract of judgment contained a space to enter the last four digits of the judgment debtors Social Security number, but Spondulix checked the box indicating that the debtors Social Security number was unknown.
The debtor opposed the relief from stay motion, arguing that the abstract of judgment was plainly unenforceable because, despite Spondulixs actual knowledge of the debtors Social Security number, that information was not included on the abstract although it was required by section 674 of the California Code of Civil Procedure (unless the creditor does not know the number). At the hearing on the relief from stay motion, Rosen acknowledged that Spondulix did know Lis Social Security number since it was included in Spondulixs original complaint against Li.
The bankruptcy court rebuffed all of the debtors arguments, noting that it was not necessary to determine whether the abstract was valid in order to rule upon the relief from stay motion. In granting relief from stay under section 362(d)(2), the court explained that the debtor could dispute the validity of the lien in state court proceedings after stay relief was granted. After the debtors motion for reconsideration was denied, the debtor timely appealed to the BAP. The BAP affirmed the bankruptcy courts orders granting relief from stay and denying the debtor
Reasoning
The BAP explained that motions for relief from stay are summary proceedings, solely for determination as to whether the automatic stay should be modified by the court, and that issues regarding the scope and enforceability of a creditors interest in estate property must typically be resolved through an adversary proceeding. Thus, relief from stay may be granted when the movant establishes a colorable claim. Biggs v. Stovin (In re Luz Intl Ltd.), 219 B.R. 837, 842 (9th Cir. BAP 1998). A colorable claim in this context would be a plausible legal claim or one that is legitimate and that may reasonably be asserted, given the facts presented and the current law.P July 8, 2011); In re Budd, No. 11-1015, 2011 WL 4485190 at *3 n.4 (9th Cir. BAP July 12, 2011).
Turning to the debtors argument regarding the unenforceability of the abstract of judgment, the BAP noted that California law requires creditors to include the last four digits of a judgment debtors Social Security number in an abstract of judgment, unless the creditor does not know it. Cal. C.C.P. 674. The BAP acknowledged that California courts have strictly enforced this requirement such that failure to comply is fatal to enforcement of the lien. Keele v. Reich, 169 Cal. App. 3d 1129, 1132 (1985); see Alcove Inv., Inc. v. Conceicao (In re Conceicao), 331 B.R. 885, 892-93 (9th Cir. BAP 2005) (invalidation of abstract obtained by bankruptcy debtor).
Rosen did not dispute that the abstract of judgment recorded by Spondulix lacked the last four digits of the Debtors Social Security number. He argued, however, that a recent amendment to section 647 of the California Code of Civil Procedure had the effect of precluding judgment debtors from attacking abstracts of judgment for such defects. The panel noted that although Conceicao was decided after the statute was amended, that case did not consider specifically whether the amendment precluded a judgment debtor from attacking an abstract of judgments validity. Further, neither of the parties could cite to a case directly addressing this issue, nor had the California Supreme Court opined on it since the statute had been amended. Finally, the panel referred to Judge Aharts treatise on enforcement of judgments, which concludes that [t]he judgment debtor is precluded from voiding a defective abstract under CCP 674(b).(Rutter Grp. May 2017).
Weighing the credibility of Rosens claim, the BAP concluded that the absence of the last four digits of Lis Social Security number would be a fatal defect under section 674, as interpreted by both the California Court of Appeals in Keele and the BAP in Conceicao. However, the panel noted that neither case negated Rosens arguments that the debtor (as the judgment debtor), was barred from attacking the validity of the abstract of judgment. In light of this, the panel concluded that Rosen had at least a colorable claim to enforce the lien, and that the bankruptcy court did not abuse its discretion in terminating the automatic stay to permit enforcement of the lien. The BAP noted that it was not expressing an opinion on the merits of Rosens claim, only that it was plausible enough to justify relief from the automatic stay.
Author's Commentary
This opinion underscores the summary nature of motions for relief from the automatic stay. While the line between a colorable claim and a frivolous one may seem subjective, practitioners can benefit from analogous bodies of case law, such as cases regarding preliminary injunctions or motions to dismiss for failure to state a claim. Debtors should be prepared to accept that arguing a claim is not colorable is a much tougher test, and allocate their resources appropriately.
These materials were prepared by ILC member Thomas B. Rupp of McNutt Law Group LLP, in San Francisco, California (trupp@ml-sf.com), with editorial contributions from ILC members Kelly Pope, of Downey Brand LLP, in Sacramento, California (kpope@downeybrand.com), and Michael W. Davis, of Brutzkus Gubner, in Woodland Hills, California (mdavis@bg.law).
Thank you for your continued support of the Committee.
Best regards,
Insolvency Law Committee
Co-Chair
Radmila A. Fulton
Law Offices of Radmila A. Fulton
radmila@rfultonlaw.com
Co-Chair
John N. Tedford, IV
Danning, Gill, Diamond & Kollitz, LLP
jtedford@dgdk.com
Co-Vice Chair
Marcus O. Colabianchi
Duane Morris LLP
mcolabianchi@duanemorris.com
Co-Vice Chair
Rebecca Winthrop
Norton Rose Fulbright US LLP
rebecca.winthrop@nortonrosefulbright.com
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FYI ...Law Office of Eric Alan Mitnick
21515 Hawthorne Boulevard, Suite 1080
Torrance, California 90503
Telephone: (310) 792-5864Facsimile: (310) 347-4353
Email: MitnickLaw@aol.com, MitnickLaw@gmail.com
Although this email and any attachments are believed to be free of any virus or other defect that might affect any computer system into which it is received and opened, it is the responsibility of the recipient to ensure that it is virus free and no responsibility is accepted by the sender for any loss or damage arising in any way from its use. The information contained in this email message and any attached files may be privileged, confidential and protected from disclosure. If you are not the intended recipient, any dissemination, distribution or copying is strictly prohibited. If you think that you have received this email message in error, please notify the sender by reply email, and delete the email message you received and all of the attached files.
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***NOTICE OF EX PARTE HEARINGS WILL NOT BE ACCEPTED BY EMAIL***he Bankruptcy Appellate Panel for the United States Court of Appeals for the Ninth Circuit (BAP) held that in the context of granting reli















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