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Insolvency Law Committee eBulletin: In re Levine
I'm pretty sure I do not agree with the ruling, but a very favorable result for debtors.
Law Office of Eric Alan Mitnick
21515 Hawthorne Boulevard, Suite 1080
Torrance, California 90503
Telephone: (310) 792-5864
Facsimile: (310) 347-4353
Email: MitnickLaw@aol.com,MitnickLaw@gmail.com
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To: mitnicklaw
Sent: Fri, Aug 3, 2018 10:48 am
Subject: Insolvency Law Committee eBulletin: In re Levine
Business Law Section
Insolvency Law Committee
August 3, 2018
Dear constituency list members of the Insolvency Law Committee:
The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:
SUMMARY:
A federal district court in California has held that a judgment creditor was precluded by the automatic stay from recording abstracts of judgment against a non-bankrupt's interest in real property as a tenant in common because a bankrupt tenant in common held contingent interests in the affected parcels of real property, pursuant to a pending settlement agreement. [In re Levine, 583 B.R. 231 (Bankr. C.D. Cal. 2018).]
FACTS: A man and a woman (not a married couple) purchased several parcels of real property together. (The parties apparently held the properties as tenants in common, although the court did not decide that issue.) After their romantic relationship ended, the woman filed a Chapter 11 bankruptcy petition, which was later converted to a Chapter 7 bankruptcy. The non-debtor male filed a claim in the female's bankruptcy case.
Her bankruptcy trustee and the non-debtor male entered into a settlement agreement, under which the debtor's estate would have a contingent interest in some of those co-owned properties. Depending on the parties' efforts to sell the properties, the non-debtor's interests in some of those properties could have been extinguished upon the full implementation of the settlement agreement. That settlement agreement was approved by the bankruptcy court.
In the meantime, a bank obtained two state court judgments against the non-debtor male. In an effort to enforce those judgments, the bank filed a motion for relief from the automatic stay, seeking to record abstracts of judgment against the non-debtor's separate interests in the properties that he co-owned with the female debtor (and which were involved in the settlement agreement). The bankruptcy court denied that motion, and the bank appealed.
REASONING: The District Court affirmed. The court first stated the issue:
The issue presented on appeal is whether an automatic bankruptcy stay protects a non-debtors separate interest in property he co-owns with a bankruptcy debtor where the non-debtors separate interest would be extinguished by the effectuation of a settlement agreement.
The bank argued that it sought to record the abstracts of judgment solely against the non-debtor male's separate interest in the properties; since he was not the bankrupt debtor, the automatic stay could not extend to his separate interest in the property.
The court explained, however, that since the debtor's estate included a contingent interest in the real property, the automatic stay extended to the entire property. The court noted that depending on the outcome of various events, the bankruptcy estate could eventually include whatever separate interest the non-debtor male currently held; therefore, the "Bank cannot take enforcement actions against the Real Properties without also affecting the bankruptcy estate's property rights."
The court also noted that the policy behind the automatic stay would be violated if the bank were to record abstracts of judgment against the properties in question:
Banks proposed enforcement actions would inhibit the orderly distribution of [the] bankruptcy estate . . . . By taking enforcement actions against [one particular parcel], Bank could inhibit the propertys sale. And, because the Settlement Agreement is contingent on [that property's] sale, Banks proposed enforcement actions threaten to dismantle an agreement that resolves multiple disputes.
AUTHOR'S COMMENT: I have doubts about this result. First, let us envision the state of title to those properties if the bank had been allowed to record its abstracts. The resulting judgment liens would have encumbered the non-debtor's interest in the property as a tenant in common. But they would have had no effect on the debtor's interest in those properties as a tenant in common. See, e.g., Dieden v. Schmidt, 104 Cal.App.4th 645, 650-651, 128 Cal.Rptr.2d 365, 369: "Cotenants (both joint tenants and tenants in common) may encumber their separate interest without the consent, and without affecting the interests, of other tenants."
So for that reason alone, the recording of the abstracts should not have been subject to the stay, since the judgment liens, by definition, could not have affected the bankrupt debtor's title to those properties. As a matter of state law, therefore, I disagree with the court's statement that the "Bank cannot take enforcement actions against the Real Properties without also affecting the bankruptcy estate's property rights."
But there is an additional reason for doubting the result in this case: if we view the settlement agreement as a prior claim on the non-debtor's interest in the property, it becomes apparent that the judgment liens would have been extinguished upon the implementation of the settlement agreement. This is also explained in Dieden, supra: "A creditor . . . may only levy on the interest of the debtor tenant." Therefore, to the extent that the non-debtor's interest in the property was subject to extinguishment, the bank's judgment liens would have been derivatively extinguished. If that is true (and I think it is), then the court's policy-based rationale (the fear of interference with the settlement agreement) is unfounded. The settlement agreement would have taken priority over the judgment liens, and the liens would not have affected the settlement.
For an analogous fact pattern, see Zeigler v. Bonnell, 52 Cal.App.2d 217, 126 P.2d 118 (1942). There, two parties held a parcel in joint tenancy. A creditor obtained a judgment lien against one of the joint tenants. That joint tenant died. The court held that the death of the joint tenant extinguished the judgment lien of the creditor, since the judgment lien was subject to the surviving joint tenant's prior contingent right of survivorship.
Here, too, the banks judgment liens encumbering the non-debtor male's tenancy in common would have been subject to the debtor female's prior contingent right to clear title under the settlement agreement. The implementation of the settlement agreement thus would have extinguished the junior judgment liens, just as the surviving joint tenant's right of survivorship extinguished the junior judgment lien in Ziegler. Therefore, the recording of the judgment liens should have had no effect on the implementation of the settlement, and there was no reason to extend the stay to prevent the recording of the judgment liens.
For a discussion of Dieden, see 2002 Comm. Fin. News. 50, Judgment Lien on Interest in Tenancy in Common Survives Conversion of Tenancy in Common to Joint Tenancy and Survives Death of Judgment Debtor/Joint Tenant.
These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.
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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I'm pretty sure I do not agree with the ruling, but a very favorable result for debtors. 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***The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of
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