Mere Physical Possession Not Legally Cognizable Property Interest

The Ninth Circuit found that mere possession of property whose title had been fully adjudicated against the debtor in a state unlawful detainer action, was not a property interest protected by the automatic stay. Eden Place v. Perl, No. 14-60049 (9th Cir. Jan. 8, 2016). Eden Place purchased the debtor’s residence at a trustee’s sale, recorded the deed, and served the debtor with a 3-day notice to quit. The debtor responded with a suit in state court alleging, among other things, wrongful foreclosure. Pursuant to its unlawful detainer procedures, the state court issued a Writ of Possession in favor of Eden Place and Eden Place instituted “lockout” proceedings. In the meantime, the debtor filed a pro se skeletal chapter 13 petition. Eden Place filed a motion for relief from stay but before the motion was decided, the Sheriff went forward with lock-out proceedings against the debtor.

The bankruptcy court found that Mr. Perl’s eviction violated the stay, reserving judgment on damages to await state court resolution of the debtor’s state court claims. On appeal, the BAP affirmed finding that Mr. Perl’s continued occupancy, however illegal under state law, constituted an equitable interest protected by the automatic stay. Eden Place, LLC v. Perl (In re Perl), 513 B.R. 566 (B.A.P. 9th Cir. 2014).

The Ninth Circuit reversed.

The court began with an examination of its jurisdiction to address the appeal, agreeing with the BAP’s finding that there was a final order of violation of the automatic stay that was subject to a claim for damages. The court noted that when a bankruptcy case is affirmed or reversed, rather than remanded, jurisdiction over an appeal is scrutinized under the two-part finality test established in SS Farms, LLC v. Sharp (In re SK Foods, L.P.), 676 F.3d 798 (9th Cir. 2012), in which a court will look to whether the bankruptcy court decision “1) resolves and seriously affects substantive rights and 2) finally determines the discrete issue to which it is addressed.” The court found that the “bankruptcy court’s determination that Eden Place violated the automatic stay is a substantive ruling with real effects, including money damages that could be sought by Perl indefinitely.” As a practical matter, because the bankruptcy case was dismissed due to Mr. Perl’s failure to make the necessary filings or attend the creditor’s meeting, the decision on the automatic stay resolved all remaining issues in the case.

Turning to the merits, the court looked to whether Mr. Perl had “any protectable legal, equitable, or possessory interest,” in the property after Eden Place “properly recorded the trustee’s deed and after the state court fully adjudicated in the unlawful detainer proceedings Perl’s remaining possessory interest in the premises.” The court found that by operation of state property law, Mr. Perl had no such interest.

Under California law, unlawful detainer actions are generally used to adjudicate the immediate right of possession between a landlord and tenant who is in violation of the lease. Unlawful detainer actions, therefore, typically do not establish title with respect to nonparties to the action. In finding that Mr. Perl retained a legally cognizable interest by reason of his continued possession, the BAP, and cases it relied on, applied this general principle to find that the unlawful detainer adjudication did not divest Mr. Perl of all right to the property.

Here, however, the unlawful detainer action was not between a landlord and tenant, but fell under the narrow exception to California’s unlawful detainer laws, section 1161a, when the court considers the relative rights of a person in possession and a person who has obtained title in a nonjudicial foreclosure proceeding. In that instance, determination of ownership of title is an integral part of the question of right of possession. In this case, therefore, the unlawful detainer adjudication in fact determined the issue of ownership of title in favor of Eden Place. In conclusion, the court held that the “unlawful detainer judgment and writ of possession entered pursuant to California Code Civil Procedure § 415.46 bestowed legal title and all rights of possession upon Eden Place. . . . Thus, at the time of the filing of the bankruptcy petition, Perl had been completely divested of all legal and equitable possessory rights that would otherwise be protected by the automatic stay.” Because Mr. Perl had no legally cognizable interest in the property, it did not become part of the bankruptcy estate protected by the automatic stay.

Judge Watford dissented on the grounds that he would have found that the court lacked jurisdiction to hear the appeal. The status of the case when Eden Place appealed was that the bankruptcy court had found a violation of the automatic stay but had not awarded damages or sanctions, having reserved that question for a later, unscheduled, hearing. The dissent argued that pursuant to Liberty Mutual Insurance Co. v. Wetzel, 424 U.S. 737, 744 (1976), “an order is not final if it determines liability but does not resolve the plaintiff’s request for damages or other relief.” (Judge Watford made a distinction between a leaving open the issue of damages and sanctions, which renders the decision not final, and leaving open the amount of attorney fees to be awarded, which may or may not render the decision final.)

Perl 9th Cir opinion