Opinion
A145889
05-31-2017
PATRICK PARTNERS, LLC et al., Plaintiffs and Appellants, v. 744 UNION INVESTORS, LLC et al., Defendants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (San Francisco County Super. Ct. No. CGC-14-542780)
This is an appeal from judgment in an action for quiet title over a parcel of real property in San Francisco. Below, the trial court sustained a demurrer to the first amended complaint filed by appellants Patrick Partners, LLC, and Patrick Connolly (collectively, Patrick Partners) against respondents 744 Union Investors, LLC (Investors), and Philips Developments, LLC (collectively, respondents) after rejecting Patrick Partners' contention that respondents were barred from transferring title to this property by an automatic stay obtained in Patrick Partners' federal bankruptcy proceedings. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
This lawsuit involves a parcel of real property located at 744 Union Street in San Francisco (hereinafter, subject property). On November 18, 2014, Patrick Partners filed a complaint against respondents for quiet title with respect to the subject property. After respondents successfully demurred to this complaint with leave to amend, Patrick Partners filed their first amended complaint on January 13, 2015, as before, asserting a single cause of action for quiet title. Respondents again demurred.
Before the trial court on demurrer were the following allegations in the first amended complaint (FAC), which we accept as true for purposes of this appeal (Searle v. Wyndham Int'l (2002) 102 Cal.App.4th 1327, 1330). According to the FAC, paragraph 7, "[Patrick Partners] became holder of the deed of trust on Unit #2 as follows: Christopher Bumgardner was the owner of the Unit #2 as of approximately May 2008 at which time he executed a promissory note and deed of trust in favor of North Beach Partners, LLC, which was in second position behind a first mortgage in favor of Circle Bank (now Umpqua Bank) ('First Deed of Trust'). At some point after May 2008, the promissory note in favor of [Patrick Partners] was recorded on September 4, 2013. Plaintiff recorded a corrected deed of trust on September 5, 2013 in the official records of the City and County of San Francisco with Office of Assessor-Recorder's document number Doc-2013-J752717-00 ('Second Deed of Trust')."
At a trustee's sale held July 29, 2013, respondents acquired from Umpqua Bank a first deed of trust on the subject property. On August 8, 2013, notice was given of a private foreclosure sale with respect to the subject property, to be held at 2 p.m. on August 8, 2013. This foreclosure sale was later postponed and rescheduled for September 6, 2013 at 2 p.m. At the sale, Investors acquired title to the subject property, executing a first deed of trust that resulted in the extinguishment of all subordinate interests in the property. Among these extinguished subordinate interests was the security interest associated with the right to occupy Unit 2 of the subject property held by Patrick Partners.
Because there were no bidders at the foreclosure sale, title to the subject property reverted back to respondents as beneficiaries under the first deed of trust.
On the same day as the scheduled foreclosure sale (September 6, 2013), at 2:01:45 p.m., Patrick Partners filed a Chapter 11 bankruptcy petition in the federal district bankruptcy court for the Northern District of California. This filing resulted in entry of an automatic stay pursuant to 11 U.S. Code, section 362.
Days later, on September 10, 2013, a Trustee's Deed Upon Sale was recorded, transferring ownership of the subject property to Investors.
Shortly thereafter, on September 30, 2013, the federal bankruptcy court dismissed Patrick Partners' case after they failed to appear at a hearing to, among other things, show cause why the case should not be dismissed.
On July 25, 2014, respondent Phillips recorded a deed of trust and assignment of rents from Investors with respect to the subject property.
In thereafter seeking to quiet title to the 5 percent tenancy-in-common interest in the subject property, Patrick Partners alleged in the FAC that both the deed of trust recorded by Investors on September 10, 2013, and the deed of trust and assignment of rents recorded by respondent Philips on July 25, 2014 are void under state and federal law (including Bankruptcy Code section 362), and represent an interest in Unit 2 of the subject property adverse to Patrick Partners. In particular, the FAC alleges: "The claims of [respondents] are without any right whatsoever and such defendants have no right, title, estate, lien or interest whatever in the above-described property or any part thereof, except for title in favor of Christopher Bumgardner, the First Deed of Trust in favor of [Investors] (described in paragraph 7 above) and the Second Deed of Trust in favor of [Patrick Partners] (described in paragraph 7 above)."
In support of its demurrer to the FAC, respondents requested, and were granted, judicial notice of several documents, including documents reflecting the fact that the foreclosure sale went forward as scheduled at 2 p.m. on September 6, 2013, and that, given the absence of any bidders, the subject property reverted back to Investors as beneficiary on the deed of trust upon completion of this sale.
Following a contested hearing, the trial court granted respondents' demurrer without leave to amend, and judgment was then entered in their favor on June 4, 2015. This appeal followed.
DISCUSSION
Patrick Partners challenge the judgment of dismissal after the trial court sustained respondents' demurrer to the FAC without leave to amend. Patrick Partners reason they have stated a valid claim for quiet title, given that the foreclosure sale by which Investors took title to the subject property occurred after (albeit, just minutes) they had filed the petition for bankruptcy in federal court that prompted issuance of an automatic stay barring transfer of title.
The standard of review for such challenge is well-established. We review de novo an order sustaining a demurrer. In doing so, we " 'treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.' [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff. [Citation.]" (Blank v. Kirwan (1985) 39 Cal.3d 311, 318. See also People ex rel. Gallegos v. Pacific Lumber Co. (2008) 158 Cal.App.4th 950, 957.)
I. Failure to State a Claim.
Here, the trial court found Patrick Partners could not state a valid claim for quiet title. Adopting its tentative ruling as the final order, the trial court referenced "Exhibits G (Tentative Ruling on Motion to Dismiss) and F (Order Granting in Part Motion to Dismiss Case)." These referenced exhibits include an order by the United States Bankruptcy Court for the Northern District of California in another case also involving the subject property, to wit, 744 Union Partners, LLC's Chapter 11 bankruptcy proceedings. In this order, the federal bankruptcy court, among other things, found moot a request for annulment of the automatic stay that was filed by the investors that had acquired the real property at 744 Union Street at a foreclosure sale held at 2:00 p.m. on February 13, 2014. Just hours before this previously-scheduled foreclosure sale, at 10:29 a.m., 744 Union Partners had filed the underlying bankruptcy petition and thereby obtained the automatic stay. According to the federal bankruptcy court, however, the investors' request to annul the automatic stay was moot because the real property did not in fact belong to the debtor's estate: "The only evidence before the Court of the Debtor's connection to the Property is the deed of trust [securing a promissory note in the amount of $15,000, the collateral for which is a 16 percent undivided interest in the Property]. While the deed of trust and all the rights therefore belong to the Debtor's estate, the Property itself does not and the Debtor's lien does not extend the automatic stay to the Property. The automatic stay only protects the Debtor's security interest in the Property. In re A Partners, LLC, 344 B.R. 114, 122-123 (Bankr. E.D. Cal. 2006). Accordingly, the Court cannot grant in rem relief with respect to the Property and there is no need to annul the stay."
According to respondents, this federal bankruptcy case is a related case filed by Louisa Trifelletti, a family member of W.B. Coyle, whom respondents describe as "the same real-party-in-interest" in this case.
According to respondents, the trial court correctly relied upon this federal bankruptcy court decision and reasoning when sustaining their demurrer given the similarity of both facts and legal positions. In addition, respondents insist that, in any event, the transfer of the subject property was accomplished prior to Patrick Partners' filing of the bankruptcy petition, not only as a matter of fact (in that the sale occurred at 2 p.m. on the date in question, minutes before the court filing) and as a matter of law, citing Civil Code section 2924h, subdivision (c).
Patrick Partners, in turn, concede its interest in the subject property is junior to respondents' interest, yet nonetheless insist "its security interest in the Property was extinguished by operation of Respondents' foreclosure sale and this action was a violation of the bankruptcy stay. This renders the foreclosure sale void. (Shorr v. Kind (1991) 1 Cal.App.4th 249, 257.)" In so arguing, they insist their bankruptcy petition was file-stamped by the court at 2:01:45 p.m. on September 6, 2013, making it improbable that the 2 p.m. foreclosure sale on the subject property could have been completed before the filing (to wit, in less than two minutes) on the day in question. As such, they contend it must be true that the automatic stay was in effect when the sale ended (even accepting the undisputed fact there were no bidders at the sale, with the result that the subject property reverted back to respondent Investors as beneficiary under the first deed of trust). (See Shaoxing County Huayue Import & Export v. Bhaumik (2011) 191 Cal.App.4th 1189, 1196 ["Upon the filing of a bankruptcy proceeding, federal bankruptcy law imposes an automatic stay on all state and federal proceedings outside the bankruptcy court against the debtor and the debtor's property"].)
Thus, the parties essentially disagree on two points. First, they disagree on whether the bankruptcy stay was in place when respondent Investors acquired the subject property at the September 6, 2013 foreclosure sale and, thus, whether respondents violated the stay by taking an action adverse to Patrick Partners' interest in it. Second, assuming the automatic stay was in place prior to the transfer, they disagree, as a legal matter, whether Patrick Partners' security interest in the subject property was an asset of the bankruptcy estate protected by the stay.
With respect to the former issue, we conclude the record at hand is not sufficient to determine at this juncture whether in fact the foreclosure sale was completed prior to the filing of Patrick Partner's bankruptcy petition, which triggered the automatic stay. Specifically, the only evidence relied upon by respondents to demonstrate the foreclosure sale occurred prior to Patrick Partners' court filing is a printout from a website showing that the foreclosure sale went forward at its scheduled time of 2:00 p.m. However, we agree with Patrick Partners this evidence does not conclusively prove when the sale actually concluded. "Although a general demurrer does not ordinarily reach affirmative defenses, it 'will lie where the complaint "has included allegations that clearly disclose some defense or bar to recovery." ' [Citations.] 'Thus, a demurrer based on an affirmative defense will be sustained only where the face of the complaint discloses that the action is necessarily barred by the defense.' ([Citations]; see Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1191 [151 Cal.Rptr.3d 827, 292 P.3d 871] [application of a statute of limitations based on facts alleged in a complaint is a legal question subject to de novo review].)" (Stella v. Asset Management Consultants, Inc. (2017) 8 Cal.App.5th 181, 191. Accord Morales v. 22nd Dist. Agricultural Assn. (2016) 1 Cal.App.5th 504, 542.) Under the circumstances at hand, we conclude this strict legal standard has not been met with regard to the timing of these two key events.
Moreover, while we agree with respondents that, on its face, Civil Code section 2924h, subdivision (c), appears to operate such that the foreclosure sale is deemed to have occurred "as of 8 a.m. on the actual day of the sale", as Patrick Partners notes, at least one court has concluded this California statute is preempted by federal bankruptcy law. (See In re Sanders (Bankr. S.D. Cal. 1996) 198 B.R. 326, 328-329.)
Pursuant to Civil Code section 2924h, subdivision (c), "the trustee's sale shall be deemed final upon the acceptance of the last and highest bid, and shall be deemed perfected as of 8 a.m. on the actual day of the sale if the trustee's deed is recorded within 15 calendar days after the sale . . . ." Here, respondent Investors acquired the subject property at the foreclosure sale on September 6, 2013, and then recorded the deed of trust just a few days later on September 10, 2013, within the 15-day time period permitted under section 2924h, subdivision (c).
However, even putting aside this timing issue, we nonetheless agree with respondents and the trial court that, in any event, Patrick Partners' subordinate security interest in the subject property did not fall within the protective scope of the automatic stay because it was not an asset of the bankruptcy estate. (See Shaoxing County Huayue Import & Export v. Bhaumik, supra, 191 Cal.App.4th at p. 1196 [whether property is property of the debtor's estate is a question of law reviewed de novo].) In reaching this conclusion below, the trial court relied on In re A Partners, LLC (Bankr. E.D. Cal. 2006) 344 B.R. 114, 122-123. We, too, find this federal decision persuasive. There, the holder of a note secured by a deed of trust against a commercial building and adjacent parking structure that was fifth in order of priority behind four other deeds of trust held by other parties petitioned for bankruptcy. The holder of the first priority trust deed against this building subsequently moved for relief from the automatic stay in the junior lienholder's case for the purpose of completing a foreclosure of its trust deed. The federal bankruptcy court, in granting the requested relief from the automatic stay, aptly explained as follows: "There is a distinction between having a security interest in property and having a 'secured claim' against the property owner. The AB Parking Note may be a 'secured' asset on the Debtor's books, but the court is not persuaded that the Debtor is in fact a 'secured creditor' of AB Parking. 'By definition, "secured claim" requires availability of collateral to secure the creditor's right to payment.' In re Elliott, 64 B.R. 429, 430 (Bankr. W.D. Mo. 1986) (citing In re Emarco, 45 B.R. at 629) (a creditor with a lien against personal property, a diamond ring, which disappeared without the debtor's permission and cannot be found, retained its security interest, but had an unsecured claim in the debtor's chapter 13 bankruptcy). Here, the Debtor's collateral, a fifth priority lien against a seriously distressed piece of property, is literally unavailable to the Debtor for repayment of the AB Parking Note. The Debtor's Lien has little value to the Debtor, just as the missing jewelry had little value to the creditor in Elliott." (In re A Partners, LLC, 344 B.R. at pp. 123-124.) This reasoning and conclusion applies squarely to the case at hand, such that we agree with respondents that their transfer of title to the subject property was not a violation of the automatic stay. (Accord In re Dagburg, LLC (Bankr. D. Ariz. 2008) 2008 Bankr. LEXIS 4283, * 11-12 [" the Debtor's interest in a Deed of Trust on the Property is de minimus. Even if the Debtor were somehow able to join with the other interests in the Deed of Trust, and act in concert, the parties do not own the Property. The Debtor does not have the financial ability to reinstate or redeem REEL's senior lien. It is unclear whether the Debtor would be able to acquire the Property at any duly scheduled non-judicial foreclosure sale of the Property. The Debtor's interest in the Deed of Trust is of little or no value, since the Debtor simply has a 5 percent interest in a $2,400,000 obligation. . . . The economic value of a 5 percent interest in a Deed of Trust which is only partially secured, under the best of circumstances, is zero or close to zero"].)
In so concluding, we reject Patrick Partners' counter argument that, regardless of whether the subject property became part of the bankruptcy estate, "it is the extinguishment of Appellant's protected security interest which is the action in violation of the stay and the basis for Appellant's cause of action for quiet title." Patrick Partners' argument is based on the already-rejected premise that their security interest in the subject property is a "protected" interest in the bankruptcy proceedings. As we have just explained, their security interest in the subject property is afforded no protection under the automatic stay, because it is not part of the bankruptcy estate. (See In re Chugach Forest Products, Inc. (9th Cir. 1994) 23 F.3d 241, 243-244 ["a bankruptcy petition 'operates as a stay, applicable to all entities, of . . . any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.' 11 U.S.C., § 362(a)(3)]".)
Moreover, and in any event, violation of the stay in bankruptcy would have no effect on the validity of the foreclosure sale: "Even if the foreclosure had violated the stay, appellants would have been required to raise that claim in the bankruptcy court. 'The bankruptcy court ha[s] jurisdiction over all claims alleging willful violation of the automatic stay.' [Citation.] The existence of a federal remedy for violation of the stay must be read as an implicit rejection of state court remedies." (Abdallah v. United Savings Bank (1996) 43 Cal.App.4th 1101, 1109.) --------
Accordingly, given our conclusion that Patrick Partners have failed to state a valid claim for quiet title, we continue to the sole remaining issue on appeal - to wit, whether the trial court properly denied leave to amend the FAC.
II. Denial of Leave to Amend.
The burden of proving a reasonable possibility of successfully amending a complaint to state a valid claim is "squarely on the plaintiff." (Blank v. Kirwan, supra, 39 Cal.3d at p. 318.) Further, "where the nature of the plaintiff's claim is clear, and under substantive law no liability exists, a court should deny leave to amend because no amendment could change the result." (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 459.)
These rules require affirmance of the trial court's refusal to authorize further amendment. Quite simply, given that their security interest in the subject property was never an asset of the bankruptcy estate, Patrick Partners' claim to quiet title is, and will continue to be, fatally flawed. As such, they have not, and cannot meet their burden of proving there is a reasonable possibility the defects in the FAC could be cured by another round of amendment. (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 68 Cal.App.4th at p. 459.)
Moreover, Patrick Partner's proposed cause of action for declaratory relief is predicated on the same set of insufficient facts as the cause of action for quiet title, with the inevitable result that it fails on the same grounds. In particular, as respondents correctly note, declaratory relief requires a plaintiff to allege facts demonstrating the existence of "an actual, present controversy between the parties." (City of Cotati v. Cashman (2002) 29 Cal.4th 69, 80.) Patrick Partners contend there is an "actual controversy" in this case over title to the subject property following the "improper foreclosure sale and the resulting extinguishment of [their] security interest." Here, for the reasons already stated, there is no such controversy.
Finally, Patrick Partners insist the FAC can be amended to state a valid cause of action for violation of the automatic stay, in that respondents violated the bankruptcy stay in effect prior to the foreclosure sale by completing the sale and thereby extinguishing their security interest in the subject property. Again, Patrick Partners' argument is no more than a restatement of each of the previous arguments raised in opposition to the ruling on demurrer and, as such, fails for reasons already identified. Accordingly, we affirm the trial court's decision to sustain respondents' demurrer without providing Patrick Partners another opportunity to amend the operative complaint.
DISPOSITION
The judgment is affirmed. Respondents are entitled to costs on appeal.
/s/_________
Jenkins, J. We concur: /s/_________
Pollak, Acting P. J. /s/_________
Siggins, J.