Opinion
Case No. 17-cv-05182-JST
08-27-2018
Priya SANGER, et al., Appellants, v. Leah AHN, Appellee.
Stephen D. Finestone, Finestone Hayes LLC, San Francisco, CA, for Appellants. Leah Ahn, San Francisco, CA, pro se.
Stephen D. Finestone, Finestone Hayes LLC, San Francisco, CA, for Appellants.
Leah Ahn, San Francisco, CA, pro se.
ORDER RE: BANKRUPTCY APPEALS
JON S. TIGAR, United States District Judge
Appellants Priya Sanger and Michael Sanger appeal rulings from the United States Bankruptcy Court in proceedings involving Appellee Leah Ahn as the debtor and plaintiff. Ahn filed a cross-appeal, which was opened as a separate case, Case No. 17-cv-05639-JST, but has now been consolidated with the Sangers' appeal. ECF No. 7. The Court finds these matters suitable for resolution without oral argument because "the facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument." Fed. R. Bankr. P. 8019(b)(3). The Court will reverse the judgment of the bankruptcy court in part and affirm it in part.
I. BACKGROUND
On March 12, 2012, the Sangers obtained a judgment against Ahn in the Superior Court of California for the County of San Francisco in the amount of $72,870.57. ECF No. 6 at 222. An abstract of judgment for this amount was issued on May 16, 2012. Id. at 13-14. The abstract of judgment contains the following:
Id. at 13. Ahn is listed as the judgment debtor with her address and driver's license number, and the box is checked to indicate that her Social Security number is unknown. Id. The box for "Judgment creditor (name and address )" is blank, as are the spaces for additional judgment creditors and debtors on the second page. Id. at 13-14 (emphasis in original). The form states, "All judgment creditors and debtors are listed on this abstract." Id. at 13.
The bankruptcy court described the procedural history of Ahn's bankruptcy proceedings as follows:
In June 2014, after entry of the [March 12, 2012] Judgment, Ms. Ahn filed a petition for relief under Chapter 7 of the Bankruptcy Code. She received a discharge in September 2014 and her bankruptcy case was subsequently closed in due course. In October 2016, Ms. Ahn reopened her bankruptcy case to file a motion for sanctions against the Sangers, as well as this adversary proceeding. She alleged in her motion for sanctions that the Sangers had violated the discharge injunction by amending their Judgment, collecting payments pursuant to the Judgment, and prosecuting an appeal, all post-discharge. In November 2016, the court denied the motion for sanctions on the grounds that the Sangers' acts related solely to their pursuit of their in rem rights against the Property and did not constitute acts to collect a pre-petition debt from Ms. Ahn personally. At that time, the court expressly declined to decide the validity of the Sangers' judgment lien in the context of a motion for sanctions.
The first amended complaint in this adversary proceeding contains two causes of action. In her first cause of action, Ms. Ahn seeks a declaration that the Sangers do not have a valid lien against the Property under California law based upon errors in the Abstract. In her second cause of action, she seeks, in the alternative, avoidance of the judgment lien under [S]ection 522(f) of the Bankruptcy Code.
Id. at 101 (footnote omitted).
The Sangers moved to dismiss Ahn's first amended complaint. Id. at 50-51. They argued that the first cause of action should be dismissed because the bankruptcy court lacked subject matter jurisdiction and because it was barred by issue preclusion based on the court's ruling on Ahn's motion for sanctions. Id. at 58-61. They sought dismissal of the second cause of action on grounds that it should have been brought by motion rather than by an adversary proceeding. Id. at 61. The bankruptcy court denied the Sangers' motion. Id. at 63-77.
Ahn then filed a motion for summary judgment on her first cause of action. She argued that the abstract of judgment was not valid for three reasons: (1) the Sangers failed to amend the abstract once they learned her Social Security number; (2) the abstract incorrectly stated that a summons was served on Michael Peers, identified as Ahn's attorney, when Peers was not actually served and was not, in fact, Ahn's attorney; and (3) the abstract failed to list the Sangers' names and addresses. Id. at 259-81. The bankruptcy court granted the motion as to the third argument and denied it in all other respects. Id. at 128.
The bankruptcy court then entered judgment as to the first cause of action in favor of Ahn, finding that "Defendants' abstract of judgment recorded May 16, 2012 did not create a valid judgment lien under California law." Id. at 130. The court dismissed the second cause of action "in light of the invalidity of the judgment lien." Id.
The Sangers appeal both the bankruptcy court's grant of summary judgment and its denial of their motion to dismiss. ECF No. 5. Ahn's cross-appeal argues that if the Court finds merit to the Sangers' appeal, then it should find the abstract of judgment invalid based on the Sangers' failure to amend once they learned her Social Security number. ECF No. 18 at 46-58. II. JURISDICTION
Neither party seeks review of the bankruptcy court's determinations regarding the abstract's notation of service on Peers.
The parties appeal from a final judgment of the bankruptcy court. This Court has jurisdiction pursuant to 28 U.S.C. § 158(a).
III. STANDARD OF REVIEW
The Court reviews the bankruptcy court's findings of fact for clear error but applies de novo review to conclusions of law and mixed questions of law and fact. In re JTS Corp. , 617 F.3d 1102, 1109 (9th Cir. 2010).
IV. DISCUSSION
A. Consideration of Ahn's Avoidance Cause of Action in an Adversary Proceeding
Relying on Barrientos v. Wells Fargo Bank, N.A. , 633 F.3d 1186 (9th Cir. 2011), the Sangers argue that the bankruptcy court was required to dismiss Ahn's avoidance cause of action because she improperly filed it as an adversary proceeding. "A proceeding under § 522(f) to avoid a lien or other transfer of property exempt under [the Bankruptcy] Code shall be commenced by motion in the manner provided by Rule 9014....". Fed. R. Bankr. P. 4003(d). Such proceedings are specifically carved out from the Bankruptcy Code's list of adversary proceedings. Fed. R. Bankr. P. 7001(2) (providing that "a proceeding to determine the validity, priority, or extent of a lien or other interest in property, but not a proceeding under ... Rule 4003(d) ," is an adversary proceeding (emphasis added)). In Barrientos , the Ninth Circuit explained that contempt proceedings, which, like avoidance proceedings, are subject to Rule 9014, "must be initiated by motion in the bankruptcy case ... and not by adversary proceeding." 633 F.3d at 1191.
However, the Barrientos court's statement was dicta, as the court held that an earlier case finding no private right of action for violation of a discharge order was "sufficient to dispose of the present case." Id. at 1189. Moreover, " Barrientos is unclear ... as to the proper procedure where, in addition to contempt damages, a debtor seeks other or additional relief of the sort that usually requires an adversary proceeding." In re Nash , 464 B.R. 874, 879 (9th Cir. BAP 2012). Here, as in Nash , Ahn sought avoidance – which must be brought by motion under Rule 4003(d) – and a declaratory judgment that the lien was invalid – which, under Rules 7001(2) and 7001(9), is an adversary proceeding. As the bankruptcy court correctly observed, had Ahn properly filed her two causes of action separately as (1) a motion for avoidance and (2) an adversary proceeding for a declaratory judgment, the two actions could have been consolidated. See ECF No. 6 at 74-75; Fed. R. Bankr. P. 7042 (adversary proceedings may be consolidated); Fed. R. Bankr. P. 9014(c) (court may apply rules governing adversary proceedings to contested matters). Other than their supplemental jurisdiction argument, which the Court addresses below, the Sangers claim no prejudice from the court's having proceeded in an adversary proceeding rather than via a contested motion. See In re Kaur , No. ADV 12-01872-MLB, 2014 WL 3361432, at *1 n.2 (9th Cir. BAP July 9, 2014) (noting that "no due process issues are triggered" by considering a § 522(f) avoidance claim as an adversary proceeding rather than a motion because "the adversary accords more due process than a motion"). Given the procedural history of this case, and that the parties had a full opportunity to present their arguments concerning the validity of the lien, the Court concludes that "it would not serve the interests of justice to remand this matter to the bankruptcy court solely to allow it to rehear [Ahn's] request for relief as a contested matter rather than in an adversary proceeding." In re Nash , 464 B.R. at 879 (citing Fed. R. Bankr. P. 1001 ("These rules shall be construed to secure the just, speedy, and inexpensive determination of every case and proceeding.")); see also In re Fagan , 559 B.R. 718, 726 (Bankr. E.D. Cal. 2016) ("If a contested matter may be consolidated with a[n] adversary proceeding, then it seems nonsensical to forbid alleging a contested matter issue as a count in an adversary proceeding.").
B. Jurisdiction Over Ahn's Declaratory Judgment Cause of Action
The Court next considers the Sangers' arguments that the bankruptcy court lacked jurisdiction to enter a declaratory judgment that the lien was invalid. "Bankruptcy courts have subject matter jurisdiction over proceedings ‘arising under title 11, or arising in or related to cases under title 11.’ " In re Wilshire Courtyard , 729 F.3d 1279, 1285 (9th Cir. 2013) (quoting 28 U.S.C. § 1334(b) ). "Proceedings ‘arising under’ title 11 involve causes of action created or determined by a statutory provision of that title. Similarly, proceedings ‘arising in’ title 11 are not those created or determined by the bankruptcy code, but which would have no existence outside of a bankruptcy case." Id. (citation omitted). A bankruptcy court has "related to" jurisdiction if "the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy." In re Fietz , 852 F.2d 455, 457 (9th Cir. 1988) (emphasis omitted) (quoting Pacor, Inc. v. Higgins , 743 F.2d 984, 994 (3d Cir. 1984) ). " ‘[R]elated to’ jurisdiction is very broad, including nearly every matter directly or indirectly related to the bankruptcy." In re Sasson , 424 F.3d 864, 868 (9th Cir. 2005) (quotation marks and citation omitted). It "also includes the district court's supplemental jurisdiction pursuant to 28 U.S.C. § 1367 ‘over all other claims that are so related to claims in the action within [the court's] original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.’ " Id. at 869 (alteration in original).
Ahn does not contest the bankruptcy court's determination that it lacked "arising under" or "arising in" jurisdiction, and this Court agrees with the bankruptcy court that "[a]n action to determine the validity of a judgment lien under state law is not one determined by reference to the Bankruptcy Code and does not arise solely by virtue of the pendency of a bankruptcy case." ECF No. 6 at 67.
The bankruptcy court also rejected two arguments regarding "related to" jurisdiction. First, it "agree[d] with [the Sangers] that a ruling in favor of [Ahn] on the first cause of action will not benefit the estate" because "[t]he schedules show and the parties do not dispute that Debtor's interest in the Property is fully encumbered by consensual liens. Therefore, a determination that the judgment lien is invalid will not result in any additional recovery." Id. Second, it explained that "[t]he validity of the lien is solely a matter of state law and has no impact on [Ahn's] rights under federal bankruptcy law" because "the discharge continues to protect [Ahn] regardless" of the lien's validity." Id. Ahn does not appeal either of these findings. To the contrary, she agrees that her "home was valued at $700,000 with consensual liens of $820,000." ECF No. 18 at 33.
Despite these findings, the bankruptcy court found it had "related to" and supplemental jurisdiction over the declaratory judgment cause of action "because a determination of the validity of a lien is ... necessary to the adjudication of [Ahn's] second cause of action for avoidance under section 522(f)." ECF No. 6 at 68. The court's determination of the substantive issue is correct:
[T]o determine whether a lien should be avoided on the grounds that it impairs a
debtor's homestead exemption, we must undergo a two step process. The first step is to utilize state law in deciding whether a valid judicial lien attached to the debtor's property. Once we have determined that a lien did attach to the debtor's property, we must ascertain whether the lien impairs the debtor's exemption in bankruptcy.
In re Nielsen , 197 B.R. 665, 667-68 (9th Cir. BAP 1996) (citation omitted). Indeed, it would be error to enter judgment in an avoidance proceeding if there were no valid lien to avoid. In re Kaur , 2014 WL 3361432, at *5 (vacating judgment of bankruptcy court and remanding with instructions to dismiss). The bankruptcy court therefore had jurisdiction to consider the validity of the lien as part of Ahn's avoidance cause of action.
As the bankruptcy court noted, the Sangers "do not appear to dispute ... that this court has subject matter jurisdiction over an action under section 522(f)." ECF No. 6 at 69.
However, this did not give the bankruptcy court jurisdiction over Ahn's first cause of action for declaratory relief. The general test for "related to" jurisdiction is whether "the proceeding could conceivably have any effect on the estate being administered in bankruptcy." In re Fietz , 852 F.2d at 457 (emphasis added) (quoting Pacor, Inc. , 743 F.2d at 994 ). Here, the bankruptcy court correctly concluded that "a determination that the judgment lien is invalid will not result in any additional recovery." ECF No. 6 at 67. Moreover, Ahn "received a discharge in September 2014 and the [Chapter 7 bankruptcy] case was subsequently closed." Id. at 64. The property was not administered as part of the bankruptcy and was therefore abandoned to Ahn at the time of closing. 11 U.S.C. § 554(c). "[O]nce an asset has been abandoned, it is no longer part of the estate." In re DeVore , 223 B.R. 193, 198 (9th Cir. BAP 1998). Because the property is no longer part of the estate, a ruling as to the validity of the lien could have no conceivable effect on the estate. The general test for "related to" jurisdiction is not satisfied.
Nor can Ahn rely on supplemental jurisdiction. As discussed above, Ahn's avoidance claim should have been brought by motion as a contested matter and not as a separate adversary proceeding. Fed. R. Bankr. P. 4003(d), 7001(2). Although the bankruptcy court was not required to dismiss the avoidance cause of action, neither the bankruptcy court nor Ahn has cited any authority, and the Court is aware of none, that allows supplemental jurisdiction to be based on a cause of action that should have been brought in a different proceeding. At least one bankruptcy court has found no "ancillary jurisdiction" in an adversary proceeding where "the claim that forms the basis for this court's subject matter jurisdiction – contempt for alleged violations of the discharge injunction – cannot proceed via adversary proceeding." In re Hye Rhee Kong , No. 08-50127-SLJ, 2013 WL 6923063, at *3 (Bankr. N.D. Cal. Nov. 15, 2013). The bankruptcy court in this case correctly reasoned that, had Ahn filed an avoidance motion separately from her declaratory judgment adversary proceeding, the two actions could have been consolidated. See ECF No. 6 at 74-75; Fed. R. Bankr. P. 7042 (adversary proceedings may be consolidated); Fed. R. Bankr. P. 9014(c) (court may apply rules governing adversary proceedings to contested matters). But "consolidation is not a means by which a district court may acquire jurisdiction" and "does not give rise to supplemental jurisdiction." In re Textainer P'ship Sec. Litig. , No. C 05-0969 MMC, 2005 WL 1791559, at *9 (N.D. Cal. July 27, 2005) (granting motion to remand consolidated case over which the court lacked original jurisdiction).
For all of these reasons, the bankruptcy court lacked subject matter jurisdiction over Ahn's declaratory judgment cause of action. Its judgment in Ahn's favor on that cause of action is therefore reversed.
C. Validity of the Lien
Nonetheless, as explained above, the parties do not dispute the bankruptcy court's subject matter jurisdiction over Ahn's avoidance cause of action, and the first step in deciding whether a lien should be avoided is to determine whether the lien is valid. The Court therefore turns to the parties' arguments concerning the bankruptcy court's determination of that question.
First, the bankruptcy court correctly declined to apply issue preclusion based on its prior decision denying Ahn's motion for sanctions. ECF No. 6 at 118-19. "Issue preclusion ... bars successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment, even if the issue recurs in the context of a different claim." Taylor v. Sturgell , 553 U.S. 880, 892, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008) (quotation marks and citation omitted). At the hearing on the motion for sanctions, the bankruptcy court stated that "the original judgment ... appears to have been valid at the time it was entered and it was then secured by an abstract of judgment that ... secured Ms. Ahn's obligations to make ... payments on account of the debt secured by the real property and interest here." ECF No. 6 at 256. However, the validity of the lien was not actually litigated in those proceedings. The bankruptcy court explained at the start of the sanctions hearing that she could not "hold that 2012 judgment that was entered in March of 2012 void. I can't do that. Certainly not in response to a motion for a violation of the discharge injunction." Id. at 230. And, when the court denied the Sangers' motion to dismiss the declaratory judgment cause of action in these proceedings, it again explained that it did not consider the validity of the lien during the sanctions proceedings:
The Sangers also argued claim preclusion before the bankruptcy court, ECF No. 6 at 117, but they do not do so on appeal, see ECF No. 5 at 38-40 (arguing only issue preclusion).
The validity of the Defendants' judgment lien was not properly before the court when it ruled on Plaintiff's sanctions motion. Indeed, at the time of the hearing on Plaintiff's request for sanctions, this adversary proceeding had only just been filed, so the court rightfully refused to consider Plaintiff's demand that those judgments (and their resulting lien) be declared void in the context of her sanctions motion. Because the court refused to consider the issue of the validity of Defendants' prepetition judgment lien in the context of a contested matter that centered on Defendants' post-discharge conduct, the court's ruling on the sanctions motion was not a final judgment on the merits of that lien.
Id. at 71-72. The validity of the lien was not actually litigated, and issue preclusion therefore does not apply.
Second, Ahn's appeal of the sanctions ruling did not divest the bankruptcy court of jurisdiction to consider the validity of the lien. "The filing of a notice of appeal ... confers jurisdiction on the court of appeals and divests the district court of its control over those aspects of the case involved in the appeal. " Griggs v. Provident Consumer Disc. Co. , 459 U.S. 56, 58, 103 S.Ct. 400, 74 L.Ed.2d 225 (1982) (emphasis added). "[W]here an appeal is taken from a judgment which does not finally determine the entire action, the appeal does not prevent the district court from proceeding with matters not involved in the appeal." Britton v. Co-op Banking Grp. , 916 F.2d 1405, 1411 (9th Cir. 1990) (quotation marks and citation omitted). Because the bankruptcy court's ruling on Ahn's sanctions motion did not finally determine the validity of the lien, the appeal of that ruling did not divest the bankruptcy court of jurisdiction to consider that issue.
Finally, the Court turns to the merits of the bankruptcy court's summary judgment ruling and, in particular, whether the court correctly determined that the lien was invalid. Under California law, a judgment lien "attaches to all interests in real property in the county where the lien is created" and "is created under this section by recording an abstract of a money judgment with the county recorder." Cal. Civ. Proc. Code § 697.310(a). California Code of Civil Procedure section 674(a) provides that:
[A]n abstract of a judgment or decree requiring the payment of money shall be certified by the clerk of the court where the judgment or decree was entered and shall contain all of the following: ...
(3) The name and last known address of the judgment debtor and the address at which the summons was either personally served or mailed to the judgment debtor or the judgment debtor's attorney of record.
(4) The name and address of the judgment creditor.
(5) The amount of the judgment or decree as entered or as last renewed.
(6) The last four digits of the social security number and driver's license number of the judgment debtor if they are known to the judgment creditor. If either or both of those sets of numbers are not known to the judgment creditor, that fact shall be indicated on the abstract of judgment....
One of the primary purposes of this statute is to give nonparties to the suit constructive notice of a judgment lien. See In re Conceicao , 331 B.R. 885, 891 (9th Cir. BAP 2005) ; Stout v. Gill , 110 Cal. App. 445, 449, 294 P. 446 (Cal. Ct. App. 1930).
Although some courts have applied a "substantial compliance" standard to determine whether section 674(a) is satisfied, that standard has only "been applied to situations where all of the required data was included. No court has validated a judgment lien where mandated information was omitted from an abstract." Keele v. Reich , 169 Cal. App. 3d 1129, 1133, 215 Cal.Rptr. 756 (1985). (emphasis in original) (citations omitted). No cases have addressed the precise issues at issue here, but courts have found an abstract to be sufficient where it included more information than required in the statute by transcribing the judgment in full, Robbins Inv. Co. v. Robbins , 49 Cal. App. 2d 446, 448-49, 122 P.2d 91 (1942), and where the amount of judgment included the correct numbers but did not include a dollar sign, Weadon v. Shahen , 50 Cal. App. 2d 254, 260, 123 P.2d 88 (1942). Also, an abstract naming "Edward Rainey, Supt. of Banks, etc." as the judgment creditor was held to be adequate, even though a new superintendent had taken state office by the time the judgment was rendered, because "[t]he office of Superintendent of Banks is a continuing state office without regard to the individual who may fill it," and "[t]he abstract of judgment certainly conveyed the information to any one who might inquire that the Superintendent of Banks of the State of California had secured a money judgment against [the debtors]." Id. at 257, 259-60, 123 P.2d 88. On the other hand, one court found that constructive notice of a judgment lien against a debtor in her married name was not provided by a judgment docketed in the debtor's maiden name. Huff v. Sweetser , 8 Cal. App. 689, 693-97, 97 P. 705 (1908). And two courts have invalidated abstracts that failed to include the debtor's Social Security number or accurately indicate that the number was unknown. Keele , 169 Cal. App. 3d at 1133, 215 Cal.Rptr. 756 (creditor knew debtor's Social Security number but marked that information as "unknown" on the abstract); In re Conceicao , 331 B.R. at 891 (abstract included neither the debtor's Social Security number nor an indication that the information was unknown).
The Sangers argue that the abstract substantially complies with section 674(a) because their names are included on the abstract as the "Plaintiff," and the abstract also includes the address of Paul Utrecht, who is identified as attorney for the "judgment creditor." In addition, there is no question that Ahn knew the Sangers' address since this dispute arose over a tenancy in common. However, "[t]he issue is not whether there was notice of the lien, but whether [the] abstract complied with statutory provisions enacted to insure notice." Keele , 169 Cal. App. 3d at 1133, 215 Cal.Rptr. 756. Even if there is no confusion over a particular lien, section 674(a) "serves as a blanket rule to prevent such confusion, and we are not free to ignore it." In re Conceicao , 331 B.R. at 892.
The abstract of judgment contains the Sangers' names but nowhere identifies them as the judgment creditors. This is insufficient. As the bankruptcy court concluded:
In applying the doctrine of substantial compliance, the court concerns itself with only one question: what on the form lets a third party know, without forcing them to make leaps of logic, that the Sangers are in fact the judgment creditors who can be reached at an address that appears somewhere on the form? Simply put, nothing. There is no information under Line 3 ["Judgment creditor (name and address) :"], or anywhere else on the Abstract, to indicate just who the judgment creditor or creditors actually are and at what address they could be contacted.
If the purpose of the statute is to provide third parties specific information, they should not be forced to search around and guess as to what that information is. But with the Abstract at issue here, that is exactly what they would have to do. The manner in which the Sangers completed their Abstract forces third parties to make too many assumptions, which leaves this court unable to accept the Sangers' arguments. The court finds and concludes that the Abstract does not substantially comply with CCP section 674(a).
ECF No. 6 at 127-28. This Court agrees that the abstract does not provide constructive notice of the identity of the judgment creditor and is therefore invalid. Accordingly, the Court affirms the bankruptcy court's dismissal of Ahn's second cause of action. See In re Kaur , 2014 WL 3361432, at *5 (remanding with instructions to dismiss avoidance adversary proceeding where lien never attached to debtor's property).
The Court does not decide whether inclusion of the creditor's attorney's address would be sufficient to satisfy section 674(a)(4)'s requirement that the abstract include the "address of the judgment creditor." Additionally, because the Court affirms the bankruptcy court's determination that the abstract is invalid, the Court does not reach the arguments in Ahn's protective cross-appeal.
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CONCLUSION
The bankruptcy court lacked jurisdiction to enter a declaratory judgment on the lien's validity, but the court properly considered the validity of the lien as a necessary first step to considering whether the lien should be avoided under § 522(f). Having correctly determined that the lien was not valid, the bankruptcy court properly dismissed Ahn's avoidance cause of action. The judgment of the bankruptcy court is reversed in part and affirmed in part. The Clerk shall enter judgment and close the file.