Opposing Views: 9th Circuit Changes California Law on Equitable Possessory Interests

Editor's Note: In re Perl is a case that may have significant ramifications, which has drawn the following articles by Jesse Valdez, Esq., who examines why the Court reached the correct decision, and by Shannon Doyle, Esq., who argues that the decision missed the mark.

The law of evictions, known as “unlawful detainer” dates back as far as the Forcible Entry Act of 1381, which prohibited a land owner from personally retaking possession of his or her real property from a tenant. This law remains an important concept in modern eviction statutes. When the unlawful detainer court issues a judgment for possession, it is coupled with a writ of possession. The writ of possession is delivered to the sheriff and provides the authority for the sheriff to execute the judgment and forcibly remove the tenants from the property, otherwise known as a “lockout”. So what happens when you add a bankruptcy to the eviction process?

In In re Perl,[1] Eden Place, who was the purchaser of the Perls’ property at a foreclosure sale, brought an unlawful detainer action to remove the Perls from the premises. Eden Place obtained a judgment and writ of possession. Just prior to Eden Place executing the writ of possession, the Perls filed a skeletal chapter 13 bankruptcy petition. Eden Place filed a motion for relief from stay alleging that the subject property was not included in the Perls’ bankruptcy estate. However, prior the hearing on the motion for relief from stay, the sheriff proceeded with a lockout of the Perls. The Perls responded with a motion for violation of the stay pursuant to §326(a)(1)(3). The Bankruptcy Court found that the lockout was a violation of the stay. Eden Place appealed and the Bankruptcy Appellate Panel (“BAP”) agreed with the Bankruptcy Court. Eden Place appealed again, and the Ninth Circuit overturned the Bankruptcy Court and the BAP and ruled in favor of Eden Place. In doing so, the Ninth Circuit overturned long standing California law without much of an explanation. The question to be answered here is, does a debtor/tenant retain an equitable possessory interest in property after an unlawful detainer judgment under California law that is protected by the automatic stay of 11 U.S.C. §361(a)(3)?

The BAP concluded that Eden Place was in violation of the stay. In rendering its decision, the BAP relied on prior California precedent, including In re Williams,[2] and cases upon which Williams relied, In re Di Giorgio[3] and In re Butler.[4] The DiGiorgios were defendants in an unlawful detainer action. After a writ of possession was issued by the unlawful detainer court, but before it was executed, the DiGiorgios filed a bankruptcy. The sheriff’s department, relying on Cal. Code Civ. Pro. §715.050, executed a writ of possession without obtaining relief from the automatic stay. Cal. Code Civ. Pro. §715.050 states as follows:  

“Except with respect to enforcement of a judgment for
money, a writ of possession issued pursuant to a
judgment for possession in an unlawful detainer action
shall be enforced pursuant to this chapter without delay,
notwithstanding receipt of notice of the filing by the
defendant of a bankruptcy proceeding.”

This statute seems straightforward enough, but enter 11 U.S.C. §362(a)(1), (2) and (3). The District Court found that 11 U.S.C. §362(a) preempted Cal. Code Civ. Pro. §715-050, and that based on Cal. Code Civ. Pro. §1006, mere possession of property, even after an unlawful detainer judgment, creates an equitable interest in the bankruptcy estate under 11 U.S.C. §541 that is subject to the protections of the automatic stay. In Perl, the Ninth Circuit recognized the BAP’s reliance on this decision but never explained why the analysis is incorrect. In fact, the Ninth Circuit ignores the issue altogether and simply adds a footnote to its decision, “Because we resolve this case without relying upon the provisions of §715.050, we express no view on whether the state statute is preempted by the Bankruptcy Code.”[5]

The BAP also relied on In re Butler. Tiphany Butler was being evicted from her residence at Westside Apartments. Westside Apartments obtained an unlawful detainer judgment and writ of possession. A week later, Butler filed a chapter 7 bankruptcy. The sheriff’s department advised Butler they were proceeding with the lock-out pursuant to Cal. Code Civ. Pro. §715-050. Butler filed an emergency motion to stay the eviction which was granted. Westside Apartments responded with a motion for relief from stay which went unanswered and was granted. However, the Court did find that Butler held an equitable interest in the property subject to the automatic stay. The issue at hand was whether mere possession of real property without a legal right to possession, creates an equitable interest in the property under California law that is protected by the automatic stay of 11 U.S.C. §362(a). It is undisputed that Butler had no legal title or legal right to possession pursuant to Cal. Code Civ. Pro. §1161(a). The Court then looked at Cal. Code Civ. Pro. §1006, which states,

“Title by Occupancy; extent
Occupancy for any period confers a title
sufficient against all except the state and those
who have title by prescription, accession,
transfer, will, or succession; but the title
conferred by occupancy is not a sufficient
interest in real property to enable the occupant
or the occupant's privies to commence or
maintain an action to quiet title, unless the
occupancy has ripened into title by prescription.”

Based on Cal. Code Civ. Pro. §1006, and early case law interpreting this statute, the Court found that Butler had an equitable interest in the property created by her physical possession thereof. The Butler Court further found that Congress intended the bankruptcy estate to include possessory interests in residential real property, quoting DiGiorgio, “Section 541(a) provides that, with a few express exceptions, property of the bankruptcy estate comprises all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. § 541(a)(1). The legislative history indicates that Congress intended the estate to include possessory interests.”[6]

In Perl, the Ninth Circuit stated that the Butler Court’s reasoning is flawed in that Cal. Code Civ. Pro. §1161(a) doesn’t just determine legal title but also establishes who has the immediate right to possession of the property. The Ninth Circuit relied heavily on a California Supreme Court case called Vella v. Hudgins.[7] Vella simply said that in circumstances where the plaintiff in an unlawful detainer action obtained the property at a foreclosure sale, the issue of legal title may be considered for the limited purpose of proving standing of the plaintiff in the unlawful detainer action.

It is difficult to see how the Ninth Circuit concluded from Vella that Cal. Code Civ. Pro. §1161(a) divests a tenant from an equitable possessory interest in property. The Ninth Circuit merely concludes that if legal title is proven in the unlawful detainer action then the legal owner has the immediate right to possession. The debtors in Butler and Perl did not have legal right to possession of the property; that right belongs to the legal title owner. However, what the Ninth Circuit fails to address are the tenants’ current possessory rights to the property and why there is no equitable right of the party in possession of the property. Remember there is no self-help in the eviction process. An immediate legal right to possession is still subject to the execution of the writ of possession via the lock-out process by the sheriff.

The Ninth Circuit’s conclusion in Perl is problematic and subject to much future debate. The legal right to possession could only be restored by the sheriff acting pursuant to the writ of possession. The legal title owner can’t go from the courthouse steps with his unlawful detainer judgment in hand and start clearing out a tenant’s belongings. That is why eviction law is historically based on the no self-help concept and, hence, is the whole point of the writ process.  As a result, until the time the sheriff acts on the writ, the tenant retains an equitable possessory interest in the property. If a bankruptcy case is filed before the sheriff acts, the tenant’s equitable possessory interest becomes property of the estate which is clearly protected under 11 U.S.C. §362(a). Accordingly, in my opinion, the Ninth Circuit completely missed the issue and unilaterally changed long standing California law.