Opposing Views - Ninth Circuit Clarifies 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.

In 2016, Eden Place LLC v. Perl (In re Perl),[1] the Ninth Circuit Court of Appeals made it clear that under California law, the entry of a judgment and writ of possession after a wrongful detainer extinguishes all of the debtor’s legal and equitable rights in real property, as a result of which a post-petition eviction did not violate the stay. This decision reverses a lower court decision that had stood since 2005, which previously held that a debtor’s retention of actual possession meant that he had some equitable rights in the property to make it part of his bankruptcy estate. While the holding itself is significant, the court’s decision has potentially far-reaching consequences, as the Court did not limit its decision to the facts of the case, thus, leaving the issue open as to how far the decision applies beyond foreclosed homeowners.

In Perl, the Debtor defaulted on his mortgage loan and Bank of America commenced foreclosure proceedings against the real property securing the loan (“Real Property”).  Eden Place, LLC (“Creditor”) purchased the Real Property through a non-judicial foreclosure sale and timely recorded its trustee’s deed. The Debtor refused to vacate the real property, and thus, the Creditor commenced unlawful detainer proceedings. The Creditor eventually obtained a judgment for possession of the real property, and also obtained a writ of possession for the real property from the state court. The Debtor then immediately filed for bankruptcy prior to the Sheriff completing its physical lockout. 

The bankruptcy court found that the Creditor violated the automatic stay by completing the lockout after the bankruptcy case was filed. The bankruptcy court determined that the Debtor had bare possessory interest, coupled with the possibility of some sort of other relief gave the bankruptcy estate a protected interest that was subject to the automatic stay.

 The BAP affirmed the bankruptcy court’s decision, even though it held that Debtor’s ownership interest was terminated prepetition when Creditor purchased the real property at the trustee’s sale. The BAP reasoned that Debtor’s actual possession, notwithstanding the illegality of the unlawful possession, bestowed a recognizable equitable interest in the real property, which Debtor retained until the Sheriff actually disposed him of the real property by executing the writ of possession. Creditor timely appealed to the Ninth Circuit Court of Appeals and the Court reversed the bankruptcy court’s ruling.

In Perl, the Court first began with the premise on whether or not the Debtor had any legal or equitable interest in the Real Property pursuant to 11 U.S.C. § 541(a)(1) after the Creditor properly recorded its trustee’s deed from the non-judicial foreclosure sale, and after the state court fully adjudicated the unlawful detainer proceedings against Debtor. Specifically, the Court focused in on whether the Debtor had a cognizable possessory interest in the Real Property.

The Court stated that there can only be a violation of the automatic stay provided the Debtor has any protectable legal, equitable, or possessory interest.  The Court held that “The unlawful detainer judgment and writ of possession . . . bestowed legal title and all rights of possession upon [Creditor].  Thus, at the time of the filing of the bankruptcy petition, [Debtor] had been completely divested of all legal and equitable possessory rights that would otherwise be protected by the automatic stay.” Consequently, the Sheriff’s lockout did not violate the automatic stay because the Debtor had no legal or equitable interests in the real property that could become part of the bankruptcy estate.

The Ninth Circuit relied and cited California case law which states that claims regarding legal title are generally not litigated in unlawful detainer actions, and generally, the sole issue in unlawful detainer actions is to determine who has possession.[2] The Ninth Circuit concluded from Vella that Cal. Code Civ. Pro. §1161(a) determines who has superior title to the property, including the right to immediate possession, and pursuant to 1161(a), the prevailing party [new owner/landlord] has a “better title” that the evicted resident. 

This case has essentially eliminated the tenant’s ability to stay in rented premises a few days or even weeks longer by taking a tool away from the tenant — the all-powerful automatic-stay. I agree with the Ninth Circuit’s conclusion in Perl. If the Debtor has no right [or interest], then the automatic stay cannot protect what the Debtor does not have.  

Debtors may still stay in the rented premises for a while longer because in the real world when a debtor files a bankruptcy petition after judgment has been entered, but before there has been a physical lockout, it is highly likely that the landlord will probably need a court order before a sheriff or marshal will complete the eviction process. Most creditors would likely request a comfort order from the bankruptcy court allowing it to proceed with the eviction process.