Two judges on the Ninth Circuit wrote three opinions about the ability of nondebtors to enforce the automatic stay for their benefit or to benefit the estate. The majority held that a creditor may assert outside of bankruptcy court that an action was void as a consequence of the automatic stay.
Circuit Judge Lawrence J.C. VanDyke, the author of the majority opinion, also wrote a concurrence where he appeared to be saying that the Ninth Circuit has disavowed its own precedent or was wrong in previously holding that creditors are never entitled to enforce the automatic stay.
The majority’s opinion and the concurrence amount to a reexamination of the notion that creditors lack standing to enforce the automatic stay or to set aside actions taken in violation of the stay.
The HOA Foreclosure
The case involved the foreclosure of a homeowners’ association’s lien arising from delinquent HOA dues.
Before a homeowner’s bankruptcy, the HOA filed notices of default and delinquent assessments, saying that the homeowner needed to pay about $3,100 to avoid the sale of his home. The homeowner file a chapter 13 petition and said he would surrender the home to the bank.
According to Judge VanDyke’s majority opinion on June 25, the HOA recorded a notice of a nonjudicial foreclosure sale while the “bankruptcy case was still pending” and sold the home to a buyer for about $6,000.
Later, the bank sued the buyer and the HOA to quiet title, aiming to declare that the foreclosure sale was void and that the bank’s lien had not been extinguished.
The district court granted summary judgment in favor of the buyer and dismissed the bank’s suit. The district court reasoned that the bank’s lien had been extinguished because the bank had no standing to enforce the automatic stay given that the bank was neither a party, a debtor nor a trustee in the underlying bankruptcy.
The Majority’s Opinion
No one disputed that the bank had constitutional standing under Article III because the bank had an injury traceable to actions by the HOA. Instead, the buyer argued that the bank lacked prudential standing under Ninth Circuit authority holding that a creditor has no standing to appeal an adverse decision regarding the automatic stay. Tilley v. Vucurevich (In re Pecan Groves), 951 F.2d 242 (9th Cir. 1991).
Judge VanDyke distinguished Pecan Groves. The bank was not appealing an adverse decision about the automatic stay and was not suing nondebtor third parties in the bankruptcy case. Instead, the appeal was about standing in a suit outside of bankruptcy court.
A Nevada statute permits suit by “any person against another who claims an . . . interest in real property, adverse to the person bringing the action.” According to Judge VanDyke, state law conferred standing on the bank to pursue a quiet title action in district court.
Significantly, Judge VanDyke interpreted the Nevada Supreme Court as invalidating HOA foreclosure sales that were conducted in violation of the bankruptcy automatic stay. He went on to say that the foreclosure sale was likewise “without effect” under Ninth Circuit precedent, citing 40234 Wash. St. Corp. v. Lusardi, 329 F.3d 1076 (9th Cir. 2003).
With a foreclosure sale that was void under bankruptcy law and state law that gave the bank standing, Judge VanDyke reversed the district court’s grant of summary judgment to the buyer, reversed the denial of summary judgment to the bank and remanded for further proceedings.
The Dissent
Circuit Judge Danielle Jo Forrest dissented. Like Judge VanDyke, she was nominated by President Trump in 2019. Judge Forrest agreed that the case had nothing to do with prudential standing that was granted by the Nevada statute. In her view, the bank could not raise a violation of the automatic stay to underpin the merits of a quiet title action.
Citing Ninth Circuit precedent from 1989, Judge Forrest said that “the automatic stay does not protect litigants pursuing claims that are adverse or unrelated to the distribution of the debtor’s estate.” Magnoni v. Globe Investment & Loan Co., 867 F.2d 556, 558-60 (9th Cir. 1989). Globe, she said, means that the “automatic stay ‘does not confer any rights’ upon the bank.” Id.
In other words, the stay gave no rights to the bank because the bank was not acting in its role as a creditor, nor was it protecting or benefitting the estate.
Like Judge VanDyke, Judge Forrest recognized that foreclosures in violation of the stay are void, not merely voidable. Still, she said, “that does not necessarily mean that anyone dissatisfied with conduct it believes violated the automatic stay may claim protection under Section 362.” The bank was not within the class of persons having the right to sue under the automatic stay and thus had “no right to assert Section 362(a) of the Bankruptcy Code as a basis for relief.”
Believing that the Ninth Circuit disavowed neither Globe nor Pecan Groves, Judge Forrest would have upheld the district court.
The Concurrence by Judge VanDyke
Judge VanDyke wrote “separately to explain further why I think Judge Forrest’s thoughtful analysis in her dissent is nonetheless incorrect.” He found “something peculiar” about the dissent’s notion that the foreclosure sale was “void as a matter of federal bankruptcy law, but Nevada property law must turn a blind eye to that fact.”
Judge VanDyke disagreed with the idea that only certain parties may claim that an action was void. If only certain parties are allowed to set aside an action, the transfer was voidable, not void. He interpreted the Ninth Circuit as having abandoned precedent holding that stay violations are only voidable, not void.
Because the foreclosure sale was void under most recent Ninth Circuit precedent, Judge VanDyke said it was “as if [the foreclosure sale] never existed,” thus permitting the bank to rely on the stay violation to set aside foreclosure in the quiet title action.
Judge VanDyke said it was “admittedly accurate (albeit wrong)” to say that the automatic stay does not protect individual creditors with regard to “prudential standing in a bankruptcy proceeding.” He went on to say that the circuit’s “bankruptcy proceeding jurisprudence is internally inconsistent,” and that he saw “no reason to extend the outdated side of that inconsistency to effectively censor a party from presenting a factually-true argument in the context of its state-law claim outside of a bankruptcy proceeding.” [Emphasis in original.]
Judge VanDyke ended his concurrence by saying:
[T]he difference between the majority and the dissent in this case reduces to whether a transaction in violation of a bankruptcy stay is void, or merely voidable. Our precedent clearly says it is void—like it never happened. Our outdated bankruptcy standing jurisprudence may, until it is corrected, improperly require us to ignore that glaring fact in some circumstances in federal bankruptcy proceedings. But there is no reason Nevada property law must duplicate that error.
Two judges on the Ninth Circuit wrote three opinions about the ability of nondebtors to enforce the automatic stay for their benefit or to benefit the estate. The majority held that a creditor may assert outside of bankruptcy court that an action was void as a consequence of the automatic stay.
Circuit Judge Lawrence J.C. VanDyke, the author of the majority opinion, also wrote a concurrence where he appeared to be saying that the Ninth Circuit has disavowed its own precedent or was wrong in previously holding that creditors are never entitled to enforce the automatic stay.
The majority’s opinion and the concurrence amount to a reexamination of the notion that creditors lack standing to enforce the automatic stay or to set aside actions taken in violation of the stay.
The HOA Foreclosure
The case involved the foreclosure of a homeowners’ association’s lien arising from delinquent HOA dues.
Before a homeowner’s bankruptcy, the HOA filed notices of default and delinquent assessments, saying that the homeowner needed to pay about $3,100 to avoid the sale of his home. The homeowner file a chapter 13 petition and said he would surrender the home to the bank.
According to Judge VanDyke’s majority opinion on June 25, the HOA recorded a notice of a nonjudicial foreclosure sale while the “bankruptcy case was still pending” and sold the home to a buyer for about $6,000.
Later, the bank sued the buyer and the HOA to quiet title, aiming to declare that the foreclosure sale was void and that the bank’s lien had not been extinguished.
The district court granted summary judgment in favor of the buyer and dismissed the bank’s suit. The district court reasoned that the bank’s lien had been extinguished because the bank had no standing to enforce the automatic stay given that the bank was neither a party, a debtor nor a trustee in the underlying bankruptcy.