If a proceeding is sub judice when the defendant files bankruptcy, the plaintiff should figure out whether a decision after bankruptcy would violate the automatic stay.

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Case Type:
Case Status:
21-1125 (9th Circuit, Apr 05,2022) Not Published
The U.S. Bankruptcy Appellate Panel of the Ninth Circuit (BAP) found a post-petition order of the U.S. District Court for the District of Nevada (DC) deeming a predecessor-in-interest to Censo LLC (DR) to have taken title subject to a senior lien (DC Order) not to violate § 362(a)(1) or (3)-(5), for creditor's counterclaims equated to a defense of its lien, and saw no abuse in the BC's dismissing the DR's amended pleading on basis of claim preclusion, the DR having repackaged issues necessarily resolved by the DC Order, and denying its plea for leave to file another equally futile complaint.
Procedural context:
Launching an offensive strike from within its chapter 11 case, the DR filed an adversary proceeding against NewRez, LLC dba Shellpoint Mortgage Servicing (Shellpoint), Bank of America (BANA), and Federal National Mortgage Association (Fannie Mae) (together, Appellees), seeking a declaration that the deed of trust (DOT) encumbering the Property was invalid due to errors in the document. Shellpoint, joined by BANA and Fannie Mae, moved to dismiss the complaint. Agreeing with both of Shellpoint's arguments, the BC decided to dismiss this complaint based on two findings: (1) that the claims in the adversary proceeding were barred by claim preclusion based on the DC Order, which had found Censo’s predecessor-in-interest to have taken title to the property subject to Fannie Mae’s senior lien,; and (2) that the alleged defects in the DOT were not legally sufficient to invalidate the document under Nevada law, When the DR sought leave to amend its pleading in response to this dismissal order, the BC rebuffed its request due to its claim preclusion finding. The DR timely appealed. It first challenged the BC's denial of his request for leave. Separately, and for the first time on appeal, it contended that the DC's order, entered post-petition, was void as a violation of the automatic stay. Notably, by focusing solely on the latter point, the DR neglected to argue that the other elements of claim preclusion had not been met and that it had adequately pleaded its causes of action.
As in so many other cases, a piece of real estate was at the center of the pre- and post-petition dispute between the DR, on the one hand, and the Appellees, on the other. It began not with Censo but a natural person, a lawyer at that. In December 2009, James Pengilly (Pengilly) had borrowed $414,000 from BANA, using his condominium unit on Allerton Park Drive, Las Vegas, NV (Property), as security for the promissory note (Note), as embodied in a deed of trust (DOT). By the Petition Date, Fannie Mae owned the loan, and Shellpoint, the formal assignee of the deed of trust, serviced it. Sometime in 2013, Pengilly defaulted on his homeowners association (HOA) assessments, and the HOA therefore initiated foreclosure proceedings. A sale to Ke Aloha Holdings, LLC (KAH), which purchased the Property at the foreclosure sale that took place in four years-to the month-after the Note's execution (i.e. December 2013), was followed by a transfer to Ke Aloha Holdings Series II, LLC (KAH II) one year later (by KAH). Meanwhile, in 2014, Pengilly had sued the HOA board members, KAH, and others in state court seeking to quiet title to the Properly and obtain declaratory relief that the foreclose sale was unlawful. KAH, then still the owner, answered, counterclaimed, and cross-claimed a bevy of parties and persons; Green Tree Servicing LLC (Green Tree), then the servicer of the Note and the beneficiary under the DOT, removed to the DC and then answered to KAH's cross-complaint and added its own counterclaim against KAH. Thereafter, KAH II transferred the Property to Censo. As the record attested, the same person-Melani Schulte-managed KAH, KAH II, and Censo from before to after the first and second transfer of the Property. Five months after this transfer (May 2019), Ditech Financial LLC (Ditech), f/k/a Green Tree, moved for summary judgment on its counterclaims. For the next year plus, bankruptcy and non-bankruptcy cases and proceedings intermingled. In October 2019, Censo filed a chapter 11 petition. "Shortly thereafter," the DC entered an order declared that KAH had taken title to the Property subject to Fannie Mae's senior lien and thus granted Ditech's motion for summary judgment, In July 2020, the BC partly granted Shellpoint's motion for relief from stay to enforce its rights under the DOT. While that motion has been pending, however, Censo had responded to its docketing by commencing an adversary proceeding against the Appellees. It was Censo's amended complaint that Shellpoint's motion to dismiss targeted.
William Lafferty; Laura S. Taylor; and Robert J. Faris

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