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Summarizing by Amir Shachmurove

In re Martin Musonge

Case Type:
Case Status:
20-1184 (9th Circuit, Jun 01,2021) Not Published
The U.S. Bankruptcy Appellate Panel of the Ninth Circuit (BAP) affirmed the dismissal of an involuntary case filed by a creditor by the U.S. Bankruptcy Court for the Northern District of California (BC) as it, like the BC, found that creditor’s claim to be subject to a bona fide dispute, thus rendering him unqualified to serve as a petitioning creditor under § 303(b).
Procedural context:
Nathaniel Basola Sobayo (Sobayo) filed a chapter 7 involuntary petition against the debtor, Martin Musonge (DR). In response, the DR docketed both an answer and a motion to dismiss (MTD). After a hearing on the MTD, the BC converted it to a motion for summary judgment (MSJ) under Federal Rule of Civil Procedure 12(d) as Sobayo and the DR (collectively, the Parties) had referenced evidence and exceeded the scope of their original pleadings in their responsive papers. At the same time, the BC gave the Parties an opportunity to present additional argument and briefing. Sobayo submitted a supplemental declaration and brief, appending more exhibits to the latter; the DR followed with his owns supplemental brief and declaration. On July 20, 2020, after considering all these papers, the BC granted the MSJ. As the BC reasoned, Sobayo’s claim was subject to bona fide dispute; therefore, Sobayo could not qualify under § 303(b) as a petitioning creditor. Sobayo timely appealed.
This appeal was but the latest chapter in a long-running legal drama that began more than four years ago. On May 12, 2017, Sobayo’s wholly-owned limited liability company Kingsway Capital Partners, LLC (Kingsway) purchased Musonge’s residence, located in Richmond, California (Residence). Kingsway financed its purchase by borrowing $580,000 from Hien Thi Nguyen (Nguyen), his promissory note (Note) secured by a deed of trust against the Residence. Without paying a cent of rent, the DR continued to inhabit that encumbered parcel. For his part, Sobayo made eight payments before stopping, at which point Nguyen launched foreclosure proceedings. Sobayo responded with state court litigation and several bankruptcy filings on behalf of both himself and Kingsway. Shortly after the bankruptcy court dismissed the first of these filing—Kingsway’s chapter 11 petition—Sobayo purported to transfer a 95% interest in the residence from Kingsway to himself. Despite these hurdles, in the aftermath of this dismissal, the dogged Nguyen, however, succeeded on foreclosing on Kingsway’s 5% interest on May 1, 2019, and on Sobayo’s 95% interest on July 3, 2019. Nguyen gained legal title to 100% of the Residence with the recording of the trustee’s deed as of July 11, 2019. Thereafter, Nguyen commenced an unlawful detainer action against the DR. On the eve of trial in that matter, Sobayo, proceeding pro se, filed the involuntary chapter 7 petition against the DR, basing his status as a petitioning creditor on two claims. First, he alleged that the DR owed him $770,677 as a “Consumer Debt Owed Value of Mortgage Liabilities re Conversion and Possession after sale of Property by Debtor …” (Mortgage Claim); second, he alleged that the DR owed him $105,000 in “Rental Income unpaid 30 months after [Kingsway’s] purchase of Property @ $3,500.00 [per month]” (Rent Claim). The DR, also pro se, filed his answer and motion to dismiss, emphasizing that he had sold his residence to Kingsway (not Sobayo) in May 2018 and that Nguyen’s foreclosures had eliminated any interest in the Residence held by either Kingsway or Sobayo.
Scott H. Gan; Gary A. Spraker; and Julia W. Brand

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