In re Michael Maloney

Case Type:
Case Status:
United States Bankruptcy Appellate Panel of the Ninth Circuit No. CC-20-1130-LST (9th Circuit, Nov 06,2020) Not Published
The BAP affirmed the bankruptcy court in full in that property held by an LLC under Minnesota law is not property of an individual debtor. Therefore, the automatic stay does not extend to foreclosures against LLC property. The BAP did note that the procedural defects noted by the bankruptcy court could have been remedied, but the substantive relief was denied because the Debtor failed to show any entitlement to the relief requested.
Procedural context:
The Debtor filed Chapter 13 bankruptcy approximately a week before a scheduled foreclosure sale. Approximately one month later, the Creditor foreclosed on the Properties owned by the LLC. The Debtor amended his schedules to indicate some ownership in the Properties. Approximately two months following the foreclosure sale, the Debtor filed a motion for sanctions for a willful violation of the automatic stay combined with a motion to set aside the foreclosure sale. The Creditor opposed the motion, because it was not brought in the form of an adversary proceeding and the automatic stay did not apply to assets of the LLC. The bankruptcy court (C.D. Cal.) heard the motion and denied it finding: no proof of service on record, sanctions under 11 U.S.C. § 362(k) must be brought by adversary proceeding, and the bankruptcy court had no jurisdiction to set aside a foreclosure in Minnesota. The bankruptcy court noted that the Debtor’s former profession as an attorney, his previous bankruptcies, and his former losing arguments regarding property ownership should have forewarned him about having the risks associated with an LLC holding the Properties. The Debtor appealed.
The Debtor was a former attorney who at one time worked in title insurance. Prior to bankruptcy, the Debtor created an LLC with his long-time domestic partner. The LLC formation took place in Minnesota for the purposes of protecting assets, and the LLC had the primary business to acquire real estate for the benefit of its individual members. The LLC acquired real estate in Minnesota including two residential properties secured by mortgages through First Minnesota Bank (Properties). CorTrust (Creditor) is the successor on the notes following a merger in 2019. The Creditor notified the LLC of the default on the loans for the Properties and set a foreclosure date for late January 2020. The Debtor filed Chapter 13 bankruptcy approximately a week before a scheduled foreclosure sale, but he did not list the Properties on his Schedule A. He did however list on his Schedule D debts owed to the Creditor.
The Hons. Lafferty, Spraker, and Taylor

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