INVEST VEGAS, LLC et al v. 21ST MORTGAGE CORPORATION et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
RESIDENTIAL CAPITAL, LLC, et al.,
Debtors.
FOR PUBLICATION
Case No. 12-12020 (MG)
(Jointly Administered)
INVEST VEGAS, LLC,
Plaintiff,
v.
21ST MORTGAGE CORPORATION; CAL-
WESTERN RECONVEYANCE
CORPORATION; NATIONAL CITY
MORTGAGE, A DIVISION OF NATIONAL
CITY BANK OF INDIANA;
COMMONWEALTH LAND TITLE
INSURANCE COMPANY; ONTARIO
CONDOMINIUM RENTAL SERVICES,
INC.; TICOR TITLE OF NEVADA, INC.;
HARLEE S. CARTER; LANA CARTER;
DARREN C. BOUTON; DOES I THROUGH
X, INCLUSIVE; ROE BUSINESS ENTITIES
I THROUGH X, INCLUSIVE,
Defendants.
Adv. Pro. 16-01029 (MG)
(CORRECTED) MEMORANDUM OPINION AND ORDER DENYING DEFENDANT’S
MOTION FOR SUMMARY JUDGMENT AND GRANTING PLAINTIFF’S CROSS
MOTION FOR SUMMARY JUDGMENT
A P P E A R A N C E S:
MCBREEN & KOPKO
Attorneys for Invest Vegas, LLC
500 North Broadway, Suite 129
Jericho, New York 11753
By: 	Kenneth Reynolds, Esq.
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HELFAND & HELFAND
Attorneys for 21st Mortgage Corporation
350 Fifth Avenue, Suite 5330
15 New York, New York 10118
By: 	Andrew B. Helfand, Esq.
Diane Bradshaw, Esq.
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Nevada law provides that a homeowners’ association (“HOA”) has a superpriority lien on
a homeowners’ Nevada property for up to nine months of unpaid HOA dues. By statute, the
HOA lien is prior to all other liens, even a first priority deed of trust recorded before the dues
became delinquent. The Nevada Supreme Court has held that the nonjudicial foreclosure of an
HOA lien extinguishes a first priority deed of trust. See SFR Invs. Pool 1, LLC v. U.S. Bank,
N.A., 334 P.3d 408 (Nev. 2014). In this case, the chapter 11 Debtors owned, and then sold in a
section 363 free and clear sale, the note and first priority deed of trust on Nevada property that
was already subject to an HOA lien. The HOA acquired the property in a nonjudicial foreclosure
sale after the Debtors filed their chapter 11 cases. The plaintiff in this case, Invest Vegas, LLC
(the “Plaintiff” or “Invest Vegas”), later acquired the Subject Property (as defined below) in the
chain of title from the HOA. The defendant, 21st Mortgage Corp. (the “Defendant” or “21st
Mortgage”), acquired the note and first priority deed of trust in the chain of title from the
Debtors. The issue here is whether the automatic stay, that became effective before the HOA
foreclosed its HOA lien, barred the HOA from completing its nonjudicial foreclosure sale that,
under Nevada law, extinguished the first priority deed of trust. If the automatic stay did not
apply—an issue within the “core” jurisdiction of the bankruptcy court—then Invest Vegas
acquired the property with the lien of the first priority deed of trust extinguished.
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The Court concludes below that the automatic stay did not bar the nonjudicial foreclosure
sale of the HOA lien because the Debtors did not have an interest in the Subject Property, so it
was not property of the estate subject to the automatic stay after the Debtors filed their chapter
11 cases. As a result, Invest Vegas acquired the property, no longer subject to the deed of trust
owned by 21st Mortgage. The issue here is framed in cross motions for summary judgment.
There are no disputed issues of material fact. As explained below, the Defendant’s motion for
summary judgment is DENIED and the Plaintiff’s cross motion for summary judgment is
GRANTED.
I. 	BACKGROUND
A. 	Procedural Background
Before the Court are cross-motions for summary judgment: (i) the Motion for Summary
Judgment (the “Defendant’s Motion,” ECF Doc. # 60) filed by the Defendant and (ii) a cross
motion for summary judgment (the “Plaintiff’s Cross Motion,” ECF Doc. # 71) filed by the
Plaintiff.
The Defendant’s Motion is supported by the affidavit of Chris Caldwell (the “Caldwell
Affidavit,” ECF Doc. # 60-2), a memorandum of law (the “Defendant’s Supporting
Memorandum,” ECF Doc. # 60-4), and a statement of undisputed facts (the “Defendant’s Facts,”
ECF Doc. # 60-6). The Plaintiff filed an opposition to the Defendant’s Motion (the “Plaintiff’s
Opposition,” ECF Doc. # 66). In support, the Plaintiff filed a memorandum of law (the
“Plaintiff’s Memorandum in Opposition,” ECF Doc. # 60-1.) Additionally, the Plaintiff filed a
response to the Defendant’s Facts (the “Response to Defendant’s Facts,” ECF Doc. # 67.) The
Defendant filed a reply to the Opposition (the “Defendant’s Reply,” ECF Doc. # 68.)
The Plaintiff’s Cross Motion is supported by the affidavit of Konstantino Kouris (the
“Kouris Affidavit,” ECF Doc. # 71-2), a memorandum of law (the “Plaintiff’s Supporting
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Memorandum,” ECF Doc. # 71-1), and a statement of undisputed facts (the “Plaintiff’s Facts,”
ECF Doc. # 71-3). The Defendant filed an opposition to the Plaintiff’s Cross Motion (the
“Defendant’s Opposition,” ECF Doc. # 73.) In response, the Plaintiff filed a memorandum in
further support and reply to the Defendant’s Opposition (the “Plaintiff’s Reply,” ECF Doc. # 74).
The Court held a hearing on June 15, 2016 (the “Hearing”). At the conclusion of the
Hearing, the Court took the Defendant’s Motion under submission and allowed the Plaintiff to
file a cross motion for summary judgment. After review of the Plaintiff’s Cross Motion, as well
as the related documents, the Court has determined that it will not hear argument on the
Plaintiff’s Cross Motion. The Court’s findings of fact and conclusions of law under Federal Rule
of Civil Procedure 52, made applicable to this matter by Federal Rule of Bankruptcy Procedure
7052, are set forth below.
B. 	Background Facts
This dispute relates to real property located at 230 E. Flamingo Road, #301, Las Vegas,
NV 89169, APN#162-16-810-384 (the “Subject Property”). The Defendant is the holder of the
promissory note (the “Note”) and first priority deed of trust (the “Deed of Trust,” together with
the Note, the “Real Property Instruments”) on the Subject Property. (Pl. Facts ¶ 1; Def. Facts ¶
1.) The Defendant acquired its interest in the Real Property Instruments pursuant to the terms of
an order that was granted, pursuant to sections 105, 363, and 365 of Bankruptcy Code (the “Sale
Order,” Case No. 12-12020, ECF Doc. # 2247).1 (Pl. Facts ¶ 2; Def. Facts ¶ 2.)
Specifically, pursuant to the terms of the Sale Order, Berkshire Hathaway Inc. (“BH”)
purchased the Real Property Instruments. (Pl. Facts ¶ 3; Def. Facts ¶ 3.) At the time that BH
acquired the Real Property Instruments, such documents were assets in the bankruptcy case of
1 	Under the Terms of the Sale Order, this Court retained jurisdiction over interpretation and enforcement of
the Sale Order.
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Residential Capital, LLC (Case No. 12-12020). (Pl. Facts ¶ 4; Def. Facts ¶ 4.) BH subsequently
deposited the Real Property Instruments into a Delaware statutory trust (the “Trust”). (Id.) The
Trust and the Defendant subsequently entered into a master serving agreement that related to
servicing of the Real Property Instruments. (Def. Mot., Ex. D.) On or about August 19, 2014,
Mortgage Electronic Registration Systems, Inc. (“MERS”) assigned the Deed of Trust to the
Defendant (the “Assignment”). (Def. Mot., Ex. E.) On October 1, 2014, the Assignment was
duly recorded in the Clark County’s Recorder’s Office. (Id.)
The parties maintain that at all times relevant to this case, Meridian Private Residence
Homeowners’ Association was the relevant homeowners’ association (the “Meridian HOA”) that
oversaw and managed the Subject Property. (Def. Facts ¶ 10; Pl. Facts ¶ 10.) On or about June
25, 2009, the Meridian HOA recorded a lien for delinquent assessments against the Subject
Property (the “HOA Lien”). (Pl. Facts ¶ 11; Def. Facts ¶ 11.) On or about October 19, 2012, the
Meridian HOA recorded a notice of foreclosure sale and set the foreclosure sale date for
November 14, 2012 (the “HOA Lien Sale”). 2 (Id.) The Meridian HOA purchased the Subject
Property at the HOA Lien Sale. (Pl. Facts ¶ 12; Def. Facts ¶ 12.) Thereafter, on December 19,
2012, Meridian HOA’s agent recorded the foreclosure deed on the Subject Property in the Clark
County’s Recorder’s Office. (Def. Mot., Ex. H.)
On May 14, 2012 (the “Petition Date”), each of the debtors in the main proceeding
(collectively, the “Debtors”) filed a voluntary petition in this Court for relief under chapter 11 of
the Bankruptcy Code. On November 21, 2012, the Court entered the Sale Order. (Pl. Facts ¶ 13;
Def. Facts ¶ 13.)
2 	At any time before the foreclosure sale, a first priority lien holder can (and usually does) protect its interest
by satisfying the amount of the HOA lien. The amount advanced is added to the unpaid balance of the mortgage
debt. The HOA lien and notice of foreclosure sale were recorded so due diligence would show the risk for anyone
holding the first priority deed of trust.
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On or about March 20, 2014, HOA transferred to RyaNik Las Vegas Holdings, LLC
(“RyaNik”), pursuant to a quitclaim deed, all rights, title and interest in the Subject Property (the
“Quitclaim Deed”). (Pl. Opp’n, Ex. 2). The Quitclaim Deed was recorded on March 28, 2014 in
the Clark County’s Recorder’s Office. (Id.) On or about May 20, 2014, RyaNik conveyed its
interest in the Subject Property to the Plaintiff (the “Second Quitclaim Deed”). (Pl. Opp’n, Ex.
1.) The Second Quitclaim Deed was recorded on May 28, 2014 in the Clark County’s
Recorder’s Office. (Id.)
C. 	Nevada Proceeding
On January 14, 2015, the Plaintiff commenced an action in the Nevada District Court (the
“Nevada State Court”) seeking to quiet title (the “Nevada Action”) against any and all parties,
among others, the Defendant, who might claim an interest in the Subject Property. (Pl. Facts ¶
14; Def. Facts ¶ 14.) The Nevada Action was ultimately removed to the United States District
Court for the District of Nevada (the “Nevada District Court”) and then transferred to this Court.
(Pl. Facts ¶ 15; Def. Facts ¶ 15.)
In the Nevada Action, the Nevada District Court held—in denying the Defendant’s
motion to remand—that the Defendant’s mortgage security in the Subject Property was part of
the bankruptcy estates of the Debtors. (See the “Nevada District Court Order,” Def. Reply Ex. 1
at 8.) On the question of whether the HOA Lien Sale and the subsequent completion of the HOA
Lien Sale violated the automatic stay, the Nevada Federal Court noted that the property protected
by the automatic stay was a security interest in the Subject Property, but not the Subject Property
itself, and, therefore, when the Meridian HOA foreclosed on the Subject Property, it did not
foreclose on the property of the Debtors’ estates. (Id. at 8–9.) However, the Nevada District
Court noted that the foreclosure had the effect of extinguishing the security interest that was
indeed property of the Debtors’ estates. (Id. at 9.) The Nevada District Court left open the
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question whether the HOA Lien Sale violated the automatic stay, by rendering valueless property
of the Debtor that was previously valuable. (Id.) On January 25, 2016, the Nevada District
Court granted 21st Mortgage’s motion to transfer the action to this Court. (ECF Doc. # 47.)
II. 	PARTIES’ ARGUMENTS
A. 	The Defendant’s Motion
The Defendant contends that BH acquired the Real Property Instruments “free and clear
of all Interests of any kind or nature whatsoever” pursuant to the terms of the Sale Order. (Def.
Mem. at 6.) Accordingly, the Defendant argues that its interest in the Real Property Instruments
is free and clear of all interests. Moreover, the Defendant contends that the Plaintiff, a
sophisticated investor, was charged with due diligence in its purchase of the Real Property
Instruments. (Def. Reply at 5–6.) 	The Defendant argues that validating HOA Lien Sale would
effectively deprive the Defendant of the value of the Real Property Instruments. (Id. at 6.)
B. 	The Plaintiff’s Opposition
The Plaintiff argues that the Subject Property was not part of the bankruptcy estate and
therefore the HOA Lien Sale did not violate the automatic stay and the extinguishment of the
Debtor’s junior lien, by a superpriority lien creditor outside of the bankruptcy, was not a
violation of the automatic stay. (Pl. Mem. at 2–3.) The Plaintiff argues that the bankruptcy
estate was limited to the junior lien interest (i.e., its equity interest in the deed of trust) and the
bankruptcy estate did not include the real property that secured the interest. (Id. at 5.) Because
the Subject Property was not property of the bankruptcy estate, the HOA Lien Sale did not
violate the automatic stay and was therefore valid. (Id.)
C. 	The Plaintiff’s Cross Motion
The Plaintiff argues that the Defendant has failed to raise any disputed material fact or
rebut the Plaintiff’s legal authority to defeat Plaintiff’s Cross Motion. (Plaintiff’s Supporting
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Mem. at 2.) The Plaintiff argues that the Subject Property was not part of the Debtors’ estates
and, as such, the HOA Lien Sale of the Subject Property could not have violated the automatic
stay. (Id. at 2.) In support, the Plaintiff cites to case law that stands for the proposition that a
debtor’s lien interest in property does not convert the underlying secured property owned by a
nondebtor into property of the bankruptcy estate. (Id. at 3–4 (citing to In re March, 140 B.R.
387 (Bankr. E. D. Va. 1992), aff’d, 988 F.2d 498 (4th Cir. 1993)).) The Plaintiff argues the sale
of property, in which a debtor had an interest, does not violate the automatic stay where
underlying property itself is not part of the debtor’s estate. (Id. at 4–5.)
Under Nevada law, the Plaintiff argues that a deed of trust does not convey title; rather, a
deed of trust is merely a lien on the property as security for the debt, subject to the laws on
foreclosure and sale. 	(Id. at 5.) Until foreclosure, the beneficiary retains only a lien interest in
the property, not legal title. (Id. at 6.) Therefore, the Plaintiff argues that the HOA Lien Sale did
not violate the automatic stay and the automatic stay did not prevent the in rem foreclosure
proceeding against a non-debtor party. (Id.)
D. 	Defendant’s Opposition3
The Defendant argues that the Real Property Instruments were property of the Debtors’
estates at the time of the HOA Lien Sale. (Def. Opp’n at 2.) Therefore, the Defendant argues,
the protections of the automatic stay extended to the Real Property Instruments. (Id. at 6.) The
HOA violated the automatic stay when it conducted the HOA Lien Sale and extinguished the
Deed of Trust. (Id. at 7.) In extinguishing the Deed of Trust, the HOA Lien Sale rendered the
3 	At the Hearing, the Court instructed the parties that a reply to the Defendant’s Opposition was not
necessary. 	However, despite the Court’s express instructions, the Plaintiff nevertheless filed a reply to the
Defendant’s Opposition. 	The Court has reviewed the Plaintiff’s Reply and determined that arguments set forth
therein need not be summarized in this Opinion.
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Debtors’ interest (and ultimately, the Defendant’s interest) in the Real Property Instruments
valueless.
III. 	DISCUSSION
Federal Rule of Civil Procedure 56(a), made applicable by Bankruptcy Rule 7056, states
that “[t]he court shall grant summary judgment if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.” To
successfully assert that a fact is not in dispute or cannot be disputed, a movant must:
(A) cit[e] to particular parts of materials in the record, including
depositions, 	documents, 	electronically 	stored 	information,
affidavits or declarations, stipulations (including those made
for purposes of the motion only), admissions, interrogatory
answers, or other materials;
(B) or show[] that the materials cited do not establish the absence
or presence of a genuine dispute, or that an adverse party
cannot produce admissible evidence to support the fact.
FED. R. CIV. P. § 56(c)(1). “The party seeking summary judgment bears the burden of
establishing that no genuine issue of material fact exists and that the undisputed facts establish
[the movant’s] right to judgment as a matter of law.” Rodriguez v. City of New York, 72 F.3d
1051, 1060–61 (2d Cir. 1995); see also McHale v. Boulder Capital LLC (In re 1031 Tax Group,
LLC), 439 B.R. 47, 58 (Bankr. S.D.N.Y. 2010).
Section 362(a)(1) of the Bankruptcy Code provides that the filing of a bankruptcy
petition:
operates as a stay, applicable to all entities, of –
(1) 	the 	commencement 	or 	continuation, 	including 	the
issuance 	of 	employment 	of 	process, 	of 	a 	judicial,
administrative, or other action or proceeding against the
debtor that was or could have been commenced before the
commencement of the case under [title 11], or to recover a
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claim 	against 	the 	debtor 	that 	arose 	before 	the
commencement of the case under [title 11].
11 U.S.C. § 362(a)(1).
Section 541(a)(1) of the Bankruptcy Code broadly defines property of the estate as “all
legal or equitable interests of the debtor in property as of the commencement of the case,”
“wherever located and by whomever held . . . .” 11 U.S.C. § 541. “This definition of property
has been given ‘the broadest possible interpretation’ . . . .” In re Nemko, Inc., 143 B.R. 980, 985
(Bankr. E.D.N.Y. 1992) (quoting Brown v. Dellinger (In re Brown), 734 F.2d 119, 123 (2d Cir.
1984)). Congress intended section 541(a) to be broad in scope, and section 541(b) lists the items
that are specifically excluded from property of the estate. See United States v. Whiting Pools,
Inc., 462 U.S. 198, 205 (1983). Due to the broad nature of subsection (a), anything not
specifically excluded under subsection (b) should be included as property of the estate. 5
COLLIER ON BANKRUPTCY ¶ 541.01 (15th ed. rev. 2007). However, the property of a bankruptcy
estate does not include the property of others in which the debtor only has a security interest.
See Whiting Pools, 462 U.S. at 204 n.8. In Whiting Pools, the Supreme Court stated that:
Section 541(a)(1) speaks in terms of the debtor’s ‘interests . . . in
property,’ rather than property in which the debtor has an interest,
but this choice of language was not meant to limit the expansive
scope 	of 	the 	section. 	The 	legislative 	history 	indicates 	that
Congress intended to exclude from the estate property of others in
which the debtor had some minor interest such as a lien or bare
legal title. 	Similar statements to the effect that § 541(a)(1) does
not expand the rights of the debtor in the hands of the estate were
made in the context of describing the principle that the estate
succeeds to no more or greater causes of action against third
parties than those held by the debtor.
Id. (emphasis added) (citations to legislative history omitted). Additionally, in In re March, the
district court held that the debtor’s junior lien interest did not convert the underlying secured
property owned by a nondebtor into property of the bankruptcy estate, subject to the provisions
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of the automatic stay. Farmers Bank v. March (In re March), 140 B.R. 387 (E.D. Va. 1992),
aff’d, 998 F.2d 498 (4th Cir. 1993).
Considered a form of mortgage in Nevada, a deed of trust “does not so convey as to allow
the beneficiary to obtain the property without foreclosure and sale, but is considered merely a
lien on the property as security for the debt, subject to the laws on foreclosure and sale.”
Edelstein v. Bank of New York Mellon, 286 P.3d 249, 254 (Nev. 2012). Until foreclosure, the
beneficiary retains only a lien interest in the property, not legal title. See id.
The parties acknowledged on the record at the Hearing that there is no dispute concerning
material facts. Therefore, this issue is appropriate for adjudication on summary judgment. What
is now before the Court is the question whether the HOA Lien Sale, in rendering the Debtor’s
property—a more junior lien on the Subject Property—valueless, violated the automatic stay.
The Defendant concedes, and the Nevada District Court held, that the Subject Property was
never part of the Debtors’ bankruptcy estates. In fact, only the Real Property Instruments were
part of the Debtors’ bankruptcy estates and therefore subject to the protections afforded by the
automatic stay. Under Whiting Pools, because the Subject Property itself was not property of the
Debtors’ bankruptcy estates, the HOA Lien Sale—despite effectively extinguishing the value of
the Real Estate Instruments that were property of the Debtors’ estates—did not violate the
automatic stay. The Defendant’s contention that, because the Real Estate Instruments were part
of the Debtors’ estates, the automatic stay protected the value of the Real Estate Instruments is
unavailing. The Court declines to adopt the rule as advanced by the Defendant that the
protections of the automatic stay extend to protect the value of the property of a debtor’s estate.
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IV. 	CONCLUSION
For the reasons set forth above, the Defendant’s Motion is DENIED and the Plaintiff’s
Cross Motion is GRANTED. Pursuant to Local Bankruptcy Rule 9074-1, plaintiff’s counsel
shall submit a separate Judgment (i) determining that the HOA Lien Sale did not violate the
automatic stay, and (ii) determining that the deed of trust owned by 21st Mortgage was
extinguished pursuant to Nevada law upon the nonjudicial foreclosure sale of the Subject
Property on November 14, 2012.
IT IS SO ORDERED.
Dated: 	August 30, 2016
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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