In re JSS of Albuquerque, LLC

In re: JSS OF ALBUQUERQUE, LLC, Debtor.

No. 11-17-10092 JA

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

August 10, 2017

MEMORANDUM OPINION

The State of New Mexico, acting through its Attorney General ("State"), requests the Court to enter an order determining that its enforcement action filed in state court against JSS of Albuquerque, LLC ("JSS") and its principal, Jesus M. Cano, falls within the police or regulatory power exception to the automatic stay. See Motion for Orders Determining State Court Proceeding is Not Stayed by Petitions for Relief ("Motion") - Docket No. 12. JSS opposes the Motion. See Objection to Motion for Stay Relief - Docket No. 16. JSS and the State briefed the issue. See Docket Nos. 38 and 39. The Court held a final hearing on the Motion on May 8, 2017 and took the matter under advisement. The Court later held a status conference on June 28, 2017 to learn about JSS's intended course of action in this Chapter 11 bankruptcy case and to clarify what relief the State is seeking from this Court. See Docket No. 48. The Court will grant the Motion in part, as set forth below.

BACKGROUND

JSS locates residential properties to sell to consumers. JSS acquires the properties from an "investor" or "investors" under real estate contracts (the "upstream real estate contracts") and resells the properties to consumers under wrap-around real estate contracts.¹ A substantial portion of the payments under the wrap-around real estate contracts is used to pay the upstreamreal estate contracts; JSS retains the difference between the upstream payment and the payment from the consumer to JSS. An escrow company divides the consumers' payments between payment on the upstream real estate contract and payment to JSS.

The State filed an action against JSS, Mr. Cano, and other unknown persons, in the Second Judicial District Court, County of Bernalillo, State of New Mexico as Case No. D-202-CV-2016-07636 ("State Court Action") on December 9, 2016. The State alleged in its Complaint that JSS and Mr. Cano unlawfully offered real estate services and defrauded unsophisticated home buyers in violation of three New Mexico consumer protection statutes.

JSS filed a voluntary petition under Chapter 11 of the Bankruptcy Code on January 18, 2017. See Docket No. 1. Jesus Cano, managing member of JSS, signed the petition. See Docket No. 2. The State filed the Motion on February 14, 2017. See Docket No. 12.

DISCUSSION

I. The New Mexico Statutes at Issue in the State Court Action

The State's complaint filed in the State Court Action requested temporary and permanent injunctive relief, restitution, civil penalties, and equitable relief against JSS and Mr. Cano under 1) the New Mexico Real Estate Brokers and Salesman Licensing Laws ("NMREB"), N.M.S.A. 1978 § 61-29-1, et seq.; 2) the New Mexico Mortgage Loan Originator Licensing Act ("NMMLO"), N.M.S.A. 1978 § 58-21B-1, et seq.; and 3) the New Mexico Unfair Trade Practices Act ("NMUPA"), N.M.S.A. 1978 § 57-12-1, et seq. See Complaint for Temporary and Permanent Injunctive Relief, Restitution, Civil Penalties, and Equitable Relief ("Complaint") - Exhibit AG-1. Each of these statutes authorizes the State to pursue an action against violators to further the public interest of protecting New Mexican consumers. Section 57-12-8(A) of the NMUPA provides:

Whenever the attorney general has reasonable belief that any person is using, has used, or is about to use any method, act, or practice which is declared by the Unfair Practices Act to be unlawful, and that proceedings would be in the public interest, he may bring an action in the name of the state alleging violations of the Unfair Practices Act.

N.M.S.A. 1978 § 57-12-8(A) (2000 Repl. Pamp.).

Similarly, § 58-21B-21 of the NMMLO provides:

Whenever the attorney general has reasonable belief that a person is using, has used or is about to use any method, act or practice in violation of the New Mexico Mortgage Loan Originator Licensing Act and enforcement proceedings would be in the public interest, the attorney general may bring an action in the name of the state alleging violations of that act.

N.M.S.A. 1978 § 58-21B-21(A) (2016 Cum. Supp.).

Section 61-29-17(B) of the NMREB authorizes the attorney general, upon application to the New Mexico Real Estate Commission, to "maintain an action in the name of the state to prosecute the violation or to enjoin the proposed act or practice." N.M.S.A. 1978 § 69-12-17(B) (2016 Cum. Supp.).

The purpose of these statutes is to protect consumers. See NMUPA, N.M.S.A. 1978 § 57-12-2(E) (2016 Cum. Supp.) (defining "'unconscionable trade practice'" as "an act or practice in connection with the sale, lease, rental or loan, or in connection with the offering for sale, lease, rental or loan, of any goods or services, including services provided by licensed professionals, or in the extension of credit or in the collection of debts that to a person's detriment: (1) takes advantage of the lack of knowledge, ability, experience or capacity of a person to a grossly unfair degree; or (2) results in a gross disparity between the value received by a person and the price paid."); NMMLO, N.M.S.A. 1978 § 58-21B-2(A) ("The legislature also finds that it is essential for the protection of the residents of New Mexico and the stability of New Mexico's economy that reasonable standards for licensing and regulation of the business practices of mortgage loan originators be imposed."). NMMLO's stated purpose is "to protect consumers seeking mortgageloans." N.M.S.A. 1978 § 58-21B-2(B) (2016 Cum. Supp.). Finally, NMREB makes it unlawful for a "person to engage in the business or act in the capacity of real estate associate broker or qualifying broker within New Mexico without a license issued by the commission." N.M.S.A. 1978 § 61-29-1 (2016 Cum. Supp.). To obtain a license, a person must "be of good repute and competent to transact the business of a qualifying broker or an associate broker in a manner that safeguards the interests of the public." N.M.S.A. 1978 § 61-29-9(A) (2016 Cum Supp.).

II. The Relief the State Seeks and Has Obtained in the State Court Action

The prayer for relief in the Complaint requests the following relief:

A. The court issue a temporary injunction restraining the Defendants from engaging in the conduct alleged herein.

B. The court issue an order freezing Defendants' assets related to the real estate services and home financing business activities JSS of Albuquerque, LLC until such time as a Receiver or neutral party can verify whether consumers were or were not victims of Defendants' enterprise.

C. For the appointment of a Receiver to manage the assets of JSS of Albuquerque, LLC related to its real estate and home financing business activities for later disgorgement and refund to the consumers harmed by Defendants' unlawful activities.

D. The court determine and adjudge that Defendants' real estate and home financing scheme violated the NMRELA [NMREB], the NMMLOLA [NMMLO], and the NMUPA.

E. The court determine and adjudge Defendants' real estate and home financing scheme is fraudulent.

F. The court issue a permanent injunction restraining the Defendants from engaging in conduct which is found to be unlawful pursuant to the NMRELA [NMREB], the NMMLOLA [NMMLO], and the NMUPA.

G. The court rescind all of Defendants' real estate services and home financing contracts and all real estate contracts associated with the same or similar unlawful business scheme.

H. The court order the Defendants to pay restitution to all persons for any monies which were acquired through any practice found to be unlawful pursuant to the NMMLOLA [NMMLO] and the NMUPA.

I. The court order Defendants to disgorge all moneys collected pursuant to real estate services and home financing contracts and pursuant to any real estate contracts associated with the same or similar unlawful business scheme.

J. The court order the Defendants to pay to the State of New Mexico a civil penalty of up to FIVE THOUSAND DOLLARS ($5,000.00) per willful violation of the NMRELA [NMREB] and the NMUPA.

K. The court determine and adjudge that Cano is personally liable, as a corporate owner, officer, or manager having knowledge and authority to direct the acts of JSS, for any violations of the NMRELA [NMREB], the NMMLOLA [NMMLO], and the NMUPA by JSS.

L. The court order Defendants to reimburse the New Mexico Office of the Attorney General for its attorney[s'] fees and costs incurred in the investigation and prosecution of this matter.

M. For such other relief as the Court deems just and proper.

Complaint, pp. 46 - 48.

On December 15, 2016, the State obtained an Order Granting Permanent Injunction ("Permanent Injunction") in the State Court Action. See Exhibit AG-2. Among other things, the Injunction prohibits JSS and Mr. Cano from the following:

Offer[ing] to sell any property, enter into a real estate contract or engage in the sale of any real estate or home related services to consumers;

Tak[ing] any legal action with respect to any property related to this matter, including, but not limited attempting to evict any inhabitant of the properties related to this matter; and

Solicit[ing] real estate and home related insurance business from the public.

Permanent Injunction, ¶¶ 2, 3, and 4.

The Permanent Injunction includes the following provision:

Defendants may contact inhabitants for the limited and sole purpose of collecting December 2016 and January 2017 contract payments. Collection of all contract payments from February until the conclusion of this matter, shall be determined by further order of the court.

Permanent Injunction, ¶ 6.

III. The Automatic Stay and its Police or Regulatory Power Exception

Upon the filing of a bankruptcy petition, the stay imposed by 11 U.S.C. § 362(a) arises automatically "to protect the debtor from and his creditors by allowing the debtor to organize his affairs, and by ensuring that the bankruptcy procedure may operate to provide an orderly...