Watson v. Confer (In re Confer), BAP EC-21-1140-TBG

In re: HARLAN PAGE CONFER, III and CHARLOTTE CLUFF CONFER, Debtors.

JACOB WATSON; JAMES WATSON, Appellants, v. HARLAN PAGE CONFER, III; CHARLOTTE CLUFF CONFER, Appellees.

BAP No. EC-21-1140-TBG

Bk. No. 2:21-bk-20167

United States Bankruptcy Appellate Panel of the Ninth Circuit

March 10, 2022

NOT FOR PUBLICATION

Appeal from the United States Bankruptcy Court for the Eastern District of California Fredrick E. Clement, Bankruptcy Judge Presiding.

Before: TAYLOR, BRAND, and GAN, Bankruptcy Judges.

MEMORANDUM ^[1]

INTRODUCTION

Jacob and James Watson appeal the bankruptcy court's order denying them relief from the automatic stay to proceed with enforcement of a state court specific performance order. For the reasons stated below,

FACTS^[2]

A. The Residential Purchase Agreement

Prepetition, octogenarians Harlan Page Confer, III and Charlotte Confer purchased their home in Red Bluff, California (the "Property"). The Property was encumbered by two deeds of trust. When the Confers fell behind on their mortgage payments, the lender noticed a foreclosure sale for January 27, 2020.

On the evening of January 26, 2020, real estate agent Edward Lenzer came to the Confers' home and conveyed the Watsons' offer to buy the Property for a price that would net the Confers $25, 000 after payment of their mortgage debts and the costs of sale.

Mr. Confer recalls first asking Mr. Lenzer to arrange a loan to cure the arrearages or a consolidation of the two deeds of trust in lieu of the proposed sale. But Mr. Lenzer was not there as agent for the Confers; he apparently informed them that the sale was the only way to preserve any equity in the Property. Thus, Mr. Confer recalls agreeing to the sale on the condition that he could repurchase the Property if later able to do so. Mr. Lenzer disputes that Mr. Confer so conditioned the sale.

The next morning, Mr. Lenzer left a residential purchase agreement signed by the Watsons (the "Agreement") with the Confers to complete.

According to the Agreement at this point, Mr. Lenzer represented both the Watsons and the Confers in the sale. The Agreement provided that the Watsons would purchase the Property for $136, 000, of which $22, 000 would be paid directly to the Confers as a down payment and the remainder would be due at the close of escrow with the remainder paid to satisfy existing liens and costs of sale. It also obligated the Confers to turn over possession of the Property to the Watsons at the close of escrow.

The Confers signed the Agreement and delivered it to Mr. Lenzer moments before the auction. Mr. Lenzer then stopped the auction by presenting proof to the auctioneer that the Watsons had paid the Confers' mortgage arrearages.

Later that day, Mr. Lenzer realized that the Confers had failed to fully execute the Agreement. He returned to their home and remedied this oversight.

Thereafter, the Watsons made the down payment. But the Confers refused to sign escrow instructions, execute a deed to the Property, or turn over possession of the Property. Presumably because of this, the Watsons never deposited the balance of the purchase price into escrow.

B. The State Court Action

In June 2020, the Watsons filed an action in state court for specific performance of the Agreement and damages for breach of the Agreement and fraud. The Confers did not participate in the state court action.

After conducting a default prove up hearing, the state court entered an order on October 7, 2020, finding that: (1) the Agreement was a valid written contract; (2) the Watsons paid the down payment; (3) the Confers refused to proceed with the sale; (4) the Confers remained in possession of the Property; and (5) the Watsons had no adequate remedy at law. Thus, the order granted specific performance relief; it required the Confers to deposit executed escrow instructions and a grant deed for the Property into escrow by October 19, 2020. It ordered that escrow would close two business days after the Confers performed as ordered, and the Watsons deposited the balance of the purchase price. It also ordered escrow to close by January 5, 2021. The state court reserved the issue of "money requests" for later.

C. The Chapter 13 Bankruptcy and Plan

The Confers did not sign the escrow instructions or convey title. Instead, they filed a chapter 13^[3] petition on January 20, 2021. Their creditors' matrix included the Watsons' state court counsel, Dean Law Firm, Inc., at its business address but did not include the Watsons.

The Confers filed bankruptcy schedules days later. Notably, they listed an ownership interest in the Property, valued the Property at $255, 000, disclosed that their mortgage debts were in default, and claimed a $300, 000 homestead exemption in the Property. They listed the Dean Law Firm-and not the Watsons-as holding a $32, 174.42 unsecured claim. In describing the debt, the Confers explained that the firm represented the Watsons in the state court action. Finally, the Confers did not list the Agreement as an executory contract in their schedule G.

The Confers filed a proposed chapter 13 plan with their schedules. The plan provided for 60 monthly payments to the chapter 13 trustee for distributions to creditors by class. It also provided for ongoing and delinquent mortgage payments, estimated that unsecured creditors would receive no dividend on their claims, rejected all executory contracts, and revested all estate property in the debtors upon confirmation.

The Clerk of the Court served notice of the case and the plan on creditors listed in the creditors' matrix, including the Dean Law Firm. Because the Watsons were not in the matrix, they only received notice through their state court counsel. The notice listed deadlines for objecting to exemptions, objecting to plan confirmation, filing a proof of claim, and filing certain nondischargeability proceedings. The Watsons did not file an objection to plan confirmation, a proof of claim, or an objection to the homestead exemption by the deadlines.

The bankruptcy court confirmed the plan after the deadlines for objecting to exemptions and confirmation had passed.

On the day before entry of the confirmation order, the Watsons filed a motion for relief from the automatic stay to enforce the state court's specific performance order.^[4] They argued that the Confers had no equity in the Property, the Property was unnecessary for an effective reorganization, and cause existed for stay relief. The Confers opposed the motion.

After a hearing on the stay relief motion, the bankruptcy court issued a memorandum decision and order denying stay relief. The bankruptcy court found that the Agreement was an executory contract, which the Confers rejected through their chapter 13 plan. The bankruptcy court further found that the plan bound the Watsons because they were served with notice of the bankruptcy and the plan through the Dean Law Firm. Thus, the bankruptcy court concluded that stay relief was unwarranted.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(G). We have jurisdiction under 28 U.S.C. § 158.

ISSUES

Whether the bankruptcy erred in finding that the chapter 13 plan rejected the Agreement. Whether the bankruptcy court abused its discretion in denying stay relief.

STANDARDS OF REVIEW

"Whether adequate notice has been given for purposes of due process in a particular instance is a mixed question of law and fact that we review de novo.” Brawders v. Cnty. of Ventura (In re Brawders), 503 F.3d 856, 866 (9th Cir. 2007).

Whether a contract is "executory" under § 365 is a question of fact, which we review for clear error. Carruth v. Eutsler (In re Eutsler), 585 B.R. 231, 234-35 (9th Cir. BAP 2017). A factual finding is clearly erroneous if it is illogical, implausible, or without support in the record. Id. at 235.

A bankruptcy court's denial of relief from the automatic stay is reviewed for an abuse of discretion. Cannery Row Co. v. Leisure Corp. (In re Leisure Corp.), 234 B.R. 916, 920 (9th Cir. BAP 1999). "A bankruptcy court abuses its discretion if it bases its ruling upon an erroneous view of the law or a clearly erroneous assessment of the evidence." Id.

DISCUSSION

A bankruptcy petition automatically stays certain acts against the debtor, the debtor's property, and the bankruptcy estate's property, including: (1) the continuation of a judicial proceeding against the debtor that was commenced prepetition; (2) the enforcement, against the debtor or estate property, of a judgment obtained prepetition; and (3) an act to obtain possession of estate property or to exercise control over estate property. §§ 362(a)(1), (2) (3). The Watsons moved for relief from the automatic stay to enforce the specific performance order against the Confers and their Property. They argued that they were entitled to stay relief under § 362(d)(1) “for cause.”^[5]

The bankruptcy court denied stay relief after determining that cause did not exist because the Agreement was an executory contract rejected in the chapter 13 plan.^[6] The Watsons argue this was error because the specific performance order transformed an otherwise executory contract into a non-executory one, which could not be rejected. They further argue that, even if the Agreement is executory, they did not receive adequate notice of its proposed rejection in the plan such that they had a fair opportunity to challenge the rejection. We agree.

A. The confirmed chapter 13 plan neither determines the executory nature of the Agreement nor rejects it.

We start with the impact of the confirmed chapter 13 plan.

When a bankruptcy plan is confirmed and becomes final, its terms usually carry the same effect as a final judgment-it binds the...