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Schoenmann v. Carmel Financing LLC

United States District Court, N.D. California

January 8, 2020

E. LYNN SCHOENMANN, Plaintiff and Appellee,
v.
CARMEL FINANCING LLC, Defendant and Appellant.

          ORDER DENYING MOTION FOR LEAVE TO APPEAL RE: DKT. NO. 1

          WILLIAM H. ORRICK UNITED STATES DISTRICT JUDGE

         Appellant Carmel Financing LLC (“Carmel”) seeks leave to appeal the September 5, 2019 decision of the Hon. Dennis Montali of the United States Bankruptcy Court for the Northern District of California denying in part Carmel's motion to dismiss in an adversary proceeding. See Motion for Leave to Appeal Interlocutory Order (“Mot.”) [Dkt. No. 1-4]; see also id., Ex. B (“Bankruptcy Decision”) [Dkt. No. 1-4] 1. Interlocutory review pursuant to 28 U.S.C. § 158(a)(3) is not warranted because Carmel has not shown that there is a substantial ground for difference of opinion concerning Judge Montali's order. Accordingly, I DENY Carmel's leave to appeal.

         BACKGROUND

         I. PROCEDURAL BACKGROUND

         On April 7, 2019, plaintiff E. Lynn Schoenmann, chapter 7 trustee (“Trustee”) of the chapter 7 estate of Mayacamas Holdings LLC (“Debtor”), initiated an adversary proceeding in the United States Bankruptcy Court for the Northern District of California. See Bankruptcy Decision at 1. She named 23 defendants, including defendant Carmel, in her Complaint. Id. at 1-2. Carmel moved to dismiss the adversary proceedings for failure to state a claim upon which relief can be granted. Id. at 2. Judge Montali denied the motion in part and granted it in part. Id.; see Mot., Ex. A.

         Carmel then filed a motion for leave to appeal Judge Montali's interlocutory order, which Trustee opposed. See Response of Appellee E. Lynn Schoenmann, Chapter 7 Trustee, to Motion of Appellant Carmel Financing, LLC, for Leave to Appeal Interlocutory Order and Declaration of Thomas F. Koegel in Support (“Oppo.”) [Dkt. No. 1-4]. The pending motion for leave is now before me.[1]

         II. FACTUAL BACKGROUND

         On April 10, 2014, Debtor executed a promissory note in the principal amount of $2, 000, 000 to the order of Carmel; it was secured by a first priority deed of trust encumbering property located in eastern Sonoma County (the “Ranch Parcel”). Bankruptcy Decision at 2. On April 7, 2017, Debtor filed a chapter 11 petition and listed the Ranch Parcel as its principal asset. Id. Trustee was appointed as the chapter 11 trustee on October 4, 2017, and the case was converted to chapter 7 on December 5, 2017. Id.

         On October 8, 2017, four days after the appointment of Trustee, the Tubbs Fire erupted and caused significant damage to the Ranch Parcel. Id. As a result, Trustee received more than $2 million from Debtor's insurance carrier for damages to the Ranch Parcel caused by the Tubbs Fire (the “insurance proceeds”). Id. Except for a court-approved expenditure of $418, 541.50 for post-fire clean-up required by law, Trustee continues to hold the insurance proceeds, which equaled $1, 695, 727.26 as of the commencement of the adversary proceedings. Id. at 3.

         In her Complaint, Trustee asserted that the chapter 7 estate, and not Carmel, is entitled to the insurance proceeds because the insurance policy does not mention Carmel or identify it as an additional loss payee. Bankruptcy Decision at 3. She also alleged that Carmel did not notify the insurer that it should be added as a loss payee on the policy in accordance with California law. Id.; see Cal. Comm. Code § 9312(b)(4) (governing the creation and perfection of security interests in insurance policies).

         Carmel contended in its motion to dismiss that the remaining insurance proceeds should be turned over to it under the promissory note and deed of trust. Bankruptcy Decision at 2-3. Carmel argued that its “status as a secured creditor on the [Ranch Parcel] means that it holds a perfected security interest in the Insurance Proceeds since it cannot be disputed that the Insurance Proceeds are the identifiable cash proceeds of that real estate collateral.” Id. at 9 (internal quotation marks and citation omitted).

         Judge Montali denied Carmel's motion to dismiss Trustee's insurance proceeds claims; Carmel seeks leave to appeal that portion of decision.[2] He gave four reasons for his decision. First, he emphasized that the Uniform Commercial Code (“UCC”) defines “security interest” as “an interest in personal property or fixtures that secures payment or performance of an obligation.” Bankruptcy Decision at 10 (emphasis in original) (quoting Cal. Comm. Code § 1201(35)). He found that Carmel did not provide any evidence that, prior to the petition date, it perfected a security interest in any personal property or fixtures of Debtor, either by filing a financing statement or taking possession of such property as required by the UCC. Id.; see Cal. Comm. Code §§ 9310(a), (b)(6); Cal. Comm. Code § 9315(c).

         Second, Judge Montali pointed out that the UCC defines “proceeds” as “disposition of collateral, ” and, as indicated in Cal. Comm. Code § 9109(c)(11), real property is not “collateral” that is governed by the UCC. Bankruptcy Decision at 10. Third, he found that Carmel did not provide any written notification to the insurer that it should be added as a loss payee to the policy, as required by California's version of the UCC. Id. at 11. Fourth, he held that California law “does not permit a mortgagee who has not been named as an insured (or who has not provided written notification of its security interest in the policy) to recover insurance proceeds relating to claims of damage to the mortgaged property.” Id. (citing Zaghi v. State Farm Gen. Ins. Co., 77 F.Supp.3d 974, 977 (N.D. Cal. 2015)). Judge Montali concluded that Trustee sufficiently stated a claim relating to the insurance proceeds. Id. at 12.

         LEGAL ...


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